It's a classic American success story. A humble hot dog stand operating out of Madison Square Park in New York City grows to become a gourmet casual food powerhouse. With a seemingly un-scalable idea, Shake Shack (SHAK) went public via an IPO in early 2015 and now commands a market capitalization of $1.8 billion, employing nearly 1,700 workers at more than 60 locations around the globe. Just how did this company arrive at its meteoric success?

Shake Shack's Beginnings

The hot dog stand operating out of Manhattan was not just your ordinary city hot dog cart. Celebrity chef Danny Meyer opened Shake Shack in 2000 in conjunction with an effort by the city to revitalize Madison Square Park, which had fallen into relative disrepair. The location was ideal, situated near investment bank Credit Suisse's (CS) New York headquarters, and one block from the iconic flatiron building. Soon after the original cart opened, people would line up daily during lunch time. According to an interview with CEO Randall Garutti, nobody was thinking about expanding beyond the hot dog cart at this point, but the city was looking to put a permanent fixture in the park as part of its revitalization efforts and actively solicited bids for potential projects. (See also: Healthifying The Fast Food Market.)

In July 2004, Meyer and Garutti won the bid and were able to convert the hot dog cart into a permanent kiosk-style fast food restaurant, serving gourmet hamburgers, hot dogs, crinkle cut French fries and, of course, milk shakes under the auspices of the Union Square Hospitality Group (USHG), operator of a number of the city's best upscale restaurants including the nearby Eleven Madison Park. This original Shack was specifically designed by the architecture firm SITE Environmental Design to be harmonious with the nature of the park as well as its urban surroundings. Modeled after a classic road-side burger stand, this modern incarnation saw immediate success as the people queuing up to order would often stretch around the park and take up to two or even three hours to reach the counter.

Soon, the Shake Shack earned a cult following. People from all over the world, as well as locals would take advantage of its unique location. A web cam was installed, known as the 'shack cam', allowing people to check on the length of the line before deciding whether or not to queue up. In June, 2014, a promotion, in which five celebrity chefs each contributed a limited edition burger recipe, drew the longest line ever recorded at the original Shake Shack. 

International Expansion

In 2010, Shake Shack expanded its operations, opening up locations throughout New York City, including the Theater District, Upper East Side, and Chelsea neighborhoods. It also opened a location in Miami's South Beach, its first location outside of New York City. In 2011, the expansion continued within New York as Shake Shack inked deals for prime locations inside Grand Central Terminal, at JFK airport, and at Citi Field, home of the New York Mets. By 2015, Shake Shack had 63 locations throughout the country and around the world. In the U.S., there are Shake Shack restaurants in New York, New Jersey, Florida, Georgia, Illinois, Nevada, Connecticut, Maryland, and Washington DC. Internationally, there are locations in London, Moscow, Beirut, Dubai, Istanbul, Abu Dhabi, Doha and Kuwait City.

Despite this rapid expansion, for most of Shake Shack's existence, the ethos was to maintain a community vibe and make Shake Shack part of New York. As a result of that way of thinking, each new location in each city has been designed specifically for its location to and keep that unique, community feel. One of the mottos that Garutti lives by is “The bigger we get, the smaller we need to act.” This means that as the company continues to expand, it will also need to work harder and harder to preserve its commitment to quality and community. (See also: Fast Food Versus Fast Casual.)

Fundamentals and Share Price

Shake Shack shares have performed fairly well, gaining 8.5% so far since the IPO. The company reported positive earnings of six cents a share, which gives it a pretty large P/E multiple of 835. (For more, see: How to Analyze Restaurant Stocks.)

There are a number of competitors against which Shake Shack's operating performance can be compared. For fiscal year 2014:

Company

Ticker

P/E

ROE

Net Profit Margin

Market Cap ($billions)

Shake Shack

SHAK

834.56

8.47%

1.79%

1.81

Sonic Corp.

SONC

33.01

68.38%

8.67%

1.66

Jack in the Box

JACK

39.22

25.99%

7.92%

3.65

Wendys Co.

WEN

33.28

6.66%

5.89%

3.94

McDonalds

MCD

20.28

32.97%

17.34%

94.01

Brinker Int'l

EAT

25.57

145.01%

5.30%

3.85

Denny's Corp.

DENN

32.2

653.59%

6.93%

1.01

Chipotle

CMG

48.33

25.09%

10.84%

21.21

Yum Brands

YUM

34.67

56.61%

7.69%

34.68

Popeyes

PLKI

36.95

61.00%

16.31%

1.37

Nathan's Famous

NATH

20.01

21.34%

10.04%

0.22

Source: Reuters, Data as of April, 2015

Compared to its peers, Shake Shack has a much higher P/E ratio than the average of 32, but because Shake Shack is growing rapidly through expansion and is still a new company, the company's earnings may yet rise in the future to bring the P/E in line with the industry. The relatively low profit margins and return on equity might also be attributed to its rapid expansion. On the other hand, it might point to the company trying to grow too much too quickly for its own good. (See also: Shake Shack and Chipolte: A Financial Comparison.

The Bottom Line

With so many success stories in technology it is interesting to see a company that started out as a small hot dog cart turn itself into a multi-billion dollar international restaurant chain. It was because of Shake Shack's modest beginnings that it was able to build a sense of community and a cult following that it has since capitalized on. Now, Shake Shack feeds gourmet burgers, crinkle fries, and milk shakes to people around the world.

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