Monday, May 23, 2016

Well That Was a Shack-ingly Brief Run

  In the world of Shake-Shack, everything is about “The Shack.”  
 Where most restaurants report “same-store sales” and “store-level operating margins” and “store economics,” SHAK reports “same-shack” sales and “shack-level operating margins” and “shack-onomics.”
 It’s a cute, quirky culture the company has built from modest roots—the now-famous hot-dog stand in Madison Square Park—into an international phenomenon, in 12 short years.
 Of course, 12 years in today’s world is actually a long time, but things didn’t get serious until 2004 when the first Shake Shack restaurant opened, starting the launching pad that would shoot the rocket ship into orbit following the wildly hyped IPO just 16 months ago to the point where, by the end of the first quarter, there would be 88 such “Shacks,” with an inordinately large number—36 to be exact—licensed to other operators outside the U.S., mainly in the Middle East.
 And it is towards that Middle East exposure we turn our attention here, since Wall Street’s Finest haven’t bothered—and anything Wall Street’s Finest don’t bother with is always interesting to this virtual column.
 Not so long ago—in the July 2015 S-1, for the record—SHAK described the Middle East as “our most prominent growth market.” 
 And the Middle East clearly was the prominent growth market at that point, having seen 49.7% licensing revenue growth in the fourth quarter of 2014.
 But by the first quarter of 2016 that growth rate had throttled down to 14.3%.
 What happened to SHAK’s “most prominent growth market”?
 Here’s what management said on the recent earnings call:
 Now, while the Middle East remains a very important market and part of our international footprint, we are experiencing softness in sales there this year, particularly in our mall locations throughout energy-dependent markets that are seeing a natural economic slowdown right now coupled with currency headwinds. So we expect sales in our Middle East Shacks to remain under pressure through this year given the macro environment in the region.”
 Not too long ago—i.e. last summer, around the same time as the aforementioned S-1—the company was describing the Middle East in far rosier terms:
“When we had just opened the second Shake Shack on the Upper West Side of New York, Mohammed Alshaya, probably many of you know Alshaya, from the Middle East, came to us and said, I don't normally do this.  I normally go with much bigger brands here, and I know you only have two, but I think Shake Shack would do tremendous in the Middle East and I want to bring you over. And Danny and Randy kind of looked at each other and shook their heads, but out of pure curiosity got on a plane and went to Dubai, saw the way Alshaya operates, saw how they do things, saw how their culture connects with ours and said, you know what, let's take a chance, let's do it.  So they opened a Shake Shack in the Mall of the Emirates in Dubai and it was one of the leading restaurants in the system and still is at this time.”
 Alshaya is, indeed, a legit operator, and they do indeed normally go with bigger brands.   They’ve opened Cheesecake Factories and Pottery Barns, and they know how to do it. 
 But Cheesecake Factory and Pottery Barn took their time on the whole opening-a-zillion-stores-overseas thing.   
 Specifically, it took Cheesecake Factory 35 years before they opened their first restaurant overseas, in Dubai, with Alshaya in 2012—and the company spent a lot of time getting ready.  
 After all, Cheesecakes in Dubai can’t serve alcohol or sell pork products, so the menu had to be adjusted and the company’s culture had to be transported all the way from Calabasas Hills to the United Arab Emirates.
 Today Alshaya operates just 9 Cheesecakes, compared to the couple-dozen-plus Shacks it opened with a bang not so long ago.
 And while Cheesecake has let it be known, most recently in March, that its international units continue to do well, SHAK said on its recent call the Middle East market is already “maturing...quite a bit” as it switched the focus to new licensees in Asia:
   “If you look at our guidance of seven Shacks all year here for that, the Middle East has got quite a few restaurants there. Our region is maturing for Shake Shack quite a bit. We have some great opportunity. We just opened in Riyadh and doing really well there. As I've said, in Bahrain and Oman. So we fully expected that region to mature a little bit.”
 From “our most prominent growth market” to a “maturing” region in less than 12 months might be a record.   
 Not the record a growth company wants to hold, but a record nonetheless.

Jeff Matthews
I Am Not Making This Up

© 2016 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

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