An n Unhe nhealt lthy Addi ddictio ion to o Units nits Cypr prus Valu alue In Investor r Con onference John M. Zolidis Oct. 2019 This presentation was given on Sept. 23, 2019 at the Cyprus Value Investor Conference
Presentation Outline Speaker Credentials Slide 3 Quo Vadis Capital Process Slide 4 This year’s idea: Shake Shack (SHAK) Sides 5-11 Investment Thesis Slide 12 Argument (the most important slides are #23 & 24) Slide 13-28 Investment recap Slide 29 Caveat Emptor Slide 30 Appendix (Past Performance of Hot Resto Names, Mgmt. Incentive Structure, Insider Activity) Slides 31-34 Disclosures Slide 35 2
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Presenter Credentials – John Zolidis ➢ Founded Quo Vadis Capital, a research boutique and Registered Investment Advisor (RIA) in 2017 ➢ Analyst following U.S. consumer sector since 1999 ➢ Named to Wall Street Journal’s Best on the Street list in 2005 ➢ Frequently cited in the financial media ➢ Education at Kenyon College & Oxford University (Mansfield College) ➢ Presented at value investment conferences in Vail, CO, Klosters, Switzerland and Cyprus ➢ Based mostly in Paris, France ➢ More at quovadiscapital.com 3
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Quo Vadis Capital, Inc. : Our Process (Condensed) ➢ Focus on Consumer sector, specialize in companies which can be analyzed by estimating and segmenting unit economics ➢ Solve for ROIC and Return on Incremental Invested Capital (ROIIC) at the unit and corporate level ➢ OUR FAVORITE BEARISH THEME is identifying cases when future dollars invested in a business generate lower returns than the existing operations. In other words, return on incremental investment is lower than return on overall investment (ROIIC < ROIC) 4
John Zolidis john.zolidis@quovadiscapital.com Check out this chart: Two-year return >200% 5
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com SHAK shares are up >200% over 2- Years… How were Fundamentals? ➢ Current year (2019) revenue is forecasted 67% higher than 2017 ➢ Current year EBTIDA is forecasted 36% higher than 2017 (EBITDA growth ½ of Revenue growth) ➢ Current year EBITDA margin forecasted 12.8% vs. 15.5% in 2017 (-270 bps) ➢ Current year EBIT forecasted 11% lower than 2017 ➢ Current year EPS forecasted 14% higher 2017 inclusive of tax reform Net, over two years the EV EBITDA has expanded to 39x from 15x. The Price to Earnings ratio has expanded to 134x from 55x even as margins have contracted and EBIT has declined. 6
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com What is Shake Shack, Inc. (SHAK)? Shake Shack is a fast-casual (food made-to-order, self-service) restaurant serving burgers, fries, hot dogs, shakes, and other food and drink items. The company went public in Jan 2015. ➢ The company currently operates ~150 restaurants in the U.S. while franchisees operate 100 locations both in the U.S. and internationally ➢ EBITDA margin: 12% estimate for 2019 ➢ 2019E Capex ~$100M (16.5% of sales) ➢ Balance Sheet: $66M cash, No debt aside from operating leases, $300M Shareholders’ equity ➢ Has never generated meaningful free cash flow; 2018 OpCF was $86M ➢ No dividend ➢ Recent price $103 on the U.S. exchange, current market cap: $3.9B 7
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Valuation? SHAK’s EV/ EBITDA Multiple is 4x The Group Average* *Peer group includes companies that primarily operate their own restaurants 8
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com SHAK’s EV/ Sales Multiple is >6x *Peer group includes companies that primarily operate their own restaurants 9
John Zolidis john.zolidis@quovadiscapital.com Why are people so excited about SHAK? ➢ The company has a hot brand and people love the product (burgers, fries and shakes) ➢ Unit-level metrics are exceptional ➢ The company is growing units at a very fast rate ➢ It is easy to envision SHAK growing its unit base several multiples of the current business ➢ Optionality on the balance sheet The multiple and the stock performance represent investor anticipation of the long-term growth potential, not near- term margin trends, cash flow, or earnings 10
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com The Combination of high ROIC and Unlimited Growth = 11
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Investment Thesis We believe future unit openings will dilute financial metrics to a much greater degree than is reflected in analyst forecasts, generating downward revisions. We expect valuation to revert closer to the industry mean as growth slows, EBITDA margins contract, and financial metrics more closely resemble those of the peer group. Our cautious view is despite agreement that SHAK has tremendous unit growth potential and a fantastic brand. We commend management for exceptional execution of a demanding growth rate and for effective communication of the story. 12
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com How we propose to analyze SHAK (our process) ➢ Step 1: Compare key unit metrics for SHAK company-operated restaurants to those of a peer group ➢ Step 2: Review metrics of recently-opened Shacks ➢ Step 3: Quantify and forecast the future impact of yet-to-be-opened units on the overall company ➢ Step 4: Propose valuation for SHAK based on future profile of the company ➢ Step 5: Discuss expected catalysts for re-valuation We will show that SHAK is a company with superior metrics today that is rapidly becoming a company with very average metrics. We expect valuation to adjust over time to reflect slower growth and its less exceptional profile. 13
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Step 1: Compare Key Shack-Level Metrics to a Peer Group Or: Why is everyone so Excited? 14
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Peer Group Unit Metric Compare: SHAK Ranks Near The Top ESTIMATED SALES PER AVERAGE SQUARE FOOT RESTAURANT LEVEL MARGINS $1,600 30% 28% $1,359 $1,400 28% 25% 26% $1,200 24% 24% $1,000 $917 $833 $800 $780 $738 $701 $653 $652 $651 21% 22% $800 19% 19% 19% 18% 18% 17% 17% 17% 17% 20% $535 $515 $487 $435 $431 $600 18% $400 $308 $266 15% 15% 16% $200 13% 14% $- 12% ESTIMATED AVERAGE UNIT LEASE-ADJUSTED PRE-TAX ROIC ESTIMATED AVERAGE UNIT CASH-ON-CASH PRE-TAX RETURN 32% 57% 60% 30% 30% 52% 28% 49% 48% 50% 27% 26% 25% 40% 24% 23% 23% 22% 35% 33% 33% 31% 30% 30% 22% 30% 21% 24% 23% 23% 20% 18% 18% 19% 18% 16% 20% 17% 17% 16% 16% 10% 12% 0% Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE; Period Presented is TTM Ended with 2Q19 15
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com HOWEVER: ARE THESE SUPERIOR METRICS JUST AN ILLUSION? 16
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Step 2: Extract New Unit Metrics & Examine 17
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com In Contrast, Recently-Opened Shacks Screen Below Peer Group Averages ESTIMATED SALES PER AVERAGE SQUARE FOOT RESTAURANT LEVEL MARGINS $1,200 30% $1,054 28% 28% $1,000 $917 25% $833 $800 $780 $738 $701 $651 $600 26% $800 24% 21% 22% $600 $535 $515 $487 $435 $431 19% 19% 19% 18% 18% 18% 17% 17% 17% 17% 20% $400 $308 $266 18% 15% 15% 16% $200 13% 14% $- 12% ESTIMATED AVERAGE UNIT LEASE-ADJUSTED PRE-TAX ROIC ESTIMATED AVERAGE UNIT CASH-ON-CASH PRE-TAX RETURN 32% 57% 30% 60% 28% 49% 48% 50% 26% 25% 27% 24% 23% 23% 40% 35% 33% 31% 31% 30% 30% 29% 22% 22% 21% 20% 20% 30% 24% 23% 23% 18% 18% 17% 16% 16% 19% 18% 16% 20% 17% 10% 12% 0% Source: Company Reports & Quo Vadis Capital, Inc. estimates; PLAY and CBRL use Jan YE; Period Presented is TTM Ended with 2Q19; New Shack-level Margin is an Estimate 18
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com But Wait, Shouldn’t Newly Opened Restaurants Have Weaker Metrics and Get better over Time? Actually, in This Case, The Trend Suggests and Management’s Commentary Confirms, Future Units Should be Even Less Attractive… 19
John Zolidis john.zolidis@quovadiscapital.com Step 3: Quantify Impact of New Unit Openings on Margins & Returns 20
Shake Shack, Inc. (SHAK) John Zolidis john.zolidis@quovadiscapital.com Trend in New Unit Performance is clear: Recent Openings Tracking to $3.46M AUV, Down 31% from Peak… TTM SALES PER AVERAGE NEW STORE ($M) SEQUENTIAL CHANGE 5% 6% $5.1 $5.1 5% 4% $4.9 $5.0 $4.8 4% $4.6 $4.5 2% $4.5 $4.3 0% $4.1 0% $4.0 -1% $4.0 $3.8 -2% -1% -2% -2% $3.7 $3.7 $3.6 $3.6 $3.5 -4% -3% -4% -4% $3.5 -4% -5% -5% -6% -6% $3.0 -8% Jun16A Sep16A Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19E Dec19E Jun16A Sep16A Dec16A Mar17A Jun17A Sep17A Dec17A Mar18A Jun18A Sep18A Dec18A Mar19A Jun19A Sep19E Dec19E Source: Company reports and Quo Vadis Capital, Inc. estimates; Calculated using 24 month delay for new units to enter comp base. 21
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