General Discussion
Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsIs Shake Shack's IPO a good thing?
Tomorrow Shake Shack will go public. (Shake Shack, for those of us who don't keep up with the East Coast, is a very small chain of very small hamburger restaurants known for good food and extremely long lines.)
My feeling is, this isn't such a great thing. Here's why:
1) No first-mover advantage. There are a LOT of these kinds of places on the market already.
2) New Yorkers and Bostonians will stand in line for an hour for a hamburger. People in Ohio or Minnesota probably will not.
3) Their food might be "fast food" priced in New York City, but in Montana that's sit-down money.
4) There is NO guarantee McDonald's won't create a "hamburger boutique" chain within their own system. They've got the supply chain and - more important - the huge amount of money it would take to build a better-burger brand. (No, it wouldn't be "Mickey D's serves fancier food. They tried that shit and it didn't work. This would be a whole new label.)
Recursion
(56,582 posts)I don't know that an IPO means they have to expand to Omaha and Dallas (though Dallas might be a good choice). I think they're looking more at Dubai, Colombo, Hongkong, Singapore, etc.
jmowreader
(50,530 posts)The Middle East seems to be their ultimate destination.
The big worry all these "upscale fast food" places should have: their customers came from somewhere. I'm thinking one-third of them are people who want to upgrade from McDonalds, and two-thirds are people who had to downgrade from "medium dining" - think Applebee's, Red Lobster, Olive Garden, the kinds of places that don't serve super-expensive food but still have tablecloths and forks made out of metal. If the economy starts to sour again the McDonald's crowd will go back there. If it starts to pick up, the Red Lobster crowd will likewise depart.
Recursion
(56,582 posts)Literally just to go there, get a Shake Shack and a Roundtable pizza, eat them, and fly back...
Dreamer Tatum
(10,926 posts)jmowreader
(50,530 posts)I found this:
http://www.businessweek.com/articles/2014-12-29/8-revealing-facts-from-shake-shacks-ipo-filing
This worries me: "Given the significant awareness of our brand and the excitement we have been able to generate for our market launches, our Shacks have generally opened with higher volumes and operating profits relative to their second year, which have often shown a decline in sales and operating profit. In year three, our Shacks generally mature and continue to grow from the second year base and then retain these higher volumes over time. It is important to note that, while our goal is to grow same Shack sales over time, this is not our greatest growth opportunity. We expect our Shacks to deliver low same Shack sales growth for the foreseeable future as the number of new Shack openings relative to our comparable Shack base remains our primary driver of growth."
If I were a cynical man, I might read that as "people come in a few times when we first open just to see what all the hype is about, then go back to Five Guys or Fatburger after they decide our food isn't worth our lines." Kinda like the line in Spinal Tap when Marty asks Ian why their first tour put them in arenas and their current one has them playing high school gymnasiums: "Our appeal has become more selective."
JayhawkSD
(3,163 posts)Shake Shack is doing what most firms doing IPOs have done, waited until its growth reached a peak for maximum hype of their IPO to assure maximum sales volume and highest pricing of their newly issued stock. Shake Shack has grown at a high rate since its founding, but that growth has started to decline this year, which is why the IPO is being issued now.
That's what IPOs are all about today. They are not about taking a small company public so that it can become a big company, they are about taking a private company which has become big and milking the public for money to enrich the people who own that company. The money does not go into expanding the company, it goes into the pockets of the present owners and makes them fabulously wealthy.
jmowreader
(50,530 posts)The filing admits part of the proceeds will go to "pay off insiders."
What's weird about this one is the size of the company: it's really very small. And the IPO documents appear to give Danny Meyer veto authority over major decisions...you know, like getting rid of Danny Meyer when he refuses to fix his stores so you're not standing in line an hour for a fucking hamburger.
Dreamer Tatum
(10,926 posts)You mean they sought to maximize the value of the company before they offered shares to the public? EGADS!
Shake Shack has grown at a high rate since its founding, but that growth has started to decline this year, which is why the IPO is being issued now.
And?
That's what IPOs are all about today. They are not about taking a small company public so that it can become a big company, they are about taking a private company which has become big and milking the public for money to enrich the people who own that company.
Actually, IPOs are about both (except the nonsense about 'milking the public'...the public can't be milked if they don't buy the stock offering). Private companies are very often owned by people who founded, run, and grow the company. If they do a good job, the future profit stream of the company is discounted to a present value, and a price per share of ownership is derived. I certainly hope the IPO is about enriching the people who own the company. Shouldn't it? And in any case, IPO rules tightly govern how and when an owner can cash out. That's why the tech bubble destroyed thousands of paper millionaires before they could cash out.
The money does not go into expanding the company, it goes into the pockets of the present owners and makes them fabulously wealthy.
Again, not correct. Demonstrably, patently false. The issuance of stock merely puts a "public" price on the shares owned by management. The proceeds of the IPO, after fees, go to the company, but not to executives, and if/when execs do cash out, it's done by selling shares on the open market. It doesn't come from the money that comes from an IPO.
JayhawkSD
(3,163 posts)Yes, I do have a problem with waiting until the value has maxed out before offering it to the public. Then the public "benefits" from a falling stock value rather than a rising one, while the founders benefit from a stock which had an actual cash value of zero, and a significant portion of which they retain, being sold to the public (and given to them for free) at its maximum value. That is a sophisticated and legalized form of theft.
"the future profit stream of the company is discounted to a present value"
No IPO is ever issued at the present value of a company. It is issued at hundreds, thousands and sometimes millions of times the present value. The IPO is always issued based on the anticipated future of the company and never on the present state of the company.
The high tech "dot com bubble" was filled with IPOs issued by companies with negative equity and negative earnings and based on hyped up future earnings. They did not "discount their future profit stream to present value," because if they had they would have been paying investors to take their stock.
"The issuance of stock merely puts a "public" price on the shares owned by management."
And that stock is a form of wealth and it is in their pocket. It is owned by them, as even you admit. It may not be possible for them to sell it immediately, but they can use it as collateral, they can show it on their balance sheet, and the ownership of that stock makes them enormously wealthy.
Dreamer Tatum
(10,926 posts)Yes, I do have a problem with waiting until the value has maxed out before offering it to the public. Then the public "benefits" from a falling stock value rather than a rising one, while the founders benefit from a stock which had an actual cash value of zero, and a significant portion of which they retain, being sold to the public (and given to them for free) at its maximum value. That is a sophisticated and legalized form of theft.
The point of the IPO is that the value hasn't been "maxed out." It appears as though you view IPOs as a way to fleece investors by saying, "Gee, we beat this horse to death, better bilk some investors if we want more money." That is a ridiculous, infantile way to look at the IPO. An IPO is a way to raise funds for the growth of the company (leave aside the stupid notion that the cash from the IPO goes right into the pockets of the owners - that's nonsense and is, in fact, not legal). In some past IPOs, like to dot com era, investors stupidly believed that any sort of e-commerce would be wildly profitable, and the only people who made out were the initial investors who took the company public.
No IPO is ever issued at the present value of a company. It is issued at hundreds, thousands and sometimes millions of times the present value. The IPO is always issued based on the anticipated future of the company and never on the present state of the company.
Would strongly suggest you learn some of the methods of stock valuation before you issue another statement like this. One of the oldest and fairest methods of ASSET (not just equity) valuation is to look at the future income stream and discount it back using an acceptable discount rate, which in many cases is the cost of capital, or a required return threshold. Many IPOs generate prices based on a multiple of that, because investors believe in the ability of the company to grow in other ways, or beyond what is suggested by market analysis.
The high tech "dot com bubble" was filled with IPOs issued by companies with negative equity and negative earnings and based on hyped up future earnings. They did not "discount their future profit stream to present value," because if they had they would have been paying investors to take their stock.
True. And that doesn't happen much anymore, as a result. Savvy investors into IPOs knew all along that their money might just be going to line Sequoia's pockets. On the other hand, look at Google and Facebook.
And that stock is a form of wealth and it is in their pocket. It is owned by them, as even you admit. It may not be possible for them to sell it immediately, but they can use it as collateral, they can show it on their balance sheet, and the ownership of that stock makes them enormously wealthy.
You do understand that that wealth is already in their pocket by dint of already owning the company, right? It appears that you think an IPO is a completely arbitrary way for a group of shysters to bilk mom and pop out of money that they are somehow forced to invest. Could not be less true, if only for the simple reason that you have to be a very wealthy individual or an institutional investor to directly participate in an IPO.
You seem to think that management and ownership have zero equity value prior to the IPO. That would come as quite a shock to, oh, Cargill, Bechtel, Koch Industries, Dell, Mars, Publix, and so on. That would also be news to the private equity companies that invest billions in growth companies for a share of the profits.
If you and I owned 50/50 a company with EBITDA of, say, $1B, and we wanted to grow in a way that involved low cost of capital, we might go to an investment bank and say, we want money. And they'd say, gee, with your GAAP EBITDA and a multiple of, say, 4x (another way to value a company), you have an enterprise worth $4B. That would make both of us billionaires on paper.
They might say, for example, if you want a billion dollars, sell a quarter of the company, which we would effect by selling some of the shares we already own.
So don't too twisted up about people who are made "enormously wealthy" by IPOs because sweet granny's gravy, they're already enormously wealthy..
zappaman
(20,606 posts)It ain't no In 'n' Out!
jmowreader
(50,530 posts)And that's another problem they have: There are ALREADY huge numbers of this kind of restaurant. California has In n Out, Fatburger and a few others I can't recall. Five Guys is all over the fucking place. The Midwest has Culver's, and they're pretty damn good. Texas is buried in Whataburger stores.
zappaman
(20,606 posts)I personally would not invest.
JI7
(89,241 posts)zappaman
(20,606 posts)To have both within a half mile.
jmowreader
(50,530 posts)I live next door to a fast food joint and my work shift always starts AFTER the lunch rush. Imagine having to smell hamburgers for lunch seven days a week!
VScott
(774 posts)Tried them once, and their burgers are waaaaay over rated.
They're ok at best. I would eat there again, but not if I had to wait more than 5 minutes.
Wendys and Carls Jr. is better on a larger scale... 5 Guys on a smaller one.
Dreamer Tatum
(10,926 posts)You can now get the same quality burger at Carl's Jr., although they call it the "All Natural Burger."
MineralMan
(146,262 posts)no In-n-Out burger places in Minnesota, I patronize Smashburger these days when I'm looking for fast food. When in California, though, it's In-n-Out for me every time.
MohRokTah
(15,429 posts)Dreamer Tatum
(10,926 posts)Shake Shack has a devoted following and is expanding, relying on something akin to a craze, but they sell a product that is unnecessary and has many good alternatives.
Just like Krispy Kreme.
fishwax
(29,148 posts)NCTraveler
(30,481 posts)jmowreader
(50,530 posts)The filing claims Shake Shack is a "pioneer" in the "fine casual" market. Dude. You're running a hamburger joint that sells beer, like every Applebee's, TGIFridays and Chili's in the United States. It's not the only place in the world to get a good burger. It doesn't translate well off the East Coast. And it is highly vulnerable to economic swings in both directions.
They sell meals that are a few bucks cheaper than table service places, but considerably higher than...oh, Wendy's. In our current halfass recovery, they're like Goldilocks: neither too large nor too small. If the Republicans will quit fucking up the recovery through obstruction, the table-service crowd will return to it. If Palin gets elected president, McDonalds will once again be full of people in suits.
KamaAina
(78,249 posts)Big storm coming to NYC.