Starboard Seeks Faster Growth From Shake Shack Through Franchising

According to an Aug. 17 report from Simply Wall St, activist investor Starboard Value has disclosed a stake worth several hundred million dollars in Shake Shack and is pushing the burger chain to accelerate its U.S. growth through franchising. The proposal would mark a significant shift for a brand that has built most of its domestic footprint through company-operated restaurants.

The brand has used licensing to expand internationally and enter places like airports, stadiums and casinos. Still, its U.S. growth has largely come through restaurants it finances, builds and operates itself. A franchise model would change that. Instead of Shake Shack carrying the full cost of opening each new location, franchisees would put up the capital and take on more of the investment required to grow the system.

Investors like the idea. The stock has gained about 29% over the past 30 days and roughly 17% over 90 days, though it remains down more than 10% year to date and down nearly 29% on a one-year total shareholder return basis.

But the valuation raises another question. Shake Shack’s price-to-earnings ratio is around 76, compared with roughly 24 for the industry and about 21 for its peers. That’s a pretty big premium, which means the company has little room for things to go off track. At the same time, it’s dealing with higher beef and energy costs and still has to navigate questions around restaurant traffic in the months ahead.

The strategic argument will sound familiar to anyone who follows the franchise industry. Franchising has become a common growth strategy for public restaurant companies because it lets them expand without putting as much of their own capital into each new location. Yum! Brands carried that logic to its endpoint in June when it agreed to sell Pizza Hut for $2.7 billion. Starboard wants Shake Shack to make that shift much earlier in its growth cycle. 

Nothing is settled. Starboard has a stake and is making its case, but it doesn't control the company. Shake Shack has made no commitment to domestic franchising. Still, Starboard has raised a bigger strategic question for Shake Shack: How much of its future U.S. growth should the company fund itself?

Read the original Simply Wall St article here.

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