Shake Shack (NYSE:SHAK) is a popular “fast and casual” franchise. Though slowing, its sales continue to grow at robust rates.
That’s in sharp contrast to McDonald’s, which has been reporting sluggish sales for several quarters.
But before it beats McDonald’s, Shake Shack must get its business model right.
Specifically, the company needs to improve its operating margins, which lag far behind McDonald’s—see table.
Chipotle’s McDonald’s, Noodle & Company And Shake Shack’s Key Statistics
Company | Total Revenue | TotalEmployees | Operating Margins | Return on Assets | Qtrly Revenue Growth (yoy) |
Chipotle | $4.11B | 53,100 | 17.47% | 19.70% | 26.70% |
Shake Shack | 106.71M | 1,630 | 4.94 | – | 39.60 |
Noodle & Company | 386.66M | 8,200 | 5.08 | 6 | 19.40 |
McDonald’s | 27.44B | — | 29.04 | – | -7.30 |
Source: finance.yahoo.com
To be fair, Shake Shack is a young franchise with a few dozen stores rather than a mature company with thousands of stores. This means that part of the difference in the margins of the two companies may be a matter of scale, whichmight expected to narrow as the company grows in size.
Still, the difference is too high to be explained by size alone.
Chipotle is a young franchise, too, but its operating margins are close to four-times higher than those of Shake Shack.
As we wrote in a previous piece here, the problem with Shake Shack’s profitability is an inherent weakness in its business model.
While the menu is great — even for people like me who aren’t burger and fries fans—it is too labor-intensive. In a recent visit to my local Shake Shack restaurant I counted 30 employees, compared to a count of 12 in the nearby Chipotle!
That’s bad economics. Besides that, it seemed like it was hard for employees to move around the kitchen without bouncing one against another.
That could explain why Shake Shack’s operating margins are much closer to those of Noodle and Company than they are to those of Chipotle or McDonald’s. And why Shake Shack’s stock may be heading lower, as has been the case with the stock of Noodle and Company.
The bottom line: Using better ingredients and customizing burgers is good for consumers who line up to buy Shake Shack’s burgers. But making better burgers comes with higher associated costs, which cuts into profit margins. That’s not good for investors. And it could explain the sell-off in Shake Shack’s stock following its recent financial results, confirming the old Wall Street adage—a good company may not necessarily be a good investment.
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