Advertisement

Is Shake Shack the new Krispy Kreme? Or will it be even worse?

Share

In January, at the time of the ultra-buzzy initial public offering of high-end hamburger joint Shake Shack, we asked if the company would turn out to be the Krispy Kreme of 2015. Now the question is: could it even turn out worse for investors?

Both companies came to market amid a halo of popular adoration. Krispy Kreme’s sugar-slathered doughnuts represented the comeback of the guilty indulgence after Americans had spent decades imprisoned in a health-obsessed nanny state, and was poised to expand nationwide. Shake Shack talked up its origins as a New York food truck, though it actually was the product of a very efficient theme-restaurant partnership.

Krispy Kreme soared after its 2000 IPO, eventually more than quintupling in price. Then it crashed. It’s now trading at less than half its peak price, reached in 2003. One reason is that, like so many “story stocks,” its story--unlimited growth far into the distant future--didn’t last.

Advertisement

Now comes Shake Shack. As we write Thursday morning, its shares are down more than 3% on the day, at $44.24, and about 14% below the high of $52.50 it reached on Jan. 30, the day of its IPO, though they’ve recovered from their worst levels. The fall came the day after its first quarterly financial report since going public.

The report shows that Shake Shack isn’t doing badly. It posted a loss of 5 cents a share, most of that due to the 4-cent cost of its IPO. Setting that aside, the loss isn’t a large as Wall Street was expecting.

The problem is that the hard numbers show investors that their frenzied expectations for the company probably need recalibrating. Wall Street analysts are visibly wrestling with the mismatch between their love for the echt-New York experience of a $9 double cheeseburger (for comparison: In-N-Out’s Double Double was raised last year to $3.45) and the possibility that Shake Shack’s growth won’t justify a stratospheric market valuation.

The company’s “headline numbers were better than expected across the board,” wrote JPMorgan analyst John Ivankoe, as quoted by Barron’s, but his price target for year-end 2016 is still only $34, which implies a further drop of about 25%. (Another analyst cited by Barron’s expects the price to keep rising to $50.)

It may not be long before investors cast a warier eye on the story being told by Shake Shack’s management, which is filled with touchy-feely self-promotion. Its principles of business, according to its public prospectus, include recruiting and developing “a team with the innate ‘personality to please’ that cannot be taught. We look for people who are warm, friendly, motivated, caring, self-aware and intellectually curious team members.... Our team is trained to understand and practice the values of Enlightened Hospitality: caring for each other, caring for our guests, caring for our community, caring for our suppliers and caring for our investors.” So it trains its staff in qualities that “cannot be taught.” Hmm.

This isn’t to say that Shake Shack won’t fulfill or even exceed the expectations embodied in its current market valuation, sooner or later. Maybe it will, maybe not--it may even have recovered by the time you read this. (Update: Truer words were never spoken; within a half hour of this post going up, Shake Shack shares went positive on the day, and closed at $48.20, up 2.77%--though they may have been buoyed by a very strong updraft market-wide.) It’s merely a reminder that the future is unknowable, and investors generally do better when their investment decisions start with a good measure of skepticism, not adoration. That always leaves more room to be surprised on the upside.

Advertisement

Keep up to date with the Economy Hub. Follow @hiltzikm on Twitter, see our Facebook page, or email mhiltzik@latimes.com.

Advertisement