2022-08-22-Credit_Suisse-Shake_Shack_Decrease_Target_Price_13页_511kb

Shake Shack (SHAK) Equity Research Analysis

Summary

• Key Takeaways & Future Outlook: Despite near-term disappointment due to business trend pullbacks and delayed new unit openings (leading to a downward revision of 2022 units to 35-40), while sentiment and top-line visibility remain challenged, the long-term story around Shake Shack remains intact. The thesis centers on growing Average Unit Volume (AUV), margin expansion, and higher-return unit growth (mitigating pre-COVID concerns on declining AUVs, margin compression, and lower ROIs) over the medium-to-long term. Consequently, the target price is lowered to US$61 from US$72, reflecting reduced top and bottom-line visibility, market pullback, and a DCF-supported view.

• Current Challenges:

  • Sales Recovery Moderated: Q2 Same-Store Sales (SSS) were weaker than expected (10.1%) due to pullbacks in mobility (especially lower-income consumers) and muted office/entertainment traffic. July SSS were only around 5%. Recovery is expected in Q3, but moderated from prior months. Urban markets face structural headwinds due to lower occupancy.
  • Margin Pressure Continued: Restaurant margin beat in Q2 (18.8%) exceeded initial expectations, driven by better flowthrough and lower beef costs, but pressures remain. Key challenges include high commodity inflation, slower urban market recovery, and higher delivery costs. Prudent pricing (including a potential 5-7% mid-4Q increase) and digital efficiency (kiosks, point-of-sale) are planned levers.
  • Unit Growth Slowed: Supply chain and permitting delays significantly impacted the initial 2022 guidance (down to 35-40 units from 40-45 initial plan). Drive-thrus are performing exceptionally well (AWS ~$80k) and represent a significant part of new unit economics and future growth potential. New unit AUV expansion is key for improved returns over time, though initial economics are below historical levels.

• Long-Term Opportunities & Strategy:

  • Digital Aggression: A fundamental digital strategy is enabling enhanced convenience, broader access points (digital is ~38% of mix), increasing customer frequency (digital check average 25% higher), and is expected to grow further with promotions and targeted marketing.
  • Expanding Format Portfolio: Growing beyond traditional sit-down units, emphasis is now on drive-thrus (expected to make up 20-30% of Q3 2023), which show superior economics (~$4.2MM annualized AUV vs. ~$3MM target). This diversifies the unit base and addresses a rising addressable market.
  • Menu & Pricing Innovation: Innovation is key, planned menu updates (vegan, Veggie Shack) and strategic pricing adjustments, particularly third-party delivery pricing, aim to drive SSS and average checks.
  • Selective Growth: While committed to growth, development is shifting subtly towards suburban market segments in the short term.
  • Margin Targets: The company aims to return to greater than 20% restaurant margins long-term.

• Risks:

  • Unit Growth/Productivity: Slower development than planned or suboptimal performance in new units/s markets.
  • Consumer Spending: Weakness in discretionary spending during economic downturns or uncertainties.
  • COVID-19 Pandemic: Continued uncertainty or flare-ups impacting sales.
  • Generally: Market pullback, macroeconomic factors, competitive pressures, costs, COVID-affected travel/tourism trends.

• Valuation & Recommendation: Neutral rating with a US$61 target price. Further下调 based on lower revenue margin and EBITDA estimates.