Expanding Shacks And Upgraded Drive-Thrus Will Improve Guest Experience

Key Takeaways

• Shake Shack's growth strategy includes quadrupling locations, enhancing margins, and leveraging culinary innovation to boost revenue and customer engagement.
  
• Expansion of licensing business and drive-thru innovations are expected to improve efficiency, satisfaction, and diversify revenue streams.
  
• Economic challenges, weather disruptions, softening tourism, rising competition, and increasing costs could pressure Shake Shack's revenue and margins.

Catalysts

Owns, operates, and licenses Shake Shack restaurants (Shacks) in the United States and internationally.

• Shake Shack is in a significant growth phase, aiming to more than quadruple the number of company-operated Shacks to at least 1,500, which is expected to fuel long-term revenue growth.
  
• The company plans to enhance restaurant-level profit margins by at least 50 basis points annually over the next three years through operational improvements and supply chain efficiencies, impacting net margins and earnings positively.
  
• Shake Shack is leveraging culinary innovation and limited time offers (LTOs) to drive frequency and traffic, which could increase revenue through higher customer engagement and spending per visit.
  
• The roll-out of new drive-thru digital menu boards and combo options is expected to improve operational efficiency, order accuracy, and guest satisfaction in drive-thrus, potentially impacting profit margins and revenue.
  
• Shake Shack is focused on expanding its licensing business with strong partners and opening new Shacks, particularly in high-growth areas, contributing to total revenue growth and more diversified revenue streams.

Shake Shack Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shake Shack's revenue will grow by 14.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $98.8 million (and earnings per share of $2.17) by about July 2028, up from $12.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.2x on those 2028 earnings, down from 435.9x today. This future PE is greater than the current PE for the US Hospitality industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.24%, as per the Simply Wall St company report.

Shake Shack Future Earnings Per Share Growth

Risks

• Economic uncertainties, such as geopolitical and macroeconomic challenges, could impact consumer spending, leading to pressure on same-store sales and overall revenue growth.
  
• Weather-related disruptions and external factors affecting major markets like New York and Los Angeles have previously impacted sales and could continue to do so, affecting revenue stability.
  
• High exposure to markets with significant tourism, which has been softening, presents a risk as declines in international tourism could hinder revenue from these key markets.
  
• Increasing competition, including promotions and discounts from other fast food and casual dining chains, could pressure Shake Shack’s value proposition and ultimately affect its revenue and margins.
  
• Rising costs, such as beef price inflation and potential tariffs, could further pressure margins despite efforts to improve operational efficiency and supply chain management.

Valuation

• The analysts have a consensus price target of $132.571 for Shake Shack based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $168.0, and the most bearish reporting a price target of just $97.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $98.8 million, and it would be trading on a PE ratio of 73.2x, assuming you use a discount rate of 8.2%.
• Given the current share price of $134.51, the analyst price target of $132.57 is 1.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.