Shake Shack's pending initial public offering is a feel-good story for Christmas week: A chain selling burgers, which everyone likes, based in Manhattan, where pretty much all markets reporters work.
But as the offering moves toward completion, the company's great brand and image will be pitted against numbers that are not all quite as tasty.
Shake Shack makes a number of disclosures that would set off alarm bells in a lesser company. Profit margins came down sharply this year even at a same-store level. As the company makes clear, same-store sales growth of 3% was half its 2013 level though it did beat inflation by a narrow margin. Note to investors: this may not be a high-growth story.
Shake Shack spends about 31% of its restaurant revenues on food - well above the level spent by other well-managed chains (25% is the gold standard) like Dave & Buster's (PLAY) , itself a successful recent IPO, Chuy's (CHUY) and even Olive Garden (DRI) . Profit before interest, taxes and non-cash items grew 12% in the first nine months of the year - less than a third of the company's 39% sales growth, excluding franchising fees for international Shake Shacks owned by other companies. The company also admits that each restaurant's sales slip in its second year of operations as the buzz wears off and local managers get down to real business.
Looking at it this soon after Monday's filing of the company's initial Securities and Exchange Commission paperwork, these issues wouldn't make investors write off the deal - but they are likely to set the agenda for when Shake Shack meets with investors before selling its $100 million in shares . It could also help determine whether it meets its reported goal of a $1 billion valuation, a steep multiple to the $83.8 million in revenue and $3.55 million in profit it reported for the first nine months of 2014.
The tension will be whether the 63-store Shake Shack can overcome these problems by pointing to its growth prospects, the power of its brand, and the quality of its management team.