Post on 01-May-2018
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FIN 4328
Student Managed Investment Fund II
Prof. Therese Pactwa
Spring 2015
Prepared by:
Michael Angelo
Robert DellaValle
Peter Figueroa
Michael Garcia
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TABLE OF CONTENTS
Page
I. Executive Summary………………………………………………………………. . 3
II. Company Overview………………………………………………………………... 3-5
III. Industy Analysis……………………………………………………………………5-8
IV. Fundamental Analysis……………………………………………………………..8-13
V. Technical Analysis………………………………………………………………14-16
VI. Summary and Reccomendation……………………………………………….……17
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I. EXECUTIVE SUMMARY
Shake Shack is an American born, now international, quick service restaurant that
focuses on fresh ingredients and guest service. They serve burgers and fresh cut crinkle fries
sourced from local artisanal producers. Its target customers are people willing to pay more for
fresh food as long as it is served fast. As consumers become more conscious of the source of
their food and our environment, they are willing to pay a premium for these qualities.1
OVERVIEW
We believe that Shake Shack is a stock that will add value to our portfolio due to its core
values which will make it stand the test of time. Shake Shack specializes in fast-casual food with
fresh ingredients. Shake Shack focuses on guest service, quality ingredients, environmental
friendliness, and being good neighbors. These qualities will foster the company’s strength and
longevity. Shake Shack is now an international company that has tripled its store count to 63 in
the last two years. It has expansion plans to open at least ten restaurants in the United Stated each
fiscal year.
RECOMMENDATION: Buy 200 Shares at the price of $70 a share for $14,000
Shake Shack is a low risk investment due to its potential longevity and flexibility. They
are focused on guest service, local high quality sources, and environmental conscious. Being
environmentally responsible will not go out of style, rather it will become a necessity for
sustainability. The restaurants offer flexibility by sourcing their ingredients locally and fresh. As
eating trends change, they can source different ingredients to keep up with those trends.
According to New York Times, the number two most expensed restaurant in 2013 was
McDonald’s which is presently facing its worst slump in ten years. Shake Shack offers a fast
served, fresh alternative. This is Shake Shack’s opportunity to gain, while McDonald’s loses.
Money spent on restaurants is increasing. American’s are spending more money dining out, than
on groceries.
II. COMPANY OVERVIEW
Shake Shack (NYSE SHAK) is a fast-casual food restaurant with locations in the United
States and international cities. They are focused on fresh local ingredients, guest service and
environmental responsibility.2
Their menu is comprised of burgers, flat-topped hot dogs, fresh cut crinkle fries and
frozen custard. All food is sourced from artisanal producers. Burgers are made from 100% all-
natural Angus beef, vegetarian fed, humanely raised, without hormones nor antibiotics and
source verified.
1 www.bloomberg.com/research/stocks/people/people.asp?ticker=SHAK
2http://www.nytimes.com/2013/10/08/business/fast-food-not-fine-dining-tops-list-of-expense-
account-spending.html?_r=0
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Shake Shack stays green by composting and recycling bottles, cardboard, and plastics.
Their cooking oil is reused to produce clean energy. Each Shake Shack is constructed from
recycled and sustainable materials. Their tabletops sourced from reclaimed bowling alley lanes,
their walls are made from reclaimed antique barn wood siding, and their booths feature lumber
certified by the Forestry Stewardship Council. Shake Shack uses energy efficient kitchen
equipment and employ LED lighting to reduce electricity consumption.
Shake Shack refers to its customers as guests, evoking a warm and welcoming feeling
fostering loyalty. Shake Shack’s founder, Danny Meyers’ focus on customer service is
highlighted in his book highlighting the importance of hospitality.3
BACKGROUND
In October 1985, Danny Meyers
at age 27 opened the Union Square Café
which is one of New York City’s most
revered restaurants. In 2000, Madison
Square Park entered rehabilitation
because it fell into poor condition. Meyer
led the creation of the Madison Square
Park Conservatory to assist in the
redevelopment of the park. Randy
Garutti, Meyer’s Director of operations,
opened a hot dog cart out of Eleven
Madison, one of Meyer’s restaurants.
That hot dog cart was wildly successful
during it’s three years of operation. In 2004, NYC started taking bids for a kiosk restaurant in
Madison Square Park. Meyer secured this opportunity and opened up his first Shake Shack in
July 2004. He did not intend to begin a chain of restaurants, rather a single location designed for
New York City. The tremendous success of the original Shake Shack revealed obvious
opportunity for further expansion.
Danny Meyer founded Shake Shack after his experiences as a child in the Midwest.
Meyer’s grew up in St. Louis dining on honest food and friendly service in restaurants such as
Steak ‘n Shake. He also frequented Ted Drewes enjoying frozen custard and “concrete,” a shake
as thick as ice cream with various possible mix-ins.
In his thirty years as a restauranteur, Meyer learned that warm customer service, a casual
feel, and locally sourced quality ingredients pleased customers. Meyer is also a best-selling
author of “Setting the Table” sharing his philosophy on the power of hospitality.
3 http://investor.shakeshack.com/investors-overview/news/press-release-details/2015/Shake-
Shack-Announces-Fourth-Quarter-and-Fiscal-Year-2014-Financial-Results/default.aspx
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Key Executives Of Shake Shack4
Danny Meyer - Founder, Union Square Hospitality Group, LLC
Randall J. Garutti - Chief Executive Officer, Director, Member of Nominating and Corporate
Governance Committee and Member of Real Estate Committee
Jeff Ultz - Chief Financial Officer and Member of Real Estate Committee
Zach Koff - Vice President of Operations
Ronald Palmese Jr. Esq - Vice President, General Counsel and Secretary
Peggy Rubenzer - Vice President in People Resources
Phil Crawford - Vice President Information Technology
III. Industry Analysis
Analysis of Competitive Forces
Rivalry
Shake Shack is considered to be in the restaurant industry but in a newer category known
as the fast casual restaurant. Since Shake Shack is in this newer industry they are considered to
have strong competition from rival sellers, but weaker than if they were also considered in the
fast food industry. Some market share might be lost to fast food restaurants such as McDonald’s
or Burger King, but customers are then searching for a product that is different from what Shake
Shack offers. Shake Shack is known for their quality and sit down casual restaurant. Some
companies that Shake Shack competes with in this fast casual restaurant industry are: Panera
Bread, Chipotle, Qdoba, In-n-out Burger, and Five Guys. Although some of these restaurants
offer different kinds of food, the atmosphere and pricing for the companies are similar which
makes them strong competition against Shake Shack.
Threat of New Entrants
Shake Shack has low pressures associated with the threat of new entrants. Shake Shack
and other companies in the United States fast casual restaurant businesses, such as Panera Bread
and Chipotle, have major advantages in this industry. These companies have cost based
advantages which make it hard for new companies to enter the industry. Although any place new
restaurant can sell burgers and fries, customers are most likely going to stay loyal to the brands
they recognize. Customers know that Shake Shack has a standard of quality and would rather pay
a little extra for that quality than purchase a burger at an unknown new store. These barriers in
place cause this low pressure in the industry which benefits Shake Shack.
4 http://investor.shakeshack.com/investors-overview/governance/default.aspx
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Threat of Substitute Products
There is a high threat of substitute products. Consumers are easily able to replace the
products that they receive at Shake Shack. Consumers are able to buy burgers, fries, and shakes
from almost any restaurant they encounter. Luckily Shake Shack has a casual fast food restaurant
feel which is combined with a higher quality burger which draws in more customers. The most
likely products that would be used to substitute the food at Shake Shack would be food that is
made at a different fast casual restaurant. For example, if someone is in the mood for Shake
Shack or another type of food they would most likely not be concerned with money so would
look for quality and might substitute for Panera Bread.
Bargaining Power of Suppliers
In the industry that Shake Shack is in there is low bargaining power of suppliers. Since
there is so much competition in the industry to create high quality burgers they are able to find
supplies from anywhere. A high level of competition among suppliers leads to competition
between suppliers to gain the business of companies in this industry. Suppliers lower prices or
offer special discounts to continue to gain the business of companies in the industry.
Bargaining Power of Buyers
There is a high presence of powerful bargaining power of buyers reduces the profit
potential for the company. The buyers increase competition within the industry by driving prices
down. Buyers are then able to demand greater quality or lower prices since they are able to pit
the competitors against one another. Shack Shake would have to lower prices if it lost a sizeable
market share to a competitor.
Management Strategies Relative to Industry
Randy Garutti, CEO of Shake Shack, has been with the business since it started as a hot
dog cart in 2001. His management theory is completely different than other food industries. In
this fast casual restaurant industry, the companies are typically trying to improve their businesses
to create a sustainable business culture. This is the case for Shake Shack, especially as it begins
to expand its reaches even further. Randy Garutti is quoted saying, “We want to be the best
burger company in the world—for our guests and for our team. We believe we have a unique
opportunity to build something truly special” in an interview with Jeff Haden of Inc.com. This
statement was in a response to other companies in similar industries “selling out” when they
became a global brand. Sustainability is at the forefront of the managerial strategy for Shake
Shack and they are definitely not compromising their values when it comes to expansion. Randy
says, “We want to be the “anti-chain chain” that never talks in terms of “units” or “how fast we
can go”. Instead he insists on finding ways to help the community in which they operate, find
farmers to raise animals without hormones, and minimize the impact Shake Shack is having on
the environment. The management of the company is also very different in that Danny Meyer
hires only humble and able managers. The Chief Restaurant Officer named Sabato Sagria
worked two months at the nine full service restaurants before he was able to lead the company.
Danny Meyer wanted him to understand the restaurant from the inside and experience the spirit
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of the restaurant. This training inside the restaurants keeps Shake Shack connected to the roots
upon which it was founded on creating a fantastic company culture that doesn’t exploit or use
shortcuts.
Shake Shack overview in its Industry
Shake Shack is still in the first stage, the early stage, of the five phases of the industry life
cycle. It is focused on expanding locations and advertising itself to people mindful of health and
environmentally conscious. This type of customer base is growing as focus on health grows
simultaneously. This should continue to increase profits as Shake Shack grows to meet the
demands of a growing consumer base.5
Due to Shake Shack’s focus on fresh food and burgers it has competition in both of those
categories. Their fresh focused competitors are Chipotle and Panera. It has competition in the
burger base is Red Robin. The total 2014 gross profit for Panera was $861,698, Chipotle was
$1,117,756, and Red Robin was $258,518 (All numbers in thousands). Shake Shack’s revenue
increased nearly 44% to $118.5 million and this doesn’t include the multiple new openings in
Boston, California, New Jersey, and now Texas.
5 http://www.bloomberg.com/news/articles/2015-04-14/americans-spending-on-dining-out-just-
overtook-grocery-sales-for-the-first-time-ever
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Relative Industry Valuation
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The chart above compares Shake Shack (SHAK), Red Robin (RRGB), Habit Resturants
(HABT), Chiplote Mexican Grill (CMG), Panera Bread (PNRA), the S&P 500 average and the
consumer goods restaurant industry. Shake Shack’s two major competitors within the gourment
6 http://finance.yahoo.com/echarts?s=SHAK+Interactive#{"comparisons":"HABT,RRGB,CMG,PNRA,^GSPC,^YHOH820","comparisonsColors":"#cc0000,#00ff00,#ff00ff,#9900ff,#000000,#f1c232","comparisonsWidths":"1,1,1,1,1,1","comparisonsGhosting":"0,0,0,0,0,0","range":"max"}
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burger industry that are public are Red Robin and Habit, while their like competitors within the
consumer goods restaurant industry are Chiplote Mexican Grill and Panera Bread. Shake Shack
has only been public for a few months, however it has outperformed the rest of its public
competitors by almost triple or more.
IV. Fundamental Analysis
Ratio Analysis
Financial ratio analysis provides an assessment of a company’s overall performance in
terms of short-term liquidity, asset management and efficiency, long-term solvency, profitability,
and market value. These ratios can be compared on a historical basis to evaluate a company’s
performance over time, and can also be used to compare a company relative to its industry and
direct competitors. All ratios included in this report were obtained from calculating a company’s
numbers directly from their individually annually published 10K reports.
Liquidity Ratios
These ratios measure the short-term solvency of a company, or how readily it can convert short-
term assets into cash, and pay off current liabilities.
Liquidity 2012 2013 2014
Current Ratio 3.23 2.11 0.16
Quick Ratio 2.88 2.03 0.12
Liquidity SHAK RRGB HABT CMG PNRA
Current Ratio 0.16 0.61 3.31 3.58 1.15
Quick Ratio 0.12 0.28 3.15 1.85 0.86
Current ratio measures the proportion of a firm’s current assets versus its current
liabilities. A ratio over one means that the firm is able to meet its short-term debt
obligations on time, while a ratio under one means that the firm may not be in sound
financial health, and is unable to cover its debt.
Shake Shack’s current ratio has decreased drastically over the past three years because of
their new found growth. This growth is not just domestically, but also internationally and will
continue for the coming years.
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Quick ratio (or acid-test) is also a measurement of short-term liquidity. To compute this
number, inventory is subtracted from current assets because it is the least liquid current
asset. Doing so decreases the quick ratio compared to current ratio but provides a better
picture of the firm’s ability to pay off debt since inventory cannot easily be converted to
cash.
Shake Shack’s quick ratio is lower than their competitors because of their rapid growth
they are experiencing. Their competitors are not currently experiencing the rapid growth,
currently going on at Shake Shack.
Profitability SHAK RRGB HABT CMG PNRA
Percentage Of Revenue Growth 0.437494 0.1266703 0.4506492 0.278007 0.060458
Percentage Growth In Profits -0.47043 0.0198567 0.3508096 0.334284 -0.10916
Percentage Growth Of Assets 2.502418 2.1595286 3.0367227 2.267262 2.17787
Net Profit Margin 0.026516 0.0389878 0.0501664 0.173017 0.109103
ROA 0.045491 0.0652067 0.0740794 0.312058 0.214594
ROE 0.125753 0.1263734 0.1081321 0.400377 0.384301
Profitability 2014 2013
Percentage Of Revenue Growth 0.437494 0.4456327
Percentage Growth In Profits -0.47043 0.2665386
Percentage Growth Of Assets 2.502418 2.2530408
Net Profit Margin 0.026516 0.0719778
ROA 0.045491 0.1195524
ROE 0.125753 0.1713881
Net profit margin measures the amount of dollars earned for every dollar of sales
generated by the firm. Net profit margin determines the earnings made by the firm for a
given period of time. The higher the ratio’s value, the more profitable the company is.
Shake Shack’s net profit margin has dropped from the previous year, due to their rapid
growth.
Return on assets (ROA) measures net profits earned as a percentage of the company’s
total assets. This number indicates how efficiently the company uses its assets to generate
sales; thus, a higher ratio shows that more profits are earned using less investment.
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Return on equity (ROE) measures the net income earned by the company as a percentage
of shareholder’s equity. Since this number shows the return to the money invested by
shareholders, this ratio is often considered the “true bottom-line measure of
performance.”
Shake Shack’s ROA and ROE have decreased because of their growth.
Stock Valuation
Using histrocial prices and projected rates from our forecast, we were able to calculate
Shake Shack’s instric value based off their store total at the end of the 2014 fiscal year. This
valuation does not factor in the new stores Shake Shack has currently opened in the 2015 fiscal
year or the hundreds of projected openings in the coming years.
Projected EPS 5.45
Projected DPS 0
Projected ROE 0.425
Sustainable Growth Rate: 0.425
Valuation 2012 2013 2014 Average 2016E
EPS 0.07 0.18 0.14 0.13 0.16
P/E 1057.00 1057.00
CFPS 2.74 3.79 3.58 3.37 5.33
P/CFPS 0.00 0.00 41.33 13.78
SPS 22.82 32.98 47.41 34.40 66.70
P/SPS 0.00 0.00 3.12 1.04
DPS 0.00 0.00 0.00 0.00
Historical values for earnings per share were obtianed from Shake Shack’s annual 10K.
Numbers for cash flow per share and sales per share were calculated by using cash flow and
sales numbers from Shake Shack’s annual 10K divided by their total number of outstanding
shares. The average values for each item were then calculated and multiplied by the growth
estimates to determine the projected share prices for each approach.
Estimated Sales Growth 0.04
Estimated Cash Flow Growth 0.04
Estimated Earnings Growth 0.04
Projected Share Prices:
P/E Approach 175.55
P/CF Approach 76.35
P/S Approach 72.17
AVERAGE 108.02
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Market Price (as of 5/8/2015): 67.95
With the current stock price of $67.95, Shake Shack’s stock is currently highly
undervalued against its instric value of $108.02.
Risk Factors7
1. "Our long-term success is highly dependent on our ability to successfully identify and secure
appropriate sites and timely develop and expand our operations in existing and new
markets."
Most Shake Shacks are located in high-revenue locations, such as Manhattan. This could
change as the brand expands, Shake Shack explains in its filing to the Securities & Exchange
Commission. The company is also particular about the type of people it wants to hire -- and it's
meticulous about training. Having "friendly and motivated" workers as representatives of the
brand is part of how Shake Shack tries to avoid being like other chain restaurants.
Shake Shack workers don't currently have a collective bargaining agreement, and the
company writes that "unionization activities may disrupt our operations and affect our
profitability." Phased implementation of the Affordable Care Act could also affect the cost of
doing business.
2. "Damage to our reputation could negatively impact our business, financial condition and
results of operations."
Obviously, the digital age is a double-edged sword for brand reputation. As much as
Shake Shack relies on mouthwatering Instagram posts to spread the word about its business, a
negative review or incident at a store could go viral. Also, Shake Shack could fall prey to a cyber
attack, making customers feel like the company doesn't do enough to protect their information,
when this is most definitely not the case. Shake Shack takes pride in the service along with the
product they are providing the consumer.
3. "Food safety and food-borne illness incidents may have an adverse effect on our business by
not only reducing demand but also increasing operating costs."
Shake Shack worries about how an illness affecting beef would disrupt operations. Shake
Shack is pretty tight-lipped about where it sources ingredients, and every location has only a few
7 http://www.ibtimes.com/pulse/shake-shacks-ipo-5-risk-factors-consider-investing-1768972
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days' worth of beef on hand. The company has five U.S. sources for raw beef and seven
international ones:
"Our proprietary blend of beef patties and/or raw materials for beef patties originate from
the United States and the EU as well as Australia. In addition, our potato buns are exclusively
from the United States, and other key items such as crinkle-cut fries and American cheese
originate within the United States or the EU. While we have established secondary supply
solutions for some of these ingredients, we have not acquired secondary supplies for all of
them."
4. "Risks related to our international operations and our international licensed Shacks"
Shake Shack gives the example of its Russian branch as international business affected
by broader political and economic factors. Western sanctions against Russia have affected the
brand's ability to import high-quality ingredients, "We have given our licensee in Russia
approval to utilize alternative ingredients not affected by the sanctions, but there is a risk that
these substitute ingredients may be inferior in taste and quality or come from suppliers that have
not been vetted for food safety and quality assurance." This can be a bad hit to a company Shake
Shack who bases their popularity largely on serving high-quality food at a fast-food pace.
Shake Shack also counts "anti-American sentiment" as a risk to business in markets such
as the Middle East. Being perceived as an "American brand" could make the company a target
for boycotting or even violence.
5. "We face significant competition for guests and our inability to compete effectively may affect
our traffic, Shack sales and Shack-level operating profit margins."
Have you ever seen a Shake Shack commercial? Minimal advertising is part of the brand
ethos. Expansion might require the digital and social media strategy of the brand to shift as the
company spends more on advertising, Shake Shack says. “We may need to make greater
investments than we originally planned in advertising and promotional activity in new markets to
build brand awareness.”
Forecasting
INCOME STATEMENT
December 28,
December 30,
December 31, December 25,
December 26,
2016 2015 2014 2013 2012
Shack sales
$ 166,750
$ 138,524
$ 112,042
$ 78,587
$ 55,591
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Licensing revenue $ 9,656
$ 8,022
$ 6,488
$ 3,869
$ 1,447
TOTAL REVENUE $ 176,406
$ 146,546
$ 118,530
$ 82,456
$ 57,038
Shack-level operating expenses:
Food and paper costs $ 51,978
$ 43,180
$ 34,925
$ 23,865
$ 16,774
Labor and related expenses $ 43,624
$ 36,240
$ 29,312
$ 20,096
$ 14,436
Other operating expenses $ 16,655
$ 13,836
$ 11,191
$ 7,315
$ 5,081
Occupancy and related expenses $ 14,515
$ 12,058
$ 9,753
$ 6,892
$ 5,053
General and administrative expenses $ 27,067
$ 22,486
$ 18,187
$ 12,453
$ 6,988
Depreciation expense $ 8,645
$ 7,182
$ 5,809
$ 3,541
$ 2,162
Pre-opening costs $ 9,086
$ 7,548
$ 6,105
$ 2,334
$ 1,858
Loss on disposal of property and equipment
$ 156
$ 130
$ 105
$ 25
—
TOTAL EXPENSES $ 171,728
$ 142,660
$ 115,387
$ 76,521
$ 52,352
OPERATING INCOME $ 4,678
$ 3,886
$ 3,143
$ 5,935
$ 4,686
Interest expense, net $ 540
$ 449
$ 363
$ 52
$ 156
INCOME BEFORE INCOME TAXES $ 4,137
$ 3,437
$ 2,780
$ 5,883
$ 4,530
Income tax expense $ 985
$ 818
$ 662
$ 460
$ 397
NET INCOME $ 3,152
$ 2,619
$ 2,118
$ 5,432
$ 4,133
Pro-forma earnings per unit:
Basic $0.07 $0.18 $0.14
Diluted $0.07 $0.18 $0.14
Pro-forma weighted-average units outstanding:
Basic 29,977 29,934 29,652
Diluted 30,122 30,018 29,918
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V. Technical Analysis
Stock Price since IPO on 1/30/2015
The chart above represents the increase in the Stock price over the passed 5 months. The
IPO came out at $21 a share and closed on the day at $52, dropped down to $38 a month later but
than rose at a rapid growth rate of over 45%. The bottom part of the chart shows the share
trading volume of Shake Shack. This shows the increase in the amount of shares being bought
and sold, and as you can see it has been increasing as the months go on.
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The chart above compares Shake Shack to Chiptole, Habbit, S&P 500, Nasdaq, and Dow
Jones over the last 4 months. Shake Shack has been out performing them all since March. March
is when they came out with the new news of opening up multiple shacks and its stock price grew
over 45- 90% higher than its compitors along with the market indexes. This again proves that
Shake Shack is not just a trending stock but a high powering company that we believe will be an
industry leader for years to come.
Moving Average since 1/30/2015
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The above chart represents rapid growth of Shake Shack’s 50 day Moving Average and
the bottom of the chart represents the increase of Shake Shack’s Money Flow over the past 4
months in billions.
VI. Summary and Recommandation
Shake Shack Inc. (SHAK) has been leading its industry since its IPO and over the passed
3-4 months because of its potential in growth. It’s a huge and popular burger restauraunt all over
New York. They have 41 stores open domestic and 27 licenced abroad as of today and their goal
is to have 450 stores open within the next 5 years. They don’t havemuch marketing services right
now but they said they will be adding them. Their main source of adverstisement is through
Instagram and the word of mouth and
posts by custumers.
They have recently opened 2 new
stores in Boston, another 2 in New Jersey,
and just last week opened one in Austin,
Texas. They are also opening another in
California in the beginning of 2016. We
believe their earnings weren’t that great
their first quarter as a public company
because their main and orginal “Shack”
was not operating due to renovations,
along with their “Shack” in Citi Field due
to the baseball season not being started.
We believe with their long term goal of
450 new Shacks being opened in the next
5 years that they will be a continueing and
strong high growth stock for our portfolio.
We are proposing to buy 200 shares of Shake Shack at the Stock Price of $70 or current
Market Price which would cost us about $14,000.
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IMPORTANT DISCLAIMER
This report was created by a student(s) enrolled in the Student Managed Investment Fund
(SMIF Fund) program at the St. John's University’s Tobin School of Business. The intent of
these reports is to provide potential employers and other interested parties an example of the
analytical skills, investment knowledge, and communication abilities of SMIF Fund students.
SMIF Fund analysts are not registered investment advisors, brokers or officially licensed
financial professionals. The investment opinion contained in this report does not represent an
offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted,
facts and figures included in this report are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not guaranteed. From time to time, St. John's
University, its faculty, staff, students, or the SMIF Fund may hold a financial interest in the
companies mentioned in this report.