HomeLatest ThreadsGreatest ThreadsForums & GroupsMy SubscriptionsMy Posts
DU Home » Latest Threads » Forums & Groups » Main » General Discussion (Forum) » Is Shake Shack's IPO a go...

Mon Jan 26, 2015, 01:01 AM

Is 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.)

26 replies, 2581 views

Reply to this thread

Back to top Alert abuse

Always highlight: 10 newest replies | Replies posted after I mark a forum
Replies to this discussion thread
Arrow 26 replies Author Time Post
Reply Is Shake Shack's IPO a good thing? (Original post)
jmowreader Jan 2015 OP
Recursion Jan 2015 #1
jmowreader Jan 2015 #3
Recursion Jan 2015 #4
Dreamer Tatum Jan 2015 #2
jmowreader Jan 2015 #6
JayhawkSD Jan 2015 #5
jmowreader Jan 2015 #8
Dreamer Tatum Jan 2015 #13
JayhawkSD Jan 2015 #15
Dreamer Tatum Jan 2015 #19
zappaman Jan 2015 #7
jmowreader Jan 2015 #9
zappaman Jan 2015 #10
JI7 Jan 2015 #11
zappaman Jan 2015 #12
jmowreader Jan 2015 #14
VScott Jan 2015 #16
Dreamer Tatum Jan 2015 #20
MineralMan Jan 2015 #17
MohRokTah Jan 2015 #18
Dreamer Tatum Jan 2015 #21
fishwax Jan 2015 #26
NCTraveler Jan 2015 #22
jmowreader Jan 2015 #23
KamaAina Jan 2015 #24
TeamPooka Jan 2015 #25

Response to jmowreader (Original post)

Mon Jan 26, 2015, 01:11 AM

1. I think their Dubai outlet is more where they're headed

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to Recursion (Reply #1)

Mon Jan 26, 2015, 02:00 AM

3. I know they've got many overseas locations already

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Reply #3)

Mon Jan 26, 2015, 02:16 AM

4. I occasionally watch Mumbai-Dubai ticket prices for that reason

Literally just to go there, get a Shake Shack and a Roundtable pizza, eat them, and fly back...

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 01:41 AM

2. All of that is true with or without an IPO. nt

Reply to this post

Back to top Alert abuse Link here Permalink


Response to Dreamer Tatum (Reply #2)

Mon Jan 26, 2015, 02:21 AM

6. Pretty much true

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."

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 02:17 AM

5. The IPO is not about expansion, it is about making the present owners rich

 

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to JayhawkSD (Reply #5)

Mon Jan 26, 2015, 02:24 AM

8. You are very close to the absolute truth

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to JayhawkSD (Reply #5)

Mon Jan 26, 2015, 02:39 AM

13. Ummm...so?

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.

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.





Reply to this post

Back to top Alert abuse Link here Permalink


Response to Dreamer Tatum (Reply #13)

Mon Jan 26, 2015, 12:08 PM

15. EGADS indeed.

 

"You mean they sought to maximize the value of the company before they offered shares to the public? EGADS!"

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to JayhawkSD (Reply #15)

Mon Jan 26, 2015, 01:41 PM

19. Let me help you understand this.



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..



Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 02:24 AM

7. It finally came to LA...

It ain't no In 'n' Out!

Reply to this post

Back to top Alert abuse Link here Permalink


Response to zappaman (Reply #7)

Mon Jan 26, 2015, 02:28 AM

9. So I've heard

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Reply #9)

Mon Jan 26, 2015, 02:31 AM

10. I agree.

I personally would not invest.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Reply #9)

Mon Jan 26, 2015, 02:34 AM

11. in and out and fatburger are my favorites

 

Reply to this post

Back to top Alert abuse Link here Permalink


Response to JI7 (Reply #11)

Mon Jan 26, 2015, 02:37 AM

12. I have the luck (not sure if it's good or bad)

To have both within a half mile.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to zappaman (Reply #12)

Mon Jan 26, 2015, 02:43 AM

14. Call it neutral luck

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!

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 12:19 PM

16. Never understood the attraction with Shake Shack

 

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to VScott (Reply #16)

Mon Jan 26, 2015, 01:42 PM

20. All burgers are overrated.

You can now get the same quality burger at Carl's Jr., although they call it the "All Natural Burger."

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 12:47 PM

17. My current loyalty is to Smashburger. Since there are

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 12:51 PM

18. It's another Krispy Kreme waiting to happen. eom

 

Reply to this post

Back to top Alert abuse Link here Permalink


Response to MohRokTah (Reply #18)

Mon Jan 26, 2015, 01:54 PM

21. I think you are correct.

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to MohRokTah (Reply #18)

Mon Jan 26, 2015, 04:05 PM

26. I think that's a solid assessment

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 02:03 PM

22. Going public doesn't have much to do with 1, 2, 3 or 4. nt.

 

Reply to this post

Back to top Alert abuse Link here Permalink


Response to NCTraveler (Reply #22)

Mon Jan 26, 2015, 03:09 PM

23. Any of the four should give an investor pause

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.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 03:14 PM

24. That's assuming the stock exchange is open

 

Big storm coming to NYC.

Reply to this post

Back to top Alert abuse Link here Permalink


Response to jmowreader (Original post)

Mon Jan 26, 2015, 03:44 PM

25. So Shake Shack's owner's are cashing in. Whatever. nt

Reply to this post

Back to top Alert abuse Link here Permalink

Reply to this thread