The following segment was excerpted from this fund letter.
Shake Shack, Inc. (NYSE:SHAK)
Shake Shack, Inc. is a company in which we have repurchased some shares as valuations in the restaurant space contracted this summer. As a business, the company has a number of things going for it, including a very strong brand with ample white space for store expansion. Additionally, the company has recently made significant strides in improving its store-level operating margins (SLOP).
For the first time since before the pandemic, the company regained the 20% margin level after instituting several cost optimization measures. The improvement seems noteworthy as the company has managed to do so despite traffic remaining down nearly 40% at about half of its store locations (those with primarily urban footprints).
Moreover, further gains look achievable, particularly after developing a better appreciation for the impact a roll-out in kiosks across the store base could affect. As another fast casual peer, Panera’s successful deployment of kiosks provides likely the most informative case study. In their case, as an early adopter when customers were still developing familiarity and acceptance around using the new technology, the company saw a sustained lift in average order sizes as customers ordered more items.
Additionally, after a certain level of volumes began going through the new automated ordering platforms, the company was able to re-allocate certain employees and labor-hours to other uses. On net, the company saw a sustained mid-single digit or better boost to store volumes, lower costs and better operating leverage that drove a couple-hundred-basis-points improvement in restaurant level operating margins.
Shake Shack looks capable of achieving something similar. Such an improvement in profitability could have a material impact on total store economics and accelerate cash flow and revenue growth. For a concept that has ample white space that appears to be just hitting its stride, a boost to store level profitability could drive a meaningful improvement in earnings power.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.