Shake Shack - Fundamental Investment Case

Shake Shack is an American fast casual restaurant originating out of New York City. The company started out as a hotdog cart in Madison Square Park in 2001.

Qualitative Concerns:
• The restaurant industry appears to be struggling with declining traffic and too many locations
• Fast casual, Shake Shack’s specific category, after years of out-performance and growth appears to be moderating.
• Rising wages could be in the early stages and a significant headwind to Shake Shack and the industry as a whole.
• Competition in the fast casual space is intense with massive store openings not only in burgers but substitute products like pizza and chicken.

Fundamental Concerns:
• Competition and industry headwinds appear to already be impacting financials with SSS declining on top of an easy comparison.
• Even worse the SSS quality is extremely low with traffic negative by a couple 100bps more then SSS and pricing driving all of the growth.
• Despite pushing through higher prices, gross margins and operating margins continue to fall.
• The valuation appears fair but with growth quality much lower the multiple compression could be severe.
• Insiders appear to agree with massive insider selling even with the stock off the highs.