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IPO Outlook: Shake Shack IPO Set To Wrap Up Busy Week

Shake Shack (NYSE: SHAK) will be this week’s highlight IPO if its 5 million-share offering raises the expected $92 million in proceeds. With a price between $14 and $16, the company will be valued at nearly $570 million.

Shake Shack describes itself as “a modern day 'roadside' burger stand that serves the classic American menu of burgers, hot dogs, fries, shakes, frozen custard, beer and wine sourced from natural and premium ingredients.”

Founder Danny Meyer leveraged his restaurant expertise from his Union Square Hospitality Group (USHG) to create the first concept of Shake Shack in 2004 – a hot dog cart in New York’s Madison Square Garden. His goal was to create a differentiated experience for customers through Shake Shack’s innovative vision of "Stand for Something Good" that has now expanded to 63 Shacks in nine countries and 34 cities.

Competition is fierce in the $34.5 billion fast-casual sector of the restaurant industry. Shake Shack seeks to differentiate itself by offering premium, healthy ingredients as well as providing a community gathering place for its loyal customer base, many of whom are millennials. As seen with the success of companies like Chipotle Mexican Grill, Inc. (NYSE: CMG), consumers are gravitating towards a more health-conscious menu.

Related Link: Shake Shack Expects 5 Million Share IPO To Price - Per Share

According to a recent S-1 filing, Shack capitalizes on this trend by using “all natural, hormone and antibiotic-free ingredients in their signature items such as their burgers, hot dogs and shakes.” A burger at Shake Shack costs $5.19 compared with Chipotle’s $6.50 chicken tacos and McDonald’s Corporation's (NYSE: MCD) $3.99 Big Mac.


Since opening in 2010, the company has opened 63 Shacks, 31 domestic and 27 international, in areas of high foot traffic and commercial density, such as New York City’s Theater District and London’s Covent Garden. The company plans to open at least 10 Shacks each year beginning in 2015 and believes over the long-term they can have a global footprint of 450 Shacks. The company aims to have most of their growth come from the U.S. market.

In fiscal 2013, Shake Shack’s domestic company-operated locations had AUVs (Average Unit Volume) of approximately $5 million, notably the Manhattan Shacks produced AUVs of approximately $7.4 million with operating profit margins of 30 percent. Non-Manhattan Shacks had AUVs of around $3.8 million with operating profit margins near 22 percent. Since the majority of future shacks will be outside Manhattan locations, Shack is targeting AUVs in the $2.8 to $3.2 million range with operating profit margins in the 18 to 22 percent range.

Shack’s revenue increased from $57 million in December 2012 to $82 million in December 2013. September 2013 revenue of $59.5 million grew by 41 percent to $83.8 million in September 2014. Net income fell 20 percent to $3.6 million in the 39 weeks, which ended in September 2014; and from $4.4 million during that same time in 2013 due to a 60 percent increase in shacks and slower same-store sales.

Shacks offering trails behind a string of successful fast-casual restaurant chain IPOs last year including Habit Restaurants Inc(NASDAQ: HABT), Zoe’s Kitchen Inc (NYSE: ZOES) and El Pollo LoCo Holdings Inc (NASDAQ: LOCO). Habit’s shares more than doubled since opening in November. Zoe’s Kitchen spiked more than 70 percent when they listed in April. El Pollo Loco’s shares jumped as high as 33 percent since their July debut.

Related Link: What Led To The Box IPO In 1 Chart

What To Look Out For

Shake Shack has taken its time to expand, taking five years to open its second location. Slow growth executed correctly can be beneficial for shareholders by keeping debt levels minimal. Boston Chicken (now Boston Market) was a hot IPO in ’93 with 175 stores. It quickly expanded to over 1000 stores through debt financing, eventually causing its 1998 filing of chapter 11.

Shack’s 27 licensed international restaurants import most of their ingredients from the U.S. and E.U. As the company expands its international footprint, Shack has noted issues supplying some locations, like the Middle East, in a timely manner. Recently, sanctions authorized in Russia have hindered the company’s capability to import ingredients. Management has given the restaurant the okay to use alternative ingredients that may not meet its typical high standard for food quality.

Conclusion And Pricing Info

Given Shake Shack’s solid financial position, expansion strategy and radiant customer following, the company looks to be positioned for success when it opens for trading later this week.

As always, investors should consider their risks and objectives before making any decision to purchase an IPO. Underwriters for the offering include JPMorgan, Morgan Stanley, Barclays and Goldman Sachs. The 5.0 million shares expect to price in the range of $14 to $16 on Friday, January 30.

Other Offerings For The Week Of January 26, 2015:

Wednesday, January 28

  • Presbia PLC (NASDAQ: LENS): 4.2 million shares between $11 and $13 through Jefferies.

  • Zosano Pharma Corp (NASDAQ: ZSAN): 3 million shares between $10 and $12 through Ladenburg Thalmann and Roth Capital Partners.

Thursday, January 29

  • Flex Pharma Inc(NASDAQ: FLKS): 4.6 million shares expect to price between $12 and $14 through Jefferies, Piper Jaffray and JMP Securities.

  • Entellus Medical Inc (NASDAQ: ENTL): 4.4 million shares expect to price between $15 and $17 through Bank of America Merrill Lynch, Piper Jaffray, William Blair and Canaccord Genuity.

Friday, January 30

  • Shake Shack (NYSE: SHAK): 5 million shares expect to price between $14 and $16 through JPMorgan, Morgan Stanley, Barclays and Goldman Sachs.

  • Spark Therapeutics (NASDAQ: ONC): 5.5 million shares expect to price between $15 to $17 through JPMorgan and Credit Suisse.

  • TRACON Pharmaceuticals Inc (NASDAQ: TCON): 3.6 million shares expect to price between $12 and $14 through Wells Fargo Securities, Stifel and Needham & Company.

  • InfraREIT Inc(NYSE: HIFR): 20 million shares expect to price between $19 and $21 through Bank of America Merrill Lynch, Citigroup and RBC Capital Markets.

  • Infraredx Inc (NASDAQ: REDX): 4 million shares expect to price between $13 and $15 through RBC Capital Markets, Canaccord Genuity and BMO Capital Markets.

Disclosure: At the time of writing, the author holds no positions in the mentioned securities.

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