Free Trial

Expansion Opportunity Makes Shake Shack (NYSE: SHAK) a Screaming Buy

Expansion Opportunity Makes Shake Shack (NYSE: SHAK) a Screaming Buy
Being a restaurant during a pandemic is tough. Being a restaurant that is concentrated in densely populated areas during a pandemic is even tougher.

That is the situation that Shake Shack (NYSE: SHAK) finds itself in. Same-Shack sales – the company’s term for comps – dipped 49% yoy in Q2. That number improved to down 31.7% yoy in Q3, and then to a 21% yoy decrease in October, but it’s clear that Shake-Shack needs this pandemic to end.

When the Pfizer NYSE: PFE vaccine news came out, investors predictably rejoiced, sending shares up 15.5% to 52-week highs. Shares have continued to advance over the past month, though at a slower pace.

I’m not going to sugarcoat it: Shake Shack is in for a tough winter. But a vaccine – or perhaps multiple vaccines – should be widely distributed in 2021. Once that happens, Shake Shack can continue to aggressively expand from its current 300 worldwide locations.

Expansion Opportunity Makes Shake Shack (NYSE: SHAK) a Screaming Buy

Stable Comps + Aggressive Expansion is the Future

Same-Shack sales (catchy, eh?) will certainly show strong growth in 2021. But that’s mainly due to the easy comps that Shake Shack will face in 2021. Pre-pandemic, the chain’s comps were growing at a really slow rate: 1.3% in fiscal 2019.

At first glance, this looks like a reason for concern. But when you dig in, it isn’t. Shake Shack’s average united volume (AUV) is already outstanding: $4.1 million in 2019. That was nearly double Chipotle’s NYSE: CMG 2019 AUV of $2.2 million.

Now, this is no indictment on Chipotle which is well-positioned for post-pandemic prosperity. The numbers speak more to the success of Shake Shack and the locations of its restaurants. The chain has a strong presence in New York City, where AUV is really high. As Shake Shack continues to expand outside the NYC area, AUV will continue to fall, but should remain higher than its peers.

That brings us to the expansion opportunity, which some believe is even bigger than Shake Shack thinks:

 Shake Shack’s 300 worldwide restaurants might sound like a lot, but not when you compare it to other restaurant chains. Chipotle, for example, has around 2,700 restaurants worldwide and it still isn’t anywhere close to oversaturation. McDonald’s NYSE: MCD has nearly 40,000 restaurants across the world. I’m not saying that Shake Shack is going to become the next Chipotle – and I’m certainly not saying that it’s going to become the next McDonald’s – but the comparisons show much growth potential is out there.

Back in August, Wedbush Analyst Nick Setyan said that management’s “long-term domestic company unit target of 450 could prove meaningfully conservative.” I agree with Setyan, but conservatism by management is never a bad thing – particularly for shareholders. If (when?) Shake Shack revises its long-term unit target, shareholders will reap the rewards.

Slow and Steady Wins the Race

Shake Shack created such a strong following because of its commitments to community and quality. It’s important that Shake Shack doesn’t lose sight of what made it great as it expands. I think it’s best if Shake Shack doesn’t expand too quickly, and carefully designs its new locations.

Fortunately, the company seems to be doing just that. Shake Shack increased its number of new stores by 32.2% in 2019, but that only equated to a 73-store increase. In 2021, the company plans to open 35 domestic restaurants and 15 international restaurants.

It might take several years – or even a decade – for Shake Shack to exhaust a good percentage of its expansion potential, but patience could pay off handsomely for shareholders.

Digital Progress Bodes Well for the Future

In August, we pointed out that Shake Shack was starting to beef up its online operations. The company’s Q3 performance was encouraging to say the least: 60% of sales were digitally-enabled during the quarter. Shake Shack now offers curbside pickup at more than 70 of its locations.

Shake Shack’s digital progress will pay off post-pandemic because even if customers pick up their orders in person, online ordering can make the entire process more efficient. The curbside pickup will be less of a factor post-pandemic, but it still shows Shake Shack’s ability to adapt to difficult circumstances. Just what you want to see from a growing company.

Shake Shack Shares are Appetizing

By getting into Shake Shack now, you’re paying a premium vs. where shares were for much of 2020. But the long-term potential is so big that it doesn’t make sense to insist on a pullback. I’d look to get into Shake Shack sooner rather than later.

→ Stop whatever you’re doing! (From Timothy Sykes) (Ad)

Should you invest $1,000 in Shake Shack right now?

Before you consider Shake Shack, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Shake Shack wasn't on the list.

While Shake Shack currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

Ten Starter Stocks For Beginners to Buy Now Cover

Just getting into the stock market? These 10 simple stocks can help beginning investors build long-term wealth without knowing options, technicals, or other advanced strategies.

Get This Free Report
Like this article? Share it with a colleague.

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Shake Shack (SHAK)
4.1049 of 5 stars
$121.86-1.8%N/A716.82Hold$110.00
Pfizer (PFE)
4.9865 of 5 stars
$27.87-0.8%6.03%37.66Moderate Buy$33.58
Compare These Stocks  Add These Stocks to My Watchlist 


Featured Articles and Offers

Alphabet Gaining Momentum: Can It Reach $200 by December?

Alphabet Gaining Momentum: Can It Reach $200 by December?

Alphabet (GOOGL) is in the midst of a year-end rally, climbing 10% since September, and some analysts predict it could gain another 30% by Christmas!

Recent Videos

ISRG Stock Surges: AI and Healthcare Innovation at the Core
Energy Vault’s 100% Stock Jump: CEO Discusses $350M Project in Australia in MarketBeat CEO Series
Market Shifts After Election: What Stocks Could Benefit Most?

Stock Lists

All Stock Lists

Investing Tools

Calendars and Tools

Search Headlines