Better Buy: Shake Shack versus The Habit Burger

Image sources: www.shakeshack.com and www.habitburger.com.

Burger Face-OffNew York-headquartered Shake Shack and West Coast-based The Habit Burger are both relatively new to the public markets. In the following slides, we’ll look at the two stocks from a number of different angles to determine which is the better buy for investors.

Image source: Getty Images.

SHAK HABTTraded: NYSE NASDAQ

IPO Date: 1/30/201511/20/2014

Market Capitalization: $1.37 billion $457.1 million

Stock Return Since IPO: -18.6% -63.3%

Forward PE Ratio: 69.3 46.9

Key Facts &

Valuation

Neither company has recovered its initial public offering pricing. Each is fairly expensive relative to one-year forward earnings – Shake Shack sells at a 45% premium to Habit.

SHAK HABTTrailing 12 Month Revenue: $246.3 million$270.6 million

TTM Operating Income: $26.5 million $12.6

TTM Operating Margin: 10.8% 4.7%

TTM Net Income: $9.8 million $3.8 million

TTM Profit Margin: 4.0% 1.4%

Profitability

Both companies present the investor with surprisingly slim operating and profit margins. Shake Shack has the edge, here.

SHAK HABTEst. 2016 Comps Growth: 4.0% - 5.0% 2.0%

Total System Stores: 105 160

Restaurant Margins 28.7% 19.8%

RestaurantOperations

Comps growth is getting difficult in the “better burger” segment, due to intensified competition. Let’s look more closely at those restaurant margins on the next slide…

SHAK HABT

Sales100.0%

100.0%

Food and paper costs 28.4% 30.4%Labor Costs 25.3% 33.1%Occupancy + Other 17.6% 16.7%Total Direct Restaurant Costs 71.3% 80.2%

Total Restaurant Margin 28.7% 19.8%

Comparing Restaurant Margin

Shake Shack has a much higher restaurant-level operating margin, per a glance at each company’s most recently reported quarter. As you can see, the biggest difference is Habit Burger’s higher labor cost.

SHAK Strategy:• Brisk unit expansion is

key.• Use Limited Time Offers

(LTOs) like “Chicken Shack” to fuel interest in brand.

• Growth strategy relies on international partners -- 40% of units are licensed abroad.

Image source: Shake Shack Instagram page.

HABT Strategy:• Also ramping up new

units.• Use LTOs (e.g.“Super

Food Salad”) to appeal beyond burgers.

• Innovative marketing to hold pricing power.

• Unlike Shake Shack, based entirely in U.S. Also, operates rather than licenses: Runs 152 out of 160 restaurants.

Image source: Habit Burger Instagram page.

Which Company Is the Better Buy?Both burger chains offer compelling reasons to buy and hold:

• Shake Shack’s higher valuation arises from its impressive potential as a global, high-end burger chain.

• Habit grew steadily and slowly for 45 years on the West Coast before going public. Its more conservative valuation reflects a measured approach to growth.

• Similar basic financial returns and operations, though Shake Shack enjoys higher restaurant margin and overall operating margin.

If you had to purchase one today, the Shack may yield better returns over a long-term period. But keep The Habit on your investment watchlist as well.

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