Shake Shack (SHAK)

Fast-food chain Shake Shack (NYSE:SHAK) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 10.5% year on year to $320.9 million. Its non-GAAP profit of $0.14 per share was 15.1% below analysts’ consensus estimates.

Company Overview

Started as a hot dog cart in New York City's Madison Square Park, Shake Shack (NYSE:SHAK) is a fast-food restaurant known for its burgers and milkshakes.

Modern fast food is a relatively newer category representing a middle ground between traditional fast food and sit-down restaurants. These establishments feature an expanded menu selection priced above traditional fast food options, often incorporating fresher and cleaner ingredients to serve customers prioritizing quality. These eateries are capitalizing on the perception that your drive-through burger and fries joint is detrimental to your health because of inferior ingredients.

Top competitors that also specialize in burgers include The Habit Burger Grill (owned by YUM! Brands, NYSE:YUM), Fatburger (owned by FAT Brands, NASDAQ:FAT), Burger King (owned by Restaurant Brands, NYSE:QSR), McDonald’s (NYSE:MCD), Wendy’s (NASDAQ:WEN), and Jack in the Box (NASDAQ:JACK).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $1.28 billion in revenue over the past 12 months, Shake Shack is a mid-sized restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, Shake Shack grew its sales at an excellent 17.3% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Shake Shack’s revenue grew by 10.5% year on year to $320.9 million but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 17.2% over the next 12 months, similar to its six-year rate. This projection is healthy and implies the market is baking in success for its menu offerings.

Number of Restaurants

Shake Shack sported 585 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip by averaging 16.1% annual growth, among the fastest in the restaurant sector. This gives it a chance to become a large, scaled business over time.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales gives us insight into this topic because it measures organic growth at restaurants open for at least a year.

Shake Shack’s demand has been healthy for a restaurant chain over the last two years. On average, the company has grown its same-store sales by a robust 2.8% per year. This performance gives it the confidence to meaningfully expand its restaurant base.

In the latest quarter, Shake Shack’s year on year same-store sales were flat. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Shake Shack can reaccelerate growth.

Shake Shack has great unit economics for a restaurant company, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an excellent 38% gross margin over the last two years. Said differently, roughly $37.97 was left to spend on selling, marketing, and general administrative overhead for every $100 in revenue.

In Q1, Shake Shack produced a 38.5% gross profit margin, up 1.8 percentage points year on year. Shake Shack’s full-year margin has also been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold

Shake Shack was roughly breakeven when averaging the last two years of quarterly operating profits, inadequate for a restaurant business. This result is surprising given its high gross margin as a starting point.

Looking at the trend in its profitability, Shake Shack’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Shake Shack’s breakeven margin was in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Shake Shack has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.6%, subpar for a restaurant business.

Taking a step back, an encouraging sign is that Shake Shack’s margin expanded by 3.3 percentage points over the last year. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Shake Shack broke even from a free cash flow perspective in Q1. This result was good as its margin was 1.4 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Shake Shack’s five-year average ROIC was negative 3.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the restaurant sector.

Shake Shack reported $312.9 million of cash and $819.1 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $180.4 million of EBITDA over the last 12 months, we view Shake Shack’s 2.8× net-debt-to-EBITDA ratio as safe. We also see its $869,000 of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its same-store sales missed and its revenue fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 2.7% to $85.40 immediately after reporting.

Updated: June 23, 2025 at 10:36 PM EDT

Before investing in or passing on Shake Shack, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

When it comes to Shake Shack’s business quality, there are some positives, but it ultimately falls short. To kick things off, its revenue growth was impressive over the last six years. And while Shake Shack’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, its new restaurant openings have increased its brand equity.

Shake Shack’s P/E ratio based on the next 12 months is 102x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.