Shake Shack Inc.’s initial public offering is still two days away, but its stock price has already increased.
On Wednesday, the New York City-based burger chain increased the price range for its IPO Friday to $17 to $19 per share, $3 per share higher than the initial $14 to $16 range Shake Shack estimated last week.
The price range of an IPO can often change in the days before a company starts selling stock to the public, but an increase in the range indicates high demand for the company’s shares.
“The IPO is going to be incredibly successful,” said Dennis Kessler, a former Burger King franchisee turned professor at the University of Rochester’s Simon Business School. “There is a hunger out there for progressive chains. It’s going to fly.”
Interest in the IPO has already given the relatively small chain a high valuation. If the stock trades at the peak of its expected range, $19 a share, it would have a valuation of $674.5 million before the stock even starts changing hands.
On average, restaurant stocks that have gone public the past two years have had an average first-day price increase of 68.9 percent. If 63-unit Shake Shack meets that average, it would have a valuation of $1.1 billion, an average of about $18 million per location.
At the mid-point of Shake Shack’s range, $18 a share, it would raise $90 million. The company plans to use the funds to pay off debt, fuel expansion and pay a distribution to the company’s existing equity holders.
Interest in Shake Shack’s IPO is being driven in part by what the company calls “outsized brand awareness.” In 2010, the concept had just seven locations.
Shake Shack has been using that awareness and interest in its roadshow. Its roadshow video shows long lines at the chain’s New York City locations and features interviews with celebrities and celebrity chefs gushing about the burgers.
The chain’s home in New York near so many institutional investors and overall interest in small, up-and-coming growth chains that go public are also expected to drive the offering’s price. Burgers remain a popular item at restaurants, and consumers have demonstrated a willingness to pay for high quality burgers at fast-casual restaurants.
Restaurateur Danny Meyer’s Union Square Hospitality Group LLC started Shake Shack as a hot dog cart in New York City’s Madison Square Park in 2001. The first unit opened in 2004. Thirty-six of the chain’s 63 locations are in the U.S. The company had systemwide sales of $140 million in 2013, and has average unit volumes of $5 million — $7.4 million in Manhattan.
Shake Shack says it could to expand to as many as 450 locations in the U.S. It predicts unit volumes of $2.8 million to $3.2 million as it expands, and operating profit margins of 18 percent to 22 percent.
The company reported $83.8 million in revenue in the first three quarters of 2014, according to SEC documents, a 41-percent increase from a year ago. The company will trade on the New York Stock Exchange under the symbol SHAK, and after the IPO will operate as a separate company from Union Square Hospitality Group.
In addition to Union Square Hospitality Group, Shake Shack’s sponsors include the private-equity firm Leonard Green & Partners and the hedge fund Select Equity Group.
J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC are acting as joint lead book-running managers for the offering. Barclays Capital Inc., Goldman Sachs & Co., and Jefferies LLC are also acting as book-running managers, while William Blair & Company LLC and Stifel are co-managers.
Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze
