Shake Shack Inc. (SHAK) Is an American-Born Premium Fast- Company Data
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THE FINAL PAGE OF THIS REPORT CONTAINS A DETAILED DISCLAIMER The content and opinions in this report are written by university students from the CityU Student Research & Investment Club, and thus are for reference only. Investors are fully responsible for their investment decisions. CityU Student Research & Investment Club is not responsible for any direct or indirect loss resulting from investments referenced to this report. The opinions in this report constitute the opinion of the CityU Student Research & Investment Club and do not constitute the opinion of the City University of Hong Kong nor any governing or student body or department under the University. Rating HOLD October 14th, 2019 Price (10/19/2019 USD) 88.49 Target price (USD) 77.85 Americas % down from Price on 10/19/2019 12.02% Equity Research Market cap. (USD, b) 03.30 Restaurants Enterprise Value (USD b) 03.24 Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. Target price is for SHAKE SHACK INCORPORATED (SHAK:NYSE) 12 months. Research Analysts: Our analysis on ‘Shake Shack’ (from hereupon referred to as “Shake Shack”, Murtaza Salman Abedin “Shack” or “SHAK”) is Discounted Cash Flow valuation-driven. Shake +852 59858568 [email protected] Shack is a growing brand with rapidly rising potential, however being a small company it still faces various growth-oriented challenges. Our Daria Yong-Tong Yip [email protected] Valuation gives SHAK a fair share value of USD 77.85 (HOLD) and this Samya Malhotra has been calculated through a DCF valuation of the 5-Year forecast period [email protected] ranging from 2019E to 2023E. Gerald Akhmelvan [email protected] We believe the company’s primary target growth strategy of raising store Raymond Widjaja count will still be their continued method of expansion, but it will be [email protected] supplemented by technology and social responsibility driven initiatives like Siddhant Jain [email protected] the partnership with ‘Grubhub’ and an increased incorporation of technology through Project ‘Concrete’. Additionally increased consumer Data Analyst: tourist traffic in high-concentration franchise regions like the Middle East Mandeep Singh and Japan, due to events such as the UAE EXPO 2020, and the Qatar FIFA [email protected] World Cup 2022, should also act as a key driver of growth. These expansion plans, however, will be impacted by challenges faced from increased revenue cannibalization, intense market competition from the likes of unlisted competitors like ‘Five Guys’, and listed ones like ‘Wingstop’. In addition to this, falling global consumer spending trends and the potential for a global economic downturn could impact SHAK’s share value, due to capital reallocation to more stable and established equities. For our Discounted Cash Flow model, we have assumed that SHAK revenue growth will be derived from a mixture of an expansion in international licenced store operations and increases in self-operated stores. We have also used an effective tax rate of 28%, which is slightly higher than the company forecasted rate of (26%-27%). SHAK Stock Price Graph Key Financial Metrics 120 in USD$ (Mn) 2019E 2020E 2021E 100 Revenue 63 4.35 79 6.80 97 4.66 80 EBIT 43 .67 54.71 66.80 EBITDA 87.67 110.12 13 4.70 E C I 60 R P Net Income 31.08 39.03 47.73 40 Revenue Growth 38.11% 25.61% 22.32% Cash Flow from Operations 87.47 111. 76 13 4.25 20 Total Stores 265 32 4 3 87 0 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 8 Self Operated Stores 16 2 20 4 25 0 7 7 8 8 8 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / Licensed Stores 2 1 2 3 4 5 6 7 8 9 0 1 2 1 2 3 4 5 6 7 8 9 0 1 10 3 12 0 137 / / / / / / / / / / / / / / / / / / 1 1 1 1 1 1 / / 1 1 1 1 1 1 1 1 1 / / / 1 1 1 1 1 1 1 1 1 / 1 1 1 1 1 1 EBIT Margin 6.88% 6.87% 6.85% DATE Price Revenue Per Store 2.394 2. 459 2. 519 Table of Contents Company Overview ....................................................................................................................................... 5 Business Summary .................................................................................................................................... 5 Ownership Structure .................................................................................................................................. 6 Legal Cases and Scandals.......................................................................................................................... 7 Industry Overview ......................................................................................................................................... 7 Dubious Future Outlook : Cautiously optimistic market .......................................................................... 7 Labour Cost Inflation and the US-China Trade War ................................................................................ 8 Risk from Digitalization ............................................................................................................................ 9 Competitor Analysis ...................................................................................................................................... 9 Valuation...................................................................................................................................................... 12 Revenue Breakdown .................................................................................................................................... 13 Regional Analysis ........................................................................................................................................ 14 Asia-Pacific ............................................................................................................................................. 15 Middle East & Europe ............................................................................................................................. 15 North America ......................................................................................................................................... 16 South America ......................................................................................................................................... 16 Expansion and Growth ................................................................................................................................ 17 New Markets in Asia ............................................................................................................................... 17 Partnership with Grubhub and Online Ordering ..................................................................................... 18 Project Concrete ...................................................................................................................................... 19 Growth Catalysts ........................................................................................................................................ 20 Grubhub ................................................................................................................................................... 20 2020 and Beyond Health Trends ............................................................................................................. 22 Environmental and Social Governance ................................................................................................... 23 Social Media Presence and Customer Engagement ................................................................................ 24 Catalysts: Conclusion .............................................................................................................................. 25 Investment Risks .......................................................................................................................................... 25 © CityU Student Research & Investment Club 4 Company Overview Business Summary Shake Shack Inc. (SHAK) is an American-born premium fast- Company Data casual restaurant chain that started in 2001 as a hot dog stand in 52 Week Range 40.67 - 105.84 Exchange Rate 1.00 Manhattan. Shake Shack is known for its offerings of hamburgers, P/E Ratio at 10/19/2019 178.41 hot dogs, frozen custards, shakes, beer, and wine. The company is Market Cap ($bn) at 10/19/2019 3.46 listed on the New York Stock Exchange as SHAK.N and has a Diluted Shares at (mn) 12/31/2018 29.18 Average Daily Vol (mn) 0.97 market capitalization of USD 3.669 Billion (10/18/2019). There Exchange Rate 1.00 are three major sources of revenue for Shake Shack: domestic Index RUSSELL 2000 Figure 1.1 company-operated stores (food-servicing), domestic licensed stores (franchising), and international licensed stores. In 2018, there were 34 new domestic company-operated Shacks and 15 new licensed Shacks in US and International locations opened. 2018 also saw the launch into 9 new domestic and global markets including Seattle, the San Francisco Bay Area, and Hong Kong. In total, Shake Shack has 256 locations to date in 17 countries including the US. Shake Shack has two classes of common stock: Class A and Class B common stock. Class A and Class B both entitle its holder to one vote per share held on matters presented to shareholders. The difference between the two is that Class