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

Shake Shack SHAK will be this week’s highlight IPO if it prices 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 company’s like Chipotle CMG, consumers are gravitating towards a more health-conscious menu.

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 MCD $3.99 Big Mac. In November 2014, the McDonald’s empire saw its worst monthly decline in sales for 10 years.

Financials

Since opening in 2010, the company has opened 63 Shacks, 31 domestic and 27 international in areas of high foot traffic and commercial density where people gather, 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%. Non-Manhattan Shacks had AUVs of around $3.8 million with operating profit margins near 22%. 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% 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% to $83.8 million September 2014. Net income fell 20% to $3.6 million in the 39 weeks ended September 2014 from $4.4 million during that same time in 2013 due to a 60 percent increase in shacks and slower same store sales than previously reported.

Shack’s offering trails behind a string of successful fast casual restaurant chain IPOs last year including Habit HABT, Zoe’s Kitchen ZOES, and El Pollo Loco LOCO. Habit’s shares more than doubled since opening in November. Zoe’s Kitchen spiked more than 70% when they listed in April and El Pollo Loco’s shares jumped as high as 33% since their July debut.

What to Look Out For

Shake Shack has taken its time to expand, taking 5 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 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.

Investors should consider their risks and objectives before making any decision to purchase an IPO, but for those that enjoy the emerging disruption in the restaurant space, consider this as a portfolio addition.

Underwriters for the offering include J.P. Morgan, Morgan Stanley, Barclays, and Goldman Sachs. The 5.0 million shares expect to price in the range of $14 to $16 on Friday.

Other offerings for the week of January 26, 2015

Wednesday, January 28

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

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

Thursday, January 29

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

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

Friday, January 30

Shake Shack SHAK: 5 million shares expect to price between $14 and $16 through J.P. Morgan, Morgan Stanley, Barclays, and Goldman Sachs.

Spark TherapeuticsONC: 5.5 million shares expect to price between $15 to $17 through J.P. Morgan and Credit Suisse.

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

Infrareit HIFR: 20 million shares expect to price between $19 and $21 through BofA Merrill Lynch, Citigroup, and RBC Capital Markets.

Infrardex 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.