Warning: Shake Shack’s Growth Plan May Produce Indigestion

Investors hungrily gobbled up shares in Shake Shack’s (NYSE: SHAK) debut on the New York Stock Exchange Friday morning. Now they’ll have to digest them. We’re not so sure they won’t get indigestion, we’ll explain our skepticism.

How the market values Shake Shack vs. some competitors

Famed owner, Danny Meyer saw his stake rise up to over $350 Million. The markets now value Shake Shack’s 63 outlets at ~$27.6 million each. Struggling McDonalds at $2.6 million per location, while Chipotle Mexican Grill (NYSE:CMG) is valued at around $10 million per restaurant.

There’s a lot of growth factored into that valuation.

Shake Shack has ambitious growth plans

Meyer plans to expand the chain by 10 outlets a year. In their IPO prospectus they said “We believe there is tremendous whitespace opportunity to expand in both existing and new U.S. markets…Based on our experience, and analysis and research conducted for us by eSite, we believe that over the long-term we have the potential to grow our current domestic company-operated Shack footprint to at least 450 Shacks by opening domestic company-operated Shacks in new and existing markets.”

According to the prospectus, the company’s Manhattan restaurants (seven of sixteen in the Greater New York area) generated average sales of $7.4 million in 2013, which amounts to nearly double the receipts rung up at “non-Manhattan Shacks.”

Manhattan is big and dense but does double the amount of sales make sense?

How good is Shake Shack at picking low-risk new locations?

We decided to do our own independent analysis of their locations. The story our algorithm tells is that they have picked a few excellent locations that support their business. However, the majority of their locations aren’t an ideal match in terms of customer demographics, buyer habits and several of the other 15,000 variables our IdealSpot algorithm analyzed.

IdealSpot’s hometown is Austin, TX so you can imagine that we were curious about the potential of this newly announced location. As you can see from shake_shack_report this location scores a 5.5 out of a potential 10. This score means that it’s a moderately risky location.

They would likely would do much better at another part of town.

How good is Shake Shack outside of New York City and Las Vegas?

It’s hard to say whether the Social Media component of our analysis demonstrates operational problems, quality problems or bad locations. Nevertheless, their overall Yelp reviews in New York and Las Vegas, about 4 stars, are much better than their other locations. Over the last three months, most of their locations’ Yelp reviews are trending downwards. The locations outside of New York and Las Vegas start out with lower scores and are trending downwards even more sharply.

One of the key factors for Shake Shack’s growth is going to be their ability to pick the ideal spots for their new restaurants. They haven’t demonstrated that ability to date.

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