Shake Shack signs on for i.p.o.

by Eric Schroeder
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Shake Shack describes itself as a modern day "roadside" burger stand.

NEW YORK — Shake Shack, which describes itself as a modern day “roadside” burger stand serving a classic American menu of premium burgers, hot dogs, crinkle-cut fries, shakes, frozen custard, beer and wine, filed for an initial public offering on Dec. 29, hoping to raise as much as $100 million.

The company did not disclose how many shares it plans to offer, or at what price, but indicated it plans to use the cash raised from the i.p.o. to open more restaurants and to renovate existing stores.

Founded by Danny Meyer’s Union Square Hospitality Group, L.L.C. (USHG) in 2001, Shake Shack was created leveraging USHG’s expertise in community building, hospitality, fine dining, restaurant operations and sourcing premium ingredients. Shake Shack originated from a hot dog cart that USHG established in 2001 to support the rejuvenation of New York City’s Madison Square Park. The hot dog cart was a hit, with lines forming daily throughout the summer months for the next three years. In response to the success, the city’s Department of Parks and Recreation awarded Shake Shack a contract to create a kiosk to help fund the park’s future. In 2004, Shake Shack officially opened and has grown since, with 63 outlets in 9 countries and 34 cities.

Of the 63 Shake Shacks, there are 31 domestic company-operated stores, 5 domestic licensed stores and 27 international licensed stores.

“We open Shacks in areas where communities gather, often with high foot traffic and substantial commercial density such as New York City’s Theater District, London’s Covent Garden and Dubai’s Mall of the Emirates,” the company noted in its Dec. 29 prospectus filing with the Securities and Exchange Commission. “We have been able to successfully grow across a variety of locations due to our versatile Shack formats and designs that are tailored to reflect each Shack community’s core attributes.”

In its prospectus filing, Shake Shack said its greatest immediate opportunity for growth lies in the domestic market.

“We waited nearly five years to open our second Shack, and we are still in the very nascent stage of our story, with only 31 domestic company-operated and 5 domestic licensed Shacks in 10 states and Washington, D.C.,” the company said. “We believe there is tremendous whitespace opportunity to expand in both existing and new U.S. markets, and we have invested in our infrastructure through new hires at our home office to enable us to continue to grow rapidly and with discipline. In fiscal 2013, we significantly expanded our domestic company-operated footprint by opening 8 new Shacks representing 62% domestic unit growth. In fiscal 2014, we opened 10 domestic company-operated Shacks. We plan to open at least 10 new domestic company-operated Shacks each year, beginning in fiscal 2015, for the foreseeable future. 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.”

The company said its rate of future growth is uncertain and is subject to numerous factors that are outside of the company’s control. But Shake Shack did indicate that it believes it has a versatile real estate model built for growth.

“We have adopted a disciplined expansion strategy designed to leverage the strength of our business model and our significant brand awareness to successfully develop new Shacks in an array of markets that are primed for growth, including new and existing and small and large markets,” the company said. “We will use a portion of the proceeds from this offering to open new Shacks and renovate existing Shacks.”

The company also believes it should be able to capitalize on its “outsized brand awareness.”

“The Shake Shack experience has cultivated significant brand awareness relative to the small number of Shacks,” the company said. “We have worked tirelessly to establish a genuine connection with our guests and integrate into their communities through investment in innovative marketing and programming.”

During the three fiscal years ended Dec. 25, 2013, the company grew from 7 Shacks in 2 states to 40 Shacks across 6 states, Washington, D.C., and 8 other countries, representing a 79% compound annual growth rate. During that same time period, total revenues grew to $82.5 million from $19.5 million, and net income grew to $5.4 million from $200,000.

Shake Shack cooks its burgers to order and promotes its use of natural ingredients, including hormone- and antibiotic-free beef. The chain calls its restaurants “shacks,” and uses the word to describe its menu items. The ShackBurger, for example, is topped with ShackSauce and a hot dog is named the Shack-cago Dog.

In addition to selling burgers, Shake Shack also specializes in custard and hot dogs.

The company also indicated in its prospectus that it has a limited number of suppliers for its major products, including beef patties, potato buns, custard, Portobello mushrooms and cheese sauce.

“In fiscal 2013, we purchased all of our ground beef patties from two suppliers, with more than 87% of our ground beef patties supplied by one supplier, potato buns directly from one supplier, custard base from one supplier, ‘Shroom Burgers from two suppliers, with approximately 50% of our ‘Shroom Burgers supplied by each supplier and ShackSauce from two suppliers, with approximately 87% of our ShackSauce supplied by one supplier,” the company said.

Randy Garutti is Shake Shack’s chief executive officer. He has worked in restaurants since he was 13 and joined USHG in 2000 as general manager of Tabla, followed by Union Square Cafe, and later took on the role of director of operations overseeing all USHG restaurants, prior to launching the first Shake Shack in 2004. Mr. Garutti led the development of the Shake Shack concept from its earliest stages and guided every aspect of the business.

Jeff Uttz is chief financial officer. Mr. Uttz has more than 22 years of restaurant finance experience, most recently as chief financial officer at Yard House Restaurants. He led the expansion of Yard House from 3 units when he began to over 40 units when Yard House was acquired by Darden Restaurants, Inc.

Shake Shack Inc. plans to list its stock on the New York Stock Exchange under the ticker symbol “SHAK.”
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