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Unveiling the Investment Potential: Shake Shack vs McDonald’s Unveiling the Investment Potential: Shake Shack vs McDonald’s

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When discussing fast-food burger chains, our minds instinctively gravitate toward the golden arches of McDonald’s (NYSE: MCD). With over 41,800 outlets worldwide, McDonald’s is a marketing juggernaut, a brand synonymous with efficiency and quality.

Yet, in the realm of quick-service hamburger eateries, the title for the most promising investment today doesn’t belong to the fast-food giant, but rather to its nimble competitor, Shake Shack (NYSE: SHAK). So why does this underdog have the edge? Well, a significant factor lies in its compact size.

Opportunities for Growth

For restaurant chains, expanding their footprint is a crucial growth driver. Shake Shack, with its smaller scale, boasts more room for expansion percentage-wise compared to a behemoth like McDonald’s.

Why does this matter? Stock valuations often hinge on growth prospects, and launching new outlets not only boosts sales but also drives profitability. Each Shake Shack outlet rakes in an average of $4 million in sales with a 20% operational margin, translating to an individual profit of around $800,000 before corporate expenses.

With 518 locations in total, including 334 in the U.S., as of the end of 2023, Shake Shack has ample space to open new establishments. While it may never match McDonald’s colossal size, reaching a scale akin to Five Guys, with nearly 1,500 U.S. locations, is a plausible goal. Coupled with international prospects, Shake Shack could quadruple its outlets from the current count, a feat unimaginable for McDonald’s given its mammoth presence.

Not resting on its laurels, Shake Shack aims to unveil 40 company-owned outlets and 40 licensed locations this year. The company-owned branches will mainly crop up in existing domestic markets, while licensed locations will spring in fresh international territories, as well as domestic airports and pit stops.

Embracing McDonald’s Strategy

Shake Shack stands to enhance its performance by mimicking some successful strategies employed by McDonald’s. Take drive-thrus, for instance—a concept McDonald’s has expertly utilized since the 1970s. Shake Shack has piloted drive-thrus at approximately 30 of its locations. The beauty of drive-thrus lies in their ability to expedite orders, enabling restaurants to cater to more customers and, consequently, drive up sales.

Similarly, Shake Shack is rolling out ordering kiosks—an innovation that has already paid dividends for McDonald’s. These kiosks slash order times and labor expenses. Customers also tend to splurge more per visit when using kiosks. Shake Shack reports a high single-digit percentage hike in checkout amounts for kiosk orders compared to those placed conventionally.

Women eating hamburger image

Image Source: Getty Images

Potential Long-term Winners

In recent years, restaurant chains have profited from hiking prices in response to rampant inflation, often surpassing the surge in costs they encountered. This strategy not only propelled same-store sales but also bolstered profits. The rationale behind profit escalation amid inflation is quite straightforward. Price hikes help restaurants preserve their margins, leading to higher profits.

Even if margins experience a slight dip, profits can surge. For instance, a 20% margin on $85 million in sales amounts to $17 million in operating profit, while an 18% margin on $100 million in sales yields $18 million. Therefore, substantial revenue growth can uplift profits even if margins shrink. Companies generally strive to maintain or bolster their margins. Not surprisingly, the dining sector has reaped favorable outcomes in this climate.

With inflation receding significantly, the scope for further price hikes among restaurant chains is slated to diminish compared to previous years. Shake Shack plans a modest 2.5% price uptick this year, while McDonald’s eyes low single-digit percentage increments. Both entities anticipate surges in customer footfall. Although not as robust as in previous years, the outlook remains resilient for both companies to sustain sales growth.

In the long haul, McDonald’s and Shake Shack are poised to emerge as sturdy performers. Nevertheless, Shake Shack holds a higher growth potential, courtesy of its ability to expand its outlets and refine operational efficacy via strategies like drive-thrus and kiosks.

Are you contemplating a $1,000 investment in Shake Shack?

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Geoffrey Seiler holds positions in Shake Shack. The Motley Fool holds no stake in any of the mentioned stocks. The Motley Fool adheres to a disclosure policy.

The views and opinions expressed here reflect those of the author and do not necessarily align with the perspectives of Nasdaq, Inc.

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