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FIN 4328

Student Managed Investment Fund II

Prof. Therese Pactwa

Spring 2015

Prepared by:

Michael Angelo

Robert DellaValle

Peter Figueroa

Michael Garcia

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TABLE OF CONTENTS

Page

I. Executive Summary………………………………………………………………. . 3

II. Company Overview………………………………………………………………... 3-5

III. Industy Analysis……………………………………………………………………5-8

IV. Fundamental Analysis……………………………………………………………..8-13

V. Technical Analysis………………………………………………………………14-16

VI. Summary and Reccomendation……………………………………………….……17

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I. EXECUTIVE SUMMARY

Shake Shack is an American born, now international, quick service restaurant that

focuses on fresh ingredients and guest service. They serve burgers and fresh cut crinkle fries

sourced from local artisanal producers. Its target customers are people willing to pay more for

fresh food as long as it is served fast. As consumers become more conscious of the source of

their food and our environment, they are willing to pay a premium for these qualities.1

OVERVIEW

We believe that Shake Shack is a stock that will add value to our portfolio due to its core

values which will make it stand the test of time. Shake Shack specializes in fast-casual food with

fresh ingredients. Shake Shack focuses on guest service, quality ingredients, environmental

friendliness, and being good neighbors. These qualities will foster the company’s strength and

longevity. Shake Shack is now an international company that has tripled its store count to 63 in

the last two years. It has expansion plans to open at least ten restaurants in the United Stated each

fiscal year.

RECOMMENDATION: Buy 200 Shares at the price of $70 a share for $14,000

Shake Shack is a low risk investment due to its potential longevity and flexibility. They

are focused on guest service, local high quality sources, and environmental conscious. Being

environmentally responsible will not go out of style, rather it will become a necessity for

sustainability. The restaurants offer flexibility by sourcing their ingredients locally and fresh. As

eating trends change, they can source different ingredients to keep up with those trends.

According to New York Times, the number two most expensed restaurant in 2013 was

McDonald’s which is presently facing its worst slump in ten years. Shake Shack offers a fast

served, fresh alternative. This is Shake Shack’s opportunity to gain, while McDonald’s loses.

Money spent on restaurants is increasing. American’s are spending more money dining out, than

on groceries.

II. COMPANY OVERVIEW

Shake Shack (NYSE SHAK) is a fast-casual food restaurant with locations in the United

States and international cities. They are focused on fresh local ingredients, guest service and

environmental responsibility.2

Their menu is comprised of burgers, flat-topped hot dogs, fresh cut crinkle fries and

frozen custard. All food is sourced from artisanal producers. Burgers are made from 100% all-

natural Angus beef, vegetarian fed, humanely raised, without hormones nor antibiotics and

source verified.

1 www.bloomberg.com/research/stocks/people/people.asp?ticker=SHAK

2http://www.nytimes.com/2013/10/08/business/fast-food-not-fine-dining-tops-list-of-expense-

account-spending.html?_r=0

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Shake Shack stays green by composting and recycling bottles, cardboard, and plastics.

Their cooking oil is reused to produce clean energy. Each Shake Shack is constructed from

recycled and sustainable materials. Their tabletops sourced from reclaimed bowling alley lanes,

their walls are made from reclaimed antique barn wood siding, and their booths feature lumber

certified by the Forestry Stewardship Council. Shake Shack uses energy efficient kitchen

equipment and employ LED lighting to reduce electricity consumption.

Shake Shack refers to its customers as guests, evoking a warm and welcoming feeling

fostering loyalty. Shake Shack’s founder, Danny Meyers’ focus on customer service is

highlighted in his book highlighting the importance of hospitality.3

BACKGROUND

In October 1985, Danny Meyers

at age 27 opened the Union Square Café

which is one of New York City’s most

revered restaurants. In 2000, Madison

Square Park entered rehabilitation

because it fell into poor condition. Meyer

led the creation of the Madison Square

Park Conservatory to assist in the

redevelopment of the park. Randy

Garutti, Meyer’s Director of operations,

opened a hot dog cart out of Eleven

Madison, one of Meyer’s restaurants.

That hot dog cart was wildly successful

during it’s three years of operation. In 2004, NYC started taking bids for a kiosk restaurant in

Madison Square Park. Meyer secured this opportunity and opened up his first Shake Shack in

July 2004. He did not intend to begin a chain of restaurants, rather a single location designed for

New York City. The tremendous success of the original Shake Shack revealed obvious

opportunity for further expansion.

Danny Meyer founded Shake Shack after his experiences as a child in the Midwest.

Meyer’s grew up in St. Louis dining on honest food and friendly service in restaurants such as

Steak ‘n Shake. He also frequented Ted Drewes enjoying frozen custard and “concrete,” a shake

as thick as ice cream with various possible mix-ins.

In his thirty years as a restauranteur, Meyer learned that warm customer service, a casual

feel, and locally sourced quality ingredients pleased customers. Meyer is also a best-selling

author of “Setting the Table” sharing his philosophy on the power of hospitality.

3 http://investor.shakeshack.com/investors-overview/news/press-release-details/2015/Shake-

Shack-Announces-Fourth-Quarter-and-Fiscal-Year-2014-Financial-Results/default.aspx

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Key Executives Of Shake Shack4

Danny Meyer - Founder, Union Square Hospitality Group, LLC

Randall J. Garutti - Chief Executive Officer, Director, Member of Nominating and Corporate

Governance Committee and Member of Real Estate Committee

Jeff Ultz - Chief Financial Officer and Member of Real Estate Committee

Zach Koff - Vice President of Operations

Ronald Palmese Jr. Esq - Vice President, General Counsel and Secretary

Peggy Rubenzer - Vice President in People Resources

Phil Crawford - Vice President Information Technology

III. Industry Analysis

Analysis of Competitive Forces

Rivalry

Shake Shack is considered to be in the restaurant industry but in a newer category known

as the fast casual restaurant. Since Shake Shack is in this newer industry they are considered to

have strong competition from rival sellers, but weaker than if they were also considered in the

fast food industry. Some market share might be lost to fast food restaurants such as McDonald’s

or Burger King, but customers are then searching for a product that is different from what Shake

Shack offers. Shake Shack is known for their quality and sit down casual restaurant. Some

companies that Shake Shack competes with in this fast casual restaurant industry are: Panera

Bread, Chipotle, Qdoba, In-n-out Burger, and Five Guys. Although some of these restaurants

offer different kinds of food, the atmosphere and pricing for the companies are similar which

makes them strong competition against Shake Shack.

Threat of New Entrants

Shake Shack has low pressures associated with the threat of new entrants. Shake Shack

and other companies in the United States fast casual restaurant businesses, such as Panera Bread

and Chipotle, have major advantages in this industry. These companies have cost based

advantages which make it hard for new companies to enter the industry. Although any place new

restaurant can sell burgers and fries, customers are most likely going to stay loyal to the brands

they recognize. Customers know that Shake Shack has a standard of quality and would rather pay

a little extra for that quality than purchase a burger at an unknown new store. These barriers in

place cause this low pressure in the industry which benefits Shake Shack.

4 http://investor.shakeshack.com/investors-overview/governance/default.aspx

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Threat of Substitute Products

There is a high threat of substitute products. Consumers are easily able to replace the

products that they receive at Shake Shack. Consumers are able to buy burgers, fries, and shakes

from almost any restaurant they encounter. Luckily Shake Shack has a casual fast food restaurant

feel which is combined with a higher quality burger which draws in more customers. The most

likely products that would be used to substitute the food at Shake Shack would be food that is

made at a different fast casual restaurant. For example, if someone is in the mood for Shake

Shack or another type of food they would most likely not be concerned with money so would

look for quality and might substitute for Panera Bread.

Bargaining Power of Suppliers

In the industry that Shake Shack is in there is low bargaining power of suppliers. Since

there is so much competition in the industry to create high quality burgers they are able to find

supplies from anywhere. A high level of competition among suppliers leads to competition

between suppliers to gain the business of companies in this industry. Suppliers lower prices or

offer special discounts to continue to gain the business of companies in the industry.

Bargaining Power of Buyers

There is a high presence of powerful bargaining power of buyers reduces the profit

potential for the company. The buyers increase competition within the industry by driving prices

down. Buyers are then able to demand greater quality or lower prices since they are able to pit

the competitors against one another. Shack Shake would have to lower prices if it lost a sizeable

market share to a competitor.

Management Strategies Relative to Industry

Randy Garutti, CEO of Shake Shack, has been with the business since it started as a hot

dog cart in 2001. His management theory is completely different than other food industries. In

this fast casual restaurant industry, the companies are typically trying to improve their businesses

to create a sustainable business culture. This is the case for Shake Shack, especially as it begins

to expand its reaches even further. Randy Garutti is quoted saying, “We want to be the best

burger company in the world—for our guests and for our team. We believe we have a unique

opportunity to build something truly special” in an interview with Jeff Haden of Inc.com. This

statement was in a response to other companies in similar industries “selling out” when they

became a global brand. Sustainability is at the forefront of the managerial strategy for Shake

Shack and they are definitely not compromising their values when it comes to expansion. Randy

says, “We want to be the “anti-chain chain” that never talks in terms of “units” or “how fast we

can go”. Instead he insists on finding ways to help the community in which they operate, find

farmers to raise animals without hormones, and minimize the impact Shake Shack is having on

the environment. The management of the company is also very different in that Danny Meyer

hires only humble and able managers. The Chief Restaurant Officer named Sabato Sagria

worked two months at the nine full service restaurants before he was able to lead the company.

Danny Meyer wanted him to understand the restaurant from the inside and experience the spirit

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of the restaurant. This training inside the restaurants keeps Shake Shack connected to the roots

upon which it was founded on creating a fantastic company culture that doesn’t exploit or use

shortcuts.

Shake Shack overview in its Industry

Shake Shack is still in the first stage, the early stage, of the five phases of the industry life

cycle. It is focused on expanding locations and advertising itself to people mindful of health and

environmentally conscious. This type of customer base is growing as focus on health grows

simultaneously. This should continue to increase profits as Shake Shack grows to meet the

demands of a growing consumer base.5

Due to Shake Shack’s focus on fresh food and burgers it has competition in both of those

categories. Their fresh focused competitors are Chipotle and Panera. It has competition in the

burger base is Red Robin. The total 2014 gross profit for Panera was $861,698, Chipotle was

$1,117,756, and Red Robin was $258,518 (All numbers in thousands). Shake Shack’s revenue

increased nearly 44% to $118.5 million and this doesn’t include the multiple new openings in

Boston, California, New Jersey, and now Texas.

5 http://www.bloomberg.com/news/articles/2015-04-14/americans-spending-on-dining-out-just-

overtook-grocery-sales-for-the-first-time-ever

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Relative Industry Valuation

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The chart above compares Shake Shack (SHAK), Red Robin (RRGB), Habit Resturants

(HABT), Chiplote Mexican Grill (CMG), Panera Bread (PNRA), the S&P 500 average and the

consumer goods restaurant industry. Shake Shack’s two major competitors within the gourment

6 http://finance.yahoo.com/echarts?s=SHAK+Interactive#{"comparisons":"HABT,RRGB,CMG,PNRA,^GSPC,^YHOH820","comparisonsColors":"#cc0000,#00ff00,#ff00ff,#9900ff,#000000,#f1c232","comparisonsWidths":"1,1,1,1,1,1","comparisonsGhosting":"0,0,0,0,0,0","range":"max"}

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burger industry that are public are Red Robin and Habit, while their like competitors within the

consumer goods restaurant industry are Chiplote Mexican Grill and Panera Bread. Shake Shack

has only been public for a few months, however it has outperformed the rest of its public

competitors by almost triple or more.

IV. Fundamental Analysis

Ratio Analysis

Financial ratio analysis provides an assessment of a company’s overall performance in

terms of short-term liquidity, asset management and efficiency, long-term solvency, profitability,

and market value. These ratios can be compared on a historical basis to evaluate a company’s

performance over time, and can also be used to compare a company relative to its industry and

direct competitors. All ratios included in this report were obtained from calculating a company’s

numbers directly from their individually annually published 10K reports.

Liquidity Ratios

These ratios measure the short-term solvency of a company, or how readily it can convert short-

term assets into cash, and pay off current liabilities.

Liquidity 2012 2013 2014

Current Ratio 3.23 2.11 0.16

Quick Ratio 2.88 2.03 0.12

Liquidity SHAK RRGB HABT CMG PNRA

Current Ratio 0.16 0.61 3.31 3.58 1.15

Quick Ratio 0.12 0.28 3.15 1.85 0.86

Current ratio measures the proportion of a firm’s current assets versus its current

liabilities. A ratio over one means that the firm is able to meet its short-term debt

obligations on time, while a ratio under one means that the firm may not be in sound

financial health, and is unable to cover its debt.

Shake Shack’s current ratio has decreased drastically over the past three years because of

their new found growth. This growth is not just domestically, but also internationally and will

continue for the coming years.

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Quick ratio (or acid-test) is also a measurement of short-term liquidity. To compute this

number, inventory is subtracted from current assets because it is the least liquid current

asset. Doing so decreases the quick ratio compared to current ratio but provides a better

picture of the firm’s ability to pay off debt since inventory cannot easily be converted to

cash.

Shake Shack’s quick ratio is lower than their competitors because of their rapid growth

they are experiencing. Their competitors are not currently experiencing the rapid growth,

currently going on at Shake Shack.

Profitability SHAK RRGB HABT CMG PNRA

Percentage Of Revenue Growth 0.437494 0.1266703 0.4506492 0.278007 0.060458

Percentage Growth In Profits -0.47043 0.0198567 0.3508096 0.334284 -0.10916

Percentage Growth Of Assets 2.502418 2.1595286 3.0367227 2.267262 2.17787

Net Profit Margin 0.026516 0.0389878 0.0501664 0.173017 0.109103

ROA 0.045491 0.0652067 0.0740794 0.312058 0.214594

ROE 0.125753 0.1263734 0.1081321 0.400377 0.384301

Profitability 2014 2013

Percentage Of Revenue Growth 0.437494 0.4456327

Percentage Growth In Profits -0.47043 0.2665386

Percentage Growth Of Assets 2.502418 2.2530408

Net Profit Margin 0.026516 0.0719778

ROA 0.045491 0.1195524

ROE 0.125753 0.1713881

Net profit margin measures the amount of dollars earned for every dollar of sales

generated by the firm. Net profit margin determines the earnings made by the firm for a

given period of time. The higher the ratio’s value, the more profitable the company is.

Shake Shack’s net profit margin has dropped from the previous year, due to their rapid

growth.

Return on assets (ROA) measures net profits earned as a percentage of the company’s

total assets. This number indicates how efficiently the company uses its assets to generate

sales; thus, a higher ratio shows that more profits are earned using less investment.

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Return on equity (ROE) measures the net income earned by the company as a percentage

of shareholder’s equity. Since this number shows the return to the money invested by

shareholders, this ratio is often considered the “true bottom-line measure of

performance.”

Shake Shack’s ROA and ROE have decreased because of their growth.

Stock Valuation

Using histrocial prices and projected rates from our forecast, we were able to calculate

Shake Shack’s instric value based off their store total at the end of the 2014 fiscal year. This

valuation does not factor in the new stores Shake Shack has currently opened in the 2015 fiscal

year or the hundreds of projected openings in the coming years.

Projected EPS 5.45

Projected DPS 0

Projected ROE 0.425

Sustainable Growth Rate: 0.425

Valuation 2012 2013 2014 Average 2016E

EPS 0.07 0.18 0.14 0.13 0.16

P/E 1057.00 1057.00

CFPS 2.74 3.79 3.58 3.37 5.33

P/CFPS 0.00 0.00 41.33 13.78

SPS 22.82 32.98 47.41 34.40 66.70

P/SPS 0.00 0.00 3.12 1.04

DPS 0.00 0.00 0.00 0.00

Historical values for earnings per share were obtianed from Shake Shack’s annual 10K.

Numbers for cash flow per share and sales per share were calculated by using cash flow and

sales numbers from Shake Shack’s annual 10K divided by their total number of outstanding

shares. The average values for each item were then calculated and multiplied by the growth

estimates to determine the projected share prices for each approach.

Estimated Sales Growth 0.04

Estimated Cash Flow Growth 0.04

Estimated Earnings Growth 0.04

Projected Share Prices:

P/E Approach 175.55

P/CF Approach 76.35

P/S Approach 72.17

AVERAGE 108.02

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Market Price (as of 5/8/2015): 67.95

With the current stock price of $67.95, Shake Shack’s stock is currently highly

undervalued against its instric value of $108.02.

Risk Factors7

1. "Our long-term success is highly dependent on our ability to successfully identify and secure

appropriate sites and timely develop and expand our operations in existing and new

markets."

Most Shake Shacks are located in high-revenue locations, such as Manhattan. This could

change as the brand expands, Shake Shack explains in its filing to the Securities & Exchange

Commission. The company is also particular about the type of people it wants to hire -- and it's

meticulous about training. Having "friendly and motivated" workers as representatives of the

brand is part of how Shake Shack tries to avoid being like other chain restaurants.

Shake Shack workers don't currently have a collective bargaining agreement, and the

company writes that "unionization activities may disrupt our operations and affect our

profitability." Phased implementation of the Affordable Care Act could also affect the cost of

doing business.

2. "Damage to our reputation could negatively impact our business, financial condition and

results of operations."

Obviously, the digital age is a double-edged sword for brand reputation. As much as

Shake Shack relies on mouthwatering Instagram posts to spread the word about its business, a

negative review or incident at a store could go viral. Also, Shake Shack could fall prey to a cyber

attack, making customers feel like the company doesn't do enough to protect their information,

when this is most definitely not the case. Shake Shack takes pride in the service along with the

product they are providing the consumer.

3. "Food safety and food-borne illness incidents may have an adverse effect on our business by

not only reducing demand but also increasing operating costs."

Shake Shack worries about how an illness affecting beef would disrupt operations. Shake

Shack is pretty tight-lipped about where it sources ingredients, and every location has only a few

7 http://www.ibtimes.com/pulse/shake-shacks-ipo-5-risk-factors-consider-investing-1768972

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days' worth of beef on hand. The company has five U.S. sources for raw beef and seven

international ones:

"Our proprietary blend of beef patties and/or raw materials for beef patties originate from

the United States and the EU as well as Australia. In addition, our potato buns are exclusively

from the United States, and other key items such as crinkle-cut fries and American cheese

originate within the United States or the EU. While we have established secondary supply

solutions for some of these ingredients, we have not acquired secondary supplies for all of

them."

4. "Risks related to our international operations and our international licensed Shacks"

Shake Shack gives the example of its Russian branch as international business affected

by broader political and economic factors. Western sanctions against Russia have affected the

brand's ability to import high-quality ingredients, "We have given our licensee in Russia

approval to utilize alternative ingredients not affected by the sanctions, but there is a risk that

these substitute ingredients may be inferior in taste and quality or come from suppliers that have

not been vetted for food safety and quality assurance." This can be a bad hit to a company Shake

Shack who bases their popularity largely on serving high-quality food at a fast-food pace.

Shake Shack also counts "anti-American sentiment" as a risk to business in markets such

as the Middle East. Being perceived as an "American brand" could make the company a target

for boycotting or even violence.

5. "We face significant competition for guests and our inability to compete effectively may affect

our traffic, Shack sales and Shack-level operating profit margins."

Have you ever seen a Shake Shack commercial? Minimal advertising is part of the brand

ethos. Expansion might require the digital and social media strategy of the brand to shift as the

company spends more on advertising, Shake Shack says. “We may need to make greater

investments than we originally planned in advertising and promotional activity in new markets to

build brand awareness.”

Forecasting

INCOME STATEMENT

December 28,

December 30,

December 31, December 25,

December 26,

2016 2015 2014 2013 2012

Shack sales

$ 166,750

$ 138,524

$ 112,042

$ 78,587

$ 55,591

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Licensing revenue $ 9,656

$ 8,022

$ 6,488

$ 3,869

$ 1,447

TOTAL REVENUE $ 176,406

$ 146,546

$ 118,530

$ 82,456

$ 57,038

Shack-level operating expenses:

Food and paper costs $ 51,978

$ 43,180

$ 34,925

$ 23,865

$ 16,774

Labor and related expenses $ 43,624

$ 36,240

$ 29,312

$ 20,096

$ 14,436

Other operating expenses $ 16,655

$ 13,836

$ 11,191

$ 7,315

$ 5,081

Occupancy and related expenses $ 14,515

$ 12,058

$ 9,753

$ 6,892

$ 5,053

General and administrative expenses $ 27,067

$ 22,486

$ 18,187

$ 12,453

$ 6,988

Depreciation expense $ 8,645

$ 7,182

$ 5,809

$ 3,541

$ 2,162

Pre-opening costs $ 9,086

$ 7,548

$ 6,105

$ 2,334

$ 1,858

Loss on disposal of property and equipment

$ 156

$ 130

$ 105

$ 25

—

TOTAL EXPENSES $ 171,728

$ 142,660

$ 115,387

$ 76,521

$ 52,352

OPERATING INCOME $ 4,678

$ 3,886

$ 3,143

$ 5,935

$ 4,686

Interest expense, net $ 540

$ 449

$ 363

$ 52

$ 156

INCOME BEFORE INCOME TAXES $ 4,137

$ 3,437

$ 2,780

$ 5,883

$ 4,530

Income tax expense $ 985

$ 818

$ 662

$ 460

$ 397

NET INCOME $ 3,152

$ 2,619

$ 2,118

$ 5,432

$ 4,133

Pro-forma earnings per unit:

Basic $0.07 $0.18 $0.14

Diluted $0.07 $0.18 $0.14

Pro-forma weighted-average units outstanding:

Basic 29,977 29,934 29,652

Diluted 30,122 30,018 29,918

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V. Technical Analysis

Stock Price since IPO on 1/30/2015

The chart above represents the increase in the Stock price over the passed 5 months. The

IPO came out at $21 a share and closed on the day at $52, dropped down to $38 a month later but

than rose at a rapid growth rate of over 45%. The bottom part of the chart shows the share

trading volume of Shake Shack. This shows the increase in the amount of shares being bought

and sold, and as you can see it has been increasing as the months go on.

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The chart above compares Shake Shack to Chiptole, Habbit, S&P 500, Nasdaq, and Dow

Jones over the last 4 months. Shake Shack has been out performing them all since March. March

is when they came out with the new news of opening up multiple shacks and its stock price grew

over 45- 90% higher than its compitors along with the market indexes. This again proves that

Shake Shack is not just a trending stock but a high powering company that we believe will be an

industry leader for years to come.

Moving Average since 1/30/2015

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The above chart represents rapid growth of Shake Shack’s 50 day Moving Average and

the bottom of the chart represents the increase of Shake Shack’s Money Flow over the past 4

months in billions.

VI. Summary and Recommandation

Shake Shack Inc. (SHAK) has been leading its industry since its IPO and over the passed

3-4 months because of its potential in growth. It’s a huge and popular burger restauraunt all over

New York. They have 41 stores open domestic and 27 licenced abroad as of today and their goal

is to have 450 stores open within the next 5 years. They don’t havemuch marketing services right

now but they said they will be adding them. Their main source of adverstisement is through

Instagram and the word of mouth and

posts by custumers.

They have recently opened 2 new

stores in Boston, another 2 in New Jersey,

and just last week opened one in Austin,

Texas. They are also opening another in

California in the beginning of 2016. We

believe their earnings weren’t that great

their first quarter as a public company

because their main and orginal “Shack”

was not operating due to renovations,

along with their “Shack” in Citi Field due

to the baseball season not being started.

We believe with their long term goal of

450 new Shacks being opened in the next

5 years that they will be a continueing and

strong high growth stock for our portfolio.

We are proposing to buy 200 shares of Shake Shack at the Stock Price of $70 or current

Market Price which would cost us about $14,000.

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IMPORTANT DISCLAIMER

This report was created by a student(s) enrolled in the Student Managed Investment Fund

(SMIF Fund) program at the St. John's University’s Tobin School of Business. The intent of

these reports is to provide potential employers and other interested parties an example of the

analytical skills, investment knowledge, and communication abilities of SMIF Fund students.

SMIF Fund analysts are not registered investment advisors, brokers or officially licensed

financial professionals. The investment opinion contained in this report does not represent an

offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted,

facts and figures included in this report are from publicly available sources. This report is not a

complete compilation of data, and its accuracy is not guaranteed. From time to time, St. John's

University, its faculty, staff, students, or the SMIF Fund may hold a financial interest in the

companies mentioned in this report.