Let’s Talk Shake Shack and Its Same-Shack Sales Chicanery

Markets Motley Fool

In this Market Foolery segment, host Chris Hill and Million Dollar Portfolio’s Jason Moser dissect last week’s Shake Shack (NYSE: SHAK) report and consider that what it offers investors by way of metrics is not identical to what other companies do. Take same-store sales, for example.

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At nearly every other company, that’s a comparison based on stores open at least one year -- usually 13 months. "Same Shack sales?" Two years -- which means they exclude newer sites from the metric. And that's more than half the company. The real question is, how well can they do long term in this heavily competitive space?

A full transcript follows the podcast.

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This podcast was recorded on Aug. 8, 2017.

Chris Hill: One of the people that I follow on Twitter, and if you're at all interested in investing you should strongly consider it as well, is Jeff Fischer, our colleague here at The Motley Fool. He's @FoolJeffFischer. Jeff was tweeting this morning about Shake Shack. They reported last week, and Jeff was tweaking the management there, and rightly so, for talking about same-store sales, not in terms of the most recent quarter -- and the same-store sales were not good.

Jason Moser: Same-shack sales?

Hill: We're going to get the same-shack sales in just a second. He's tweaking the management for talking about how they were doing a year ago. Jeff's point, and he's absolutely right, is, "Look, that's irrelevant. Don't tell me about your greatest hits album. I want to hear the new stuff. I don't want to hear about how great your sales were a year ago. I want to hear about the most recent quarter. A year ago? That's not relevant." So, I was reading some stuff this morning, did you know that same-shack sales are a different metric than same-store sales? In this sense -- when we talked about same-store sales, whether it's restaurants or retailers, same-store sales are generally agreed to be, these are sales on locations that have been open for at least a year. Typically it's 13 months, but at least a year. Same-shack sales, as I just learned this morning, two years.

Moser: Yeah, it's a different timeline.

Hill: It's a different timeline. So, they are ... I don't like this. [laughs] 

Moser: In their defense, at least, I will say, a lot of times you'll see, whether it's grocery stores or restaurants, some of them, at least, will give you same-store sales, and they'll do it over one and two-year stacks, to give you an idea of how traffic is looking there. To your point, I think that is important to know. It's not as clear as it could be. So, you look at same-shack sales and you think, that's just some clever branding like the Zestimate, or something.

Hill: Yeah, that's what I thought.

Moser: Yeah, exactly. You have to understand exactly what they're measuring. If you don't understand what they're measuring, then you might be interpreting that data wrong. With Shake Shack, they think the same-shack sales metric is cleverly branded, but by the same token, it's very good to understand how these businesses are performing on two-year versus one-year timelines, because they could be, obviously, very different.

Hill: And in the case of Shake Shack, this is not a mature company. They have 134 locations. Only 37 of them have been open for two years. So, when they're throwing out same-shack sales, that's a fraction of their company.

Moser: It is. It's not the biggest presence to begin with, I think they have somewhere in the neighborhood of 120 stores, or something like that. But it's basically split down the middle as far as franchise versus company-owned. The big question, at least, with Shake Shack, remains how much can they grow this concept? We were lucky enough to take that train up to New York City last year and do a little market research. I loved the food, it was great. But you know what? I ate at Five Guys last night, Chris, and it was really just as good. I don't know that they really have anything that truly differentiates themselves beyond the same-shack sales metric. I mean, that's clever, but that's the thing we talk about with these restaurants. There's so many burger places out there. 

We saw a decade ago with Chipotle, for example, making such progress and having so much success because they were an innovator in that space and introduced a new concept, a new way of doing food that was, you saw the fast casual dynamic come out. Now we see all the imitators. And Shake Shack is one of those imitators, along with Five Guys and a million other ones. You just have so many in there now that it becomes very difficult to really gain any serious, sustainable traction there, because you have so many options. So, when we look at Shake Shack, it's really difficult to justify it as an investment. Again, it's not like the performance is all that great. The success on the top line there was due to opening new stores. And at some point, you can't do that. So, once they stop opening stores, how are they going to gin up traffic? They only have a modicum of pricing power. Really not much at all.

Hill: That's the thing. To the extent that anyone at that company's management cares, my two cents is, if you're performing, you can be as cute as you want with your metrics, branding, and all that sort of thing. Look at John Legere at T-Mobile. When you are putting numbers through the roof, then you can be as cute as you want to be. Until then, to Jeff's point this morning on Twitter, you can't hide the numbers.

Moser: No, you can't. The numbers tell the story. Maybe what we need to do next quarter, Chris, is we need to jump on that earnings call, and we need to actually call them out on this and say, "Listen, guys, just come back to earth. Just be like everybody else. Same-store sales is just fine, it makes it easier. Don't try to obfuscate the data. Let's just be clear and understand what you're trying to do."

Chris Hill owns shares of Chipotle Mexican Grill. Jason Moser owns shares of Chipotle Mexican Grill and Twitter. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Twitter. The Motley Fool is short Shake Shack. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.