7/23/15

Short SHAK ($59.5)

The entire fast casual restaurant sector is in a bubble with Shake Shack at the pinnacle. I've been watching SHAK since its IPO and, unfortunately, have been too busy to trade and post on it. It debuted earlier this year around $40 and rose to $96 before falling to its current price (as I kicked myself the entire time). Despite the 40% correction, SHAK is still grossly overvalued.

Chipotle is the gold standard for fast casual restaurants. They have executed flawlessly to grow to almost 1,800 stores profitably and are still overvalued at current prices. Below are a few comparison metrics to show the absurdity of SHAK's valuation compared to Chipotle.

At year end, each Chipotle restaurant was valued at $12.7 million compared to $68.4 million for SHAK. SHAK restaurants are valued over 5.4x that of Chipotle, despite producing only 1.6x the revenue, less profitably. The story is the same for every possible metric, with the most ridiculous being SHAK's EV/EBITDA multiple of 234x, over 10 times Chipotle.

The argument for SHAK is centered around growth. It is growing at a rapid pace with the combination of new stores and increased same store sales. Given the valuations, you would expect SHAK to be growing 5-10x as fast as Chipotle. In reality, SHAK is expected to grow revenue 25% next year compared to Chipotle at 15%. In terms of same store sales, SHAK grew 11.7% in Q1 compared to Chipotle at 10.4%, and below Domino's at 14.5%. SHAK is growing at a similar pace to proven concepts in both metrics, yet valued substantially higher.

Bottom line, there are too many headwinds for SHAK to maintain its current price. Any slowdown in consumer spending will be first reflected in discretionary items like $15 hamburger meals. The IPO lockup expires July 29 so I would jump in prior.