After a tumultuous start following a much anticipated IPO, Shack Shake (SHAK), the fast-casual chain that operates and licenses more than 60 restaurants across the world, saw its stock surge from $49.7 to $59.93, an increase of 14% since Monday. Shares managed to hit an all-time high of $53.90 on Monday, and continued in the same trajectory, closing at an incredible $57.47. SHAK now trades more than 30% higher than when it went public and this after it rose to $45.9, 119% above its offering price on its first day of trading.
A Great Start That Was Short Lived
Shake Shack has shown tremendous growth by increasing the number of Shak restaurants from seven to 63 since 2010. Looking to fund their aggressive domestic and international expansion strategy, the company raised $105 million in late January through an initial public offering.
Investors were initially dubious about the company because of the amount of hype surrounding the offering compounded by the fact that the stock closed 119% above the IPO price. As a result, Shake Shack saw their share price fall to an all-time low of $38.63 on February 17th. Since, the stock has gradually appreciated in value, fueled by their latest quarterly report.
Latest Numbers Showing Continued Growth
Total sales increased 51.5% to $34.8 million (above) in Q4 2014 which represents a 52% increase from Q4 2013. This was mainly attributable to a 51.6% increase in Shack sales (from the opening of 10 new domestic and company operated stores) with same Shack-sales growing 7.2%.Shake Shack saw a significant improvement in their Shack-level operating profits which grew 7.2% in the last quarter of 2014 from the same period a year ago.
Finally, the company experienced a 58.5% and 31.5% increase in adjusted EBITDA in Q4 FY2014 and FY 2014 respectively over the same period a year ago (above). Adjusted EBITDA Margin decreased slightly to 15.93% due to higher food, paper and labor costs.
Beware the upcoming lockout expiration
An IPO lockup period, whereby pre-IPO investors are prohibited from selling their shares, is generally 180 days after the IPO date. During this time, the low supply of shares from a company’s small float results in high artificial demand.
Once this date arrives, and the locked up shares are freely traded, the market is flooded with greater supply and not enough demand. This puts selling pressure on the stock price.
Go Pro (GRPO) experienced this following their June 2014 IPO after their underwriter J.P. Morgan prematurely removed the lockup restriction in October. Consequently, the company saw a gradual decline in their share prices from a high of $93.85 (below) to $46.35 today.
Shake Shack’s current float is 5 million shares, out of a potential 24.27 million outstanding. After the lockup, the majority of the locked up shares will hit the market. With the lockup expiration on July 29th 2015, Shake Shack’s price will be negatively affected by the end of 2015 summer. Until that time, it’s difficult to predict the price movement due to the limited float.
In their latest earnings call, Shake Shack provided guidance for 2015 with expected revenues growth in the low single digits and sales to be in between $159 to $163 million. On the lower end that would give SHAK a P/S of 4.39x, making it slightly more expensive than the industry average of 3.4x. Such a metric may be warranted with the company’s ambitious growth strategy of opening ten new domestically operated restaurants and five internationally licensed Shaks within the year. Until the lockup period expired, investors should stay clear of Shake Shack due to the volatile swings that aren’t fundamentally driven.