Shake Shack IPO vaults shares into 'nosebleed' territory

(Reuters) - Shares of Shake Shack Inc (SHAK.N) more than doubled on Friday, putting a nearly $2 billion price tag on the small cult hamburger chain, in a huge bet that its growth can match top performers in the crowded "fast-casual" dining space.

Shake Shack's debut is the latest in a string of blockbuster IPOs from trendy restaurant chains that cater to younger and more affluent diners willing to pay a bit more for fresher and higher quality food. Growth-hungry investors are hoping to replicate the red-hot run of industry darling Chipotle Mexican Grill (CMG.N).

But Shake Shack's own CEO Randy Garutti cast doubt on whether it will do so, calling the chain known for decadent milkshakes and hormone- and antibiotic-free burgers a "very measured growth company."

Its IPO followed the successful listing two months ago of fellow premium burger seller Habit Restaurants (HABT.O). Other hot restaurant debuts have been followed by stock swoons, including Noodles & Co (NDLS.O) and sandwich maker Potbelly Corp (PBPB.O).

Based on 2013 earnings, the company that grew out of a hotdog cart in New York's Madison Square Park is trading at an eye-popping price-to-earnings ratio of about 325, with each restaurant valued at about $27 million.

"Seems like a nosebleed valuation," said Bob Goldin, an executive vice president at foodservice consultancy Technomic. Shake Shack would need "explosive growth for years and years" to justify its stock price, he said.

Its shares hit a session high of $52.50, a gain of 150 percent from its IPO price of $21, raising questions about whether the stock was overvalued. The stock trimmed gains slightly to close at $45.90.

"This is a valuation hurdle that is well ... shaky," said Douglas Kass, president of hedge fund Seabreeze Partners Management Inc, describing the rally as indicative of "silly season."

While the 63-unit chain boasts some of the industry's highest average annual restaurant sales, it only plans to add 10 domestic restaurants per year. Many of those new restaurants will be in lower-profit-margin markets outside New York City.

The company, which had revenue of $83.8 million in the 39 weeks to Sept. 24, eventually plans to have 450 U.S. locations. Shake Shack will also slowly expand overseas, with a store set to open in London later this year and others likely to follow, Garutti said, without providing a specific forecast.

When Chipotle went public in 2006, it had almost 500 U.S. restaurants. Shares in the chain, which now has roughly 1,700 U.S. restaurants and is known for its uncanny ability to profitably increase sales, debuted at $22 and trade at more than $710.

"We're at a point where investors are willing to give 'story' stocks the benefit of a doubt," said James Angel, associate professor of finance at Georgetown University's McDonough School of Business.

Repeating Chipotle's success has proven elusive for most restaurant operators, and it could be even harder to do in the crowded and competitive high-quality burger segment.

"If it were easy to replicate, plenty of other people would have already done it," said Angel.

Shake Shack raised $105 million from its initial public offering.

Its IPO has been bonanza for founder Daniel Meyer, whose 21 percent stake was worth about $390 million based on the stock's intraday high.

Meyer, the chef-owner of popular New York restaurants Blue Smoke, Gramercy Tavern and Union Square Cafe, opened the first Shake Shack in 2004.

J.P. Morgan and Morgan Stanley were lead underwriters for the IPO.

Shake Shack's customers spend roughly $30 for a meal for two, considerably more than diners spend at struggling fast-food giant McDonald's Inc (MCD.N), which this week replaced its CEO after a dismal 2014.

Sales at premium burger chains, which also include Five Guys Burgers and Fries, the Counter and Smashburger, rose 9 percent in 2013, according to Technomic, while overall sales at all burger chains including McDonald's fell 1 percent.

Some old-school operators are also riding the wave. Shares in mall-based chain Red Robin Gourmet Burgers, which went public over a decade ago, have more than doubled in the last two years.

(Additional reporting by Lisa Baertlein and David Gaffen in New York; Editing by Ted Kerr and Christian Plumb)

Source: http://www.reuters.com/article/2015/01/30/us-shake-shack-ipo-idUSKBN0L31RS20150130

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Burger mania: Shake Shack stock up 135%

Burger mania: Shake Shack stock up135%

NEW YORK (CNNMoney) Shake Shack is no longer just a cult favorite for foodies. Its now a cult stock too.

The upscale burger joints shares surged 135% Friday morning in their debut on the New York Stock Exchange.

Shake Shack priced its initial public offering at $21 a share Thursday evening above the price range Shake Shack set earlier this week. It opened at $47.21 and quickly shot above $50 a share before pulling back slightly.

The company raised $105 million from the stock sale. And at Friday mornings price of about $49, Shake Shack is worth $1.74 billion.

Shake Shack is sharing some of the wealth with customers too. To celebrate its first day as a public company, Shake Shack will be offering free breakfast sandwiches and burgers at a food truck outside the NYSE.

Restaurateur Danny Meyer, who is chairman of Shake Shack and founder of the Union Square Hospitality Group that started Shake Shack, owns a 21% stake in the company. His share is now worth nearly $365 million.

Meyer thanked employees and fans in a tweet Thursday night.

#Gratitude. Team, Guests, Community, Suppliers, and Investors. In that order. Thank you all, he wrote.

Shake Shack, which started in 2001 as a hot dog cart in New Yorks Madison Square Park, has quickly become a Big Apple icon.

Expanding but not too quickly. The company currently operates just 63 restaurants worldwide but 16 of them are in the metropolitan New York City area.

Shake Shack has already planted outposts in several global markets, such as London, Moscow, Kuwait, Turkey and the United Arab Emirates.

And the company has said that it wants to expand relatively slowly. It is targeting 10 new locations in the U.S. a year as well as more international locations.

The strategy has been extremely successful so far. Shake Shack reported revenue of $83.8 million in the first three quarters of last year, an increase of more than 40% from the same period in 2013.

Shake Shack is also profitable. But net income fell in the first nine months of 2014, primarily due to higher costs for paper, food and labor as the company opened more locations.

Profiting from the problems at Mickey Ds? Still, Shake Shack appears to be doing well at the expense of McDonalds. The CEO of McDonalds announced his retirement this week following another quarter of bleak sales.

Shake Shack bills itself as a fine casual dining chain, a play on the fast casual term popularized by Chipotle and Panera.

In addition to having the backing of star chef Meyer, Shake Shack says in its IPO filing that it prides itself on using sustainable ingredients, such as all-natural, hormone and antibiotic-free beef.

The proof is in the prices. A typical burger at Shake Shack can cost twice as much as a Big Mac.

Shake Shack also differentiates itself from other burger restaurants by selling hot dogs, beer, wine and of course frozen custard shakes.

Investors are clearly hungry for restaurant IPOs.

El Pollo Loco, Potbelly, Noodles and Zoes Kitchen have gone public in the past two years and soared on their first day of trading.

There is a lot of competition in the burger wars. But those four stocks are now well off their highs.

So is Habit, a popular California burger chain that went public last November and more than doubled in its debut.

Habit may not be as well-known to New Yorkers as Shake Shack. But its burgers were voted best in America by readers of Consumer Reports last year.

To that end, competition could prove to be the biggest risk for Shake Shack.

Even though its burgers are delicious, so are ones made by privately held Five Guys, Smashburger, Bareburger, In-N-Out and many other regional and national upstarts.

Heck, Sonic is doing really well lately thanks to strong demand for its burgers.

But pricey burgers could wind up being another culinary fad too. Krispy Kreme was a hot IPO when the doughnut chain went public in 2000. But the stock is now trading more than 60% below its all-time high.

Shake Shack has already satisfied the palates of hipster burger gourmands. But now has to deal with the fickle tastes of Wall Street traders and hedge funds too.

Source: http://wtkr.com/2015/01/30/burger-mania-shake-shack-stock-up-135/

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