Menu
“Our best track record is in restaurants. We’ve never lost money. We’ve only made a fortune, interestingly, investing restaurants.”
There were many things that surprised me about Lex Fridman’s interview with billionaire hedge fund manager Bill Ackman, including the 3.5-hour length of the interview, but this statement about Mr. Ackman’s success with restaurant companies stood out the most.
Investing in individual restaurants is fraught with risks, but I guess some of that risk is mitigated when you are investing in a restaurant chain with a proven business model. It also helps if you get the timing of investing in a company like Chipotle Mexican Grill (CMG) right by pouncing on the opportunity during a moment of temporary weakness. This article is not about Chipotle but rather another fast-casual restaurant chain that is undergoing a CEO transition.
Shake Shack Inc. (SHAK): $94.91
Market Cap: $4.02B
Key Insights
Founded in 2004, Shake Shack Inc. (SHAK) made its mark as a fast-casual restaurant chain, recognized globally for its premium burgers, hot dogs, fries, and shakes. The company went public in 2015, marking a significant milestone in its expansion. Originating from NYC’s Madison Square Park, Shake Shack has since grown its presence to over 520 locations worldwide, solidifying its position as a favorite destination for quality fast-casual dining.
Leadership Transition
On December 11, 2023, Shake Shack Inc. (SHAK) disclosed that Randy Garutti, its Chief Executive Officer, would retire in 2024 after more than two decades with the company. Following this announcement, on March 21, 2024, Shake Shack revealed that Rob Lynch would step into the role of CEO, effective May 20, 2024.
Notably, Mr. Lynch’s selection marks a significant shift for Shake Shack, as he will be the first outsider to assume the leadership role in the company’s history. Garutti, synonymous with Shake Shack’s rise from a humble hot dog cart in Madison Square Park to a global brand, will transition to an advisory role to provide support until the end of 2024.
These kinds of transitions from a long-serving CEO are generally difficult, and it is not uncommon for them to return as a “boomerang CEO” after initially handing over the reins to an outsider.
Ravi Thanawala, Papa John’s International’s current CFO since July 2023, will be assuming the interim CEO position at the pizza chain.
At first glance, Shake Shack’s latest move seems surprising. After all, they’re known for their hip, city-style burger joints, quite different from the nationwide pizza empire of Papa John’s (PZZA). But hey, sometimes unexpected choices lead to big wins, right?
Bringing on Rob Lynch, the former CEO of Papa John’s, could be just the shake-up Shake Shack needs. Mr. Lynch’s tenure at Papa John’s saw him navigating turbulent waters, stepping in after founder John Schnatter’s controversial departure.
When Lynch took the helm at Papa John’s in 2019, the company was grappling with the fallout from the Schnatter controversies as detailed in this Vice article. As a result of the reputational damage, the company experienced a notable decline in its financial performance.
However, under Lynch’s executive leadership over the subsequent five years, there were several significant milestones achieved that revitalized the brand. Concurrently, efforts were made to modernize Papa John’s and shift the brand narrative away from Schnatter’s prominent role as the face of the pizza chain. Despite pandemic challenges, Papa John’s reported 12 consecutive quarters of strong performance, positioning itself as a contender in the pizza industry.
Rob Lynch orchestrated a remarkable surge in global system-wide sales, soaring past the $5 billion mark across nearly 5,900 outlets.
With an illustrious career spanning over 25 years in the quick-service restaurant and consumer packaged goods realms, Lynch’s journey boasts stints as the President of Arby’s and the Vice President of Marketing at Taco Bell.
While these achievements certainly paint a successful picture of leadership in the food service industry, the question arises: why transition from leading a quick-service pizza chain to spearheading a fast-casual burger brand?
Despite being a larger company, Shake Shack’s stock performance has not matched that of Papa John’s.
“Rob’s appointment as CEO marks the beginning of our next chapter of growth as we seek to further elevate Shake Shack as a leading global brand,” said Danny Meyer, Shake Shack’s Founder and Chairman of the Board of Directors.
During the recent earnings call, Mr. Garutti disclosed Shake Shack’s pivot towards quick-service elements, such as combo meals and new desserts like sundaes and mini shakes. Despite this shift, Shake Shack maintains its commitment to offering a premium dining experience. Leveraging Mr. Lynch’s expertise in menu innovation from his Papa John’s tenure, Shake Shack aims to explore expanded menu options. Additionally, while expanding drive-thru locations and licensed stores, Shake Shack faces the challenge of cracking into the top ranks of limited-service burger restaurants nationwide.
Shake Shack ended last year with 518 stores worldwide, including 184 outside the U.S. The company has said it plans to open 80 more stores this year. Papa John’s has 5,900 stores worldwide, including 2,473 outside the U.S.
Compensation
Restaurant Association’s Restaurant Performance Index
The National Restaurant Association’s Restaurant Performance Index (RPI) is a monthly composite index that tracks the health of the U.S. restaurant industry.
The RPI is measured in relation to a neutral level of 100. Index values above 100 indicate that key industry indicators are in a period of expansion, while index values below 100 represent a period of contraction for key industry indicators. The index consists of two components: the Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), and the Expectations Index, which measures restaurant operators’ six-month outlook for those four indicators.
The National Restaurant Association’s Restaurant Performance Index (RPI) stood at 99.0 in February, up 0.3% from a level of 98.7 in January.
The Current Situation Index, which measures current trends in four industry indicators, stood at 98.3 in February – up 1.8% from a level of 96.6 in January. February represented the fifth consecutive month in which the Current Situation Index stood below the 100 level in contraction territory.
Same-Store Sales and Customer Traffic
Restaurant operators reported a modest improvement in same-store sales and customer traffic from January’s soft readings, but both metrics were still down from year-ago levels. Looking forward, restaurant operators’ outlook for both sales and the economy in the months ahead remains uncertain.
Restaurant operators persisted in reporting a decline in customer traffic.
Peers
The table below provides a comparison of four Shake Shack peers. 
Valuation
Shake Shack shares surged to their highest point in nearly three years before experiencing a slight decline. However, even with this downturn, the company’s stock has gained almost 75% since last year.
The company has a market cap of $4.11 billion, an enterprise value of $4.34 billion, and a $478 million net debt. The forward P/E ratio is 147.26 and the company is unprofitable on a GAAP basis.
Financials
Shake Shack has been facing challenges in translating its revenue growth into corresponding net income. Despite a commendable increase in system-wide sales, particularly highlighted in the latest quarter, the company’s net income remains comparatively subdued.
Elevated expenses, including food, labor, and occupancy costs, have contributed to lower-than-expected net income margin.
Key Insights from Earnings Call
On April 1, California Assembly Bill 1228 took effect, raising the minimum wage by another 25% for fast-food employees on top of the $16 minimum wage mandate that was enacted at the beginning of the year. Fast-food chains like McDonald’s, Chipotle, Starbucks, Taco Bell, Shake Shack, El Pollo Loco, and In-N-Out Burger, which operate nearly 30,000 restaurants in California, are strategizing to mitigate rising labor costs.
CFO Katie Fogertey indicated during an earnings call that Shake Shack plans to raise menu prices this year.
Fourth Quarter 2023 Financial Results (Press Release) (Investor Presentation)
Financial Highlights for the Fiscal Year 2023:
FY2024 Targets:
Conclusion
Shake Shack outlined strategic priorities to enhance guest experience, boost sales, increase profitability, optimize construction, and invest in teams. Rob Lynch’s appointment aligns with these goals, aiming to address challenges in translating revenue growth into net income.
The growth story is certainly exciting, but the rich valuation gives us some pause.
CEO
CFO
General Counsel/Chief Legal Officer
Others
Appointments
1. Crown Castle (CCI): $93.05
On April 9, 2024, the Board appointed Steven J. Moskowitz as President and CEO, effective April 11, 2024.
| MarketCap: $40.83B | Avg. Daily Volume (30 days): 2,641,016 | Revenue (TTM): $6.98B |
| Net Income Margin (TTM): 21.52% | ROE (TTM): 21.72% | Net Debt: $28.71B |
| P/E: 27.16 | Forward P/E: 31.85 | EV/EBIDTA (TTM): 16.57 |
| P/S (TTM): 5.78 | P/B (TTM): 6.34 | 52 Week Range: $82.40 – $126.58 |
2. Wipro Limited (WIT): $5.25
| MarketCap: $28.01B | Avg. Daily Volume (30 days): 3,716,686 | Revenue (TTM): $10.90B |
| Net Income Margin (TTM): 12.44% | ROE (TTM): 15.27% | Net Cash: $2.45B |
| P/E: 21.22 | Forward P/E: 20.76 | EV/EBIDTA (TTM): 12.88 |
| P/S (TTM): 2.63 | P/B (TTM): 3.19 | 52 Week Range: $4.34 – $6.45 |
3. Teladoc Health (TDOC): $13.14
On April 5, 2024, Teladoc Health announced the appointment of Mala Murthy to the position of acting Chief Executive Officer of the company, effective immediately.
| MarketCap: $2.22B | Avg. Daily Volume (30 days): 4,333,832 | Revenue (TTM): $2.60B |
| Net Income Margin (TTM): -8.47% | ROE (TTM): -9.51% | Net Debt: $472.40M |
| P/E: N/A | Forward P/E: N/A | EV/EBIDTA (TTM): 58.36 |
| P/S (TTM): 0.83 | P/B (TTM): 0.94 | 52 Week Range: $13.03 – $30.41 |
4. Discover Financial Services (DFS): $119.89
On March 26, 2024, the Board appointed J. Michael Shepherd as Interim Chief Executive Officer and President of the company and as Interim President of the Bank, effective April 1, 2024.
| MarketCap: $30.04B | Avg. Daily Volume (30 days): 1,144,046 | Revenue (TTM): $9.90B |
| Net Income Margin (TTM): 23.03% | ROE (TTM): 15.71% | Net Debt: $7.79B |
| P/E: 13.67 | Forward P/E: 10.72 | EV/EBIDTA (TTM): N/A |
| P/S (TTM): 3.04 | P/B (TTM): 2.04 | 52 Week Range: $77.96 – $131.65 |
5. Ally Financial (ALLY): $36.27
| MarketCap: $11.02B | Avg. Daily Volume (30 days): 3,255,354 | Revenue (TTM): $7.11B |
| Net Income Margin (TTM): 14.35% | ROE (TTM): 7.68% | Net Debt: $11.7B |
| P/E: 12.13 | Forward P/E: 12.79 | EV/EBIDTA (TTM): N/A |
| P/S (TTM): 1.55 | P/B (TTM): 0.96 | 52 Week Range: $22.08 – $41.56 |
1. Boeing Co. (BA): $170.21
On March 25, 2024, Boeing (BA) President and CEO Dave Calhoun announced his decision to step down as CEO at the end of 2024, and he will continue to lead Boeing through the year.
| MarketCap: $103.85B | Avg. Daily Volume (30 days): 7,414,002 | Revenue (TTM): $77.79B |
| Net Income Margin (TTM): -2.86% | ROE (TTM): 13.56% | Net Debt: $38.18B |
| P/E: N/A | Forward P/E: 57.10 | EV/EBIDTA (TTM): 45.03 |
| P/S (TTM): 1.33 | P/B (TTM): N/A | 52 Week Range: $167.53 – $267.54 |
2. Papa John`s International (PZZA): $60.95
On March 18, 2024, Robert M. Lynch informed the Board of Directors of Papa John’s International of his decision to resign from his position as President and Chief Executive Officer of the company effective March 20, 2024, to assume a chief executive officer role with another company.
| MarketCap: $2.01B | Avg. Daily Volume (30 days): 995,441 | Revenue (TTM): $2.14B |
| Net Income Margin (TTM): 3.84% | ROE (TTM): -23.25% | Net Debt: $925.51M |
| P/E: 24.58 | Forward P/E: 23.04 | EV/EBIDTA (TTM): 13.38 |
| P/S (TTM): 0.94 | P/B (TTM): N/A | 52 Week Range: $59.06 – $83.16 |
3. Discover Financial Services (DFS): $119.89
On March 26, 2024, Discover Financial Services accepted the resignation of Michael G. Rhodes from his positions as Chief Executive Officer and President of the company effective April 1, 2024.
| MarketCap: $30.04B | Avg. Daily Volume (30 days): 1,144,046 | Revenue (TTM): $9.90B |
| Net Income Margin (TTM): 23.03% | ROE (TTM): 15.71% | Net Debt: $7.79B |
| P/E: 13.67 | Forward P/E: 10.72 | EV/EBIDTA (TTM): N/A |
| P/S (TTM): 3.04 | P/B (TTM): 2.04 | 52 Week Range: $77.96 – $131.65 |
4. Teladoc Health (TDOC): $13.14
On April 5, 2024, Teladoc Health announced that Chief Executive Officer Jason Gorevic departs.
| MarketCap: $2.22B | Avg. Daily Volume (30 days): 4,333,832 | Revenue (TTM): $2.60B |
| Net Income Margin (TTM): -8.47% | ROE (TTM): -9.51% | Net Debt: $472.40M |
| P/E: N/A | Forward P/E: N/A | EV/EBIDTA (TTM): 58.36 |
| P/S (TTM): 0.83 | P/B (TTM): 0.94 | 52 Week Range: $13.03 – $30.41 |
5. Wipro Limited (WIT): $5.25
On April 6, 2024, Wipro announced that Chief Executive Officer Thierry Delaporte resigns effective immediately.
| MarketCap: $28.01B | Avg. Daily Volume (30 days): 3,716,686 | Revenue (TTM): $10.90B |
| Net Income Margin (TTM): 12.44% | ROE (TTM): 15.27% | Net Cash: $2.45B |
| P/E: 21.22 | Forward P/E: 20.76 | EV/EBIDTA (TTM): 12.88 |
| P/S (TTM): 2.63 | P/B (TTM): 3.19 | 52 Week Range: $4.34 – $6.45 |
If you are reading this article and have not signed up to receive such articles by email, please sign up either for our free, IA Plus or IA Premium service here. If you are an existing subscriber, you can login to the InsideArbitrage.com website to adjust the kinds of articles you receive by email by turning on or off specific categories of articles.
Disclaimer: I hold a long position in AESI. Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.