Insiders Cheer as Sales of Shares Accelerate
Yesterday, SHAK’s CEO Randall Garutti disclosed additional insider sales of stock through a Form 4 filing with the SEC. This Tuesday, October 1, 2019, Garutti exercised 60,000 stock options at $21 for zero consideration. Through his bankers at JP Morgan, he sold the underlying shares in a series of trades that same day between $92.695 - $97.93 per share generating estimated gross proceeds of $5.6MM. Added to other recent sales of shares beginning September 9, 2019, when a 10b5-1 auto liquidation program went effective for Garutti with JP Morgan, we estimate Garutti has sold over $11.8MM of paper near today’s price range.
The September 2019 and October 2019 options had expiration dates of 01/29/2025, so there was no urgency to monetize the position(s) except that SHAK shares have doubled on Street hype that has driven them to an unwarranted valuation premium to the Company’s peer group range. We think the sales tells the story – Garutti must not see much more upside to SHAK shares based on the recent run in the stock and business-specific non-public information he has access to. He may also realize the "jig is up" as pertains to Class B shares that have been excluded from share count calculations, as minority SSE LLC % interests convert into millions of Class A common shares in preparation to be sold to the Street.
Insiders Looking Out For Themselves, Not Small Investors
Marc Benioff, CEO of Silicon Valley darling Salesforce.Com, recently made poignant comments that Milton Friedman’s definition of Capitalism is dead: “If trust isn’t your highest value, then what is?” he says, believing Wall Street is now in a new era of Capitalism where all that matters is making money and no other value creation matters (e.g., brand, reputation, market share, positioning, staying power, etc.). Garutti’s sales, taken along with a waver of insider sales by the Company’s other C-level executives, Directors, Founders and affiliates, is a violation of investor trust, in our opinion, when taken against the backdrop of recent bullish commentary by the CEO and CFO of SHAK at the Goldman Sachs Retail Conference and highly positive outlook for the Company, its shareholders, its employees, and its customers. Note that the conference was held only a week before Garutti's liquidation program was filed with JP Morgan.
We don’t like looking in people’s wallets, but at this point SHAK’s insider sales wave has gone over the top exceeding hundreds of millions of dollars over a short period of time. It’s never a good sign when insiders load their pockets and all available pieces of their clothing with equity compensation at the expense of investors to exorbitant levels that exceed the net income of the entire organization each year. Benioff believes that management today no longer focuses on value creation over the long-term, instead opting for quick money if and when it becomes available. Given SHAK’s overvaluation at 7.1x enterprise value/TTM sales versus a comp mean multiple of 4.1x, which is not supported by deteriorating margins due to wage inflation, packaging and materials cost increases, beef price hikes, rising store opening and operating costs, weakening traffic performance and unit performance after each store’s “one year anniversary”, slowing P&L growth as the law of large numbers begins to take hold, and substantial competition in all corners of the market for fast casual dining, insider sales trends will likely be on pace for a record performance in 2019-2020. That is not the kind of record performance minority investors should pay for.
Maintain Strong Sell, $50 Fair Value
We anticipate SHAK will correct to more rational levels of $75 or below where the Company’s 2Q19 results were initially cheered by its “analyst team” and the Street. Today, the only people involved with SHAK that are cheering are insiders selling their own stock into the open market. We maintain our STRONG SELL recommendation and $50 target.
Garutti Form(S) 4 – September 9, 2019 and October 1, 2019
Full Insider Sales Wave
SHAK Presentation at Goldman Sachs September 4-5, 2019
SHAK Comparable Table 10-03-2019
Disclosure: I am/we are short SHAK.
Additional disclosure: We intend to provide additional commentary in our ongoing coverage of SHAK.