Shake Shack Announces Plans to Become as Big as Five Guys. Here’s Why This Is a Risky, High-Reward Vision That Investors Should Pay Attention To.
Hamburger restaurant chain Shake Shack (NYSE:Shaq) Its long-term vision has only tripled in size. But this may be the most complicated development for shareholders since the company went public a decade ago.
On January 13, at the ICR’s 27th Annual Conference, Shake Shack significantly strengthened its long-term goals. When it went public, management said there might one day be 450 company-owned U.S. restaurant locations. He has made tremendous progress against this original goal. It had just 31 locally owned locations at the end of 2014, but now has ten times that number.
Shake Shack management believes it can have more than 1,500 local company-owned restaurants in the long term. In perspective, that would make it roughly the same size as fellow burger chain Five Guys, and would be much larger than other chains like Carl’s Jr. And Whataburger.
Its importance cannot be understated: This plan represents a complete reimagining of what Shake Shack could be on a large scale. But there is a risk involved with this plan, which is worth noting before we get too excited.
There are two main ways to grow Restaurant business: Businesses can open new owned locations, or they can grant restaurant franchises to third parties. Company-owned locations are more expensive and slower to open. But if the unit economics are attractive, it’s a worthwhile plan. However, as chains become larger and more complex, most choose the franchise model.
To be clear, Shake Shack franchises and licenses restaurants, especially internationally. And it will continue to do so in the future. But the management target of 1,500 is for company-owned sites only. This is more than three times its original goal and represents an approximately 400% increase over its company-owned footprint today.
Main component of Investment thesis Now is whether or not Shake Shack’s unit economics will remain attractive at this scale.
According to management, Shake Shack locations currently average $4.1 million in sales annually, which is known as average unit volume (AUV). Based on preliminary numbers, the company achieved a restaurant operating margin of 22.7% in 2024.
But keep in mind that Shake Shack is concentrated in urban areas. At the end of 2023, 39% of company-owned domestic locations were located in urban areas with potential for increased sales volume. As the company grew, it necessarily expanded into suburban areas, which negatively impacted AUV.
Expanding to 1,500 locations will put more pressure on Shake Shack’s AUV, and management acknowledges that. The long-term goal for AUV is between $2.8 million and $4.0 million. In other words, these newer sites will have a lower sales volume than the average site now.
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