Monday, May 23, 2016

Well That Was a Shack-ingly Brief Run

  In the world of Shake-Shack, everything is about “The Shack.”  
 Where most restaurants report “same-store sales” and “store-level operating margins” and “store economics,” SHAK reports “same-shack” sales and “shack-level operating margins” and “shack-onomics.”
 It’s a cute, quirky culture the company has built from modest roots—the now-famous hot-dog stand in Madison Square Park—into an international phenomenon, in 12 short years.
 Of course, 12 years in today’s world is actually a long time, but things didn’t get serious until 2004 when the first Shake Shack restaurant opened, starting the launching pad that would shoot the rocket ship into orbit following the wildly hyped IPO just 16 months ago to the point where, by the end of the first quarter, there would be 88 such “Shacks,” with an inordinately large number—36 to be exact—licensed to other operators outside the U.S., mainly in the Middle East.
 And it is towards that Middle East exposure we turn our attention here, since Wall Street’s Finest haven’t bothered—and anything Wall Street’s Finest don’t bother with is always interesting to this virtual column.
 Not so long ago—in the July 2015 S-1, for the record—SHAK described the Middle East as “our most prominent growth market.” 
 And the Middle East clearly was the prominent growth market at that point, having seen 49.7% licensing revenue growth in the fourth quarter of 2014.
 But by the first quarter of 2016 that growth rate had throttled down to 14.3%.
 What happened to SHAK’s “most prominent growth market”?
 Here’s what management said on the recent earnings call:
 Now, while the Middle East remains a very important market and part of our international footprint, we are experiencing softness in sales there this year, particularly in our mall locations throughout energy-dependent markets that are seeing a natural economic slowdown right now coupled with currency headwinds. So we expect sales in our Middle East Shacks to remain under pressure through this year given the macro environment in the region.”
 Not too long ago—i.e. last summer, around the same time as the aforementioned S-1—the company was describing the Middle East in far rosier terms:
“When we had just opened the second Shake Shack on the Upper West Side of New York, Mohammed Alshaya, probably many of you know Alshaya, from the Middle East, came to us and said, I don't normally do this.  I normally go with much bigger brands here, and I know you only have two, but I think Shake Shack would do tremendous in the Middle East and I want to bring you over. And Danny and Randy kind of looked at each other and shook their heads, but out of pure curiosity got on a plane and went to Dubai, saw the way Alshaya operates, saw how they do things, saw how their culture connects with ours and said, you know what, let's take a chance, let's do it.  So they opened a Shake Shack in the Mall of the Emirates in Dubai and it was one of the leading restaurants in the system and still is at this time.”
 Alshaya is, indeed, a legit operator, and they do indeed normally go with bigger brands.   They’ve opened Cheesecake Factories and Pottery Barns, and they know how to do it. 
 But Cheesecake Factory and Pottery Barn took their time on the whole opening-a-zillion-stores-overseas thing.   
 Specifically, it took Cheesecake Factory 35 years before they opened their first restaurant overseas, in Dubai, with Alshaya in 2012—and the company spent a lot of time getting ready.  
 After all, Cheesecakes in Dubai can’t serve alcohol or sell pork products, so the menu had to be adjusted and the company’s culture had to be transported all the way from Calabasas Hills to the United Arab Emirates.
 Today Alshaya operates just 9 Cheesecakes, compared to the couple-dozen-plus Shacks it opened with a bang not so long ago.
 And while Cheesecake has let it be known, most recently in March, that its international units continue to do well, SHAK said on its recent call the Middle East market is already “maturing...quite a bit” as it switched the focus to new licensees in Asia:
   “If you look at our guidance of seven Shacks all year here for that, the Middle East has got quite a few restaurants there. Our region is maturing for Shake Shack quite a bit. We have some great opportunity. We just opened in Riyadh and doing really well there. As I've said, in Bahrain and Oman. So we fully expected that region to mature a little bit.”
 From “our most prominent growth market” to a “maturing” region in less than 12 months might be a record.   
 Not the record a growth company wants to hold, but a record nonetheless.


Jeff Matthews
I Am Not Making This Up

© 2016 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

Tuesday, April 26, 2016

When Analysts Surrender

 It’s bad enough when analysts thank CEOs for letting them ask a question on an company earnings call, at least when they do it in a way that goes beyond a simple act of politeness and more towards a cringe-making act of fawning, which too many analysts have a way of doing these days.
 This is, after all, a business: it’s an analyst’s job to ask questions; it’s a CEO’s job to answer them.   Get on with it.
 What’s worse, however—much worse—is when an analyst who asks a good question gets schmoozed by the CEO, and instead of following up and getting an answer, surrenders.
 It happened tonight on the Apple call.
 After thanking the company for “fitting me in” (really?) the analyst asked Tim Cook—all quotes are from the indispensable Seeking Alpha—a very reasonable question about the “top two or three things” that had changed from the previous quarter, when Apple’s CEO was way more bullish about the demand environment for iPhones than it turned out to be.
 Cook’s response turned the question into a math equation:
 “…we did not contemplate or comprehend that we were going to make a $2 billion-plus reduction in channel inventory during this quarter. And so if you factor that in and look at true customer demand, which is the way that we look at it internally, I think you'll find a much more reasonable comparison.
 The analyst jumped on Cook for changing the subject—after all, he said, the fact that you decided to cut $2 billion out of channel inventory must mean you had $2 billion more product in the channel than you expected, which means “true customer demand,” as Cook called it, was $2 billion weaker than plan, right?
 Ha!  We’re joking.
 The analyst did no such thing.   He surrendered.   “Okay, great.  Thank you,” he said, and then asked a softball follow-up.
 Tim Cook took home $10.3 million last year.   He can handle tough questions.
 Personally, I’d like to know why Cook—who gets on his high moral horse every time some politically correct brushfire starts up somewhere in America—gives up without a sound when the Chinese authorities demand the Apple Store stop carrying apps involving the Dalai Lama.
 We know the answer: money.
 Still, it would be fun to ask.
 But don’t hold your breath.

Jeff Matthews
I Am Not Making This Up

© 2016 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

Monday, April 18, 2016

The Graduate From Spinal Tap...The NotMakingThisUp Review of Dan Lyons’ “Disrupted: My Misadventure in the Start-Up Bubble”


Mr. McCleery: You aren’t one of those agitators, are you?
Benjamin: What?
Mr. McCleery: I hate ’em. I won’t stand for it.
—The Graduate

  We here at NotMakingThisUp only write book reviews when we like the book.   (If we don’t like it, we don’t write anything at all, because it’s hard—really hard—to write a book, so just the fact that someone has written a book ought to be respected, not criticized.)   Journalist Dan Lyons has not only written a book, but it’s good—and not just “good,” but laugh-out-loud good.
  The subject matter, however, is not always laugh-out-loud funny. 
  It’s about Lyons’ time at HubSpot, the “cloud-based marketing and sales software platform company” he worked for at roughly the peak of the Web 2.0 cycle (Lyons would probably describe it as a “spam-based marketing and sales software platform company,” but we’ll go with the official terminology), and while you may be more familiar with the frat-boy excerpts that have already made made plenty of headlines, they’re nothing anybody who was around during the last bubble hasn’t heard about before and don’t need repeating here.  
  Way more interesting is Lyons’ take on what it’s like to be a 50+ year old Boomer working at a hotshot Millennial company—or “cult,” as he sees it.
  Lyons listens to conference calls with the company’s ‘social media scientist,’ “a competitive weightlifter who lives in Las Vegas and basically does nothing”; he spends too much time in meetings, which, “like most journalists—and, I would argue, most sane people” he detests; and he gets so fed up with the bubbly self-reinforcing “Happy!!  Awesome!! Start-Up Cult” culture that he begins sending around emails like “Jan is the best!!!  Her can-do attitude and big smile cheer me up every morning!!!!!!!” about the “grumpy woman who runs the blog,” until he is told to “cut that s--- out.”
  It’s a riot, and it makes the book swing, but that’s not the important stuff.
  The important stuff includes the sheer whiteness of the workforce, which should be no surprise to him but is (did he really report on the technology world most of his career and not notice that before?); not to mention the youngness of the place, which should also be no surprise to him (does he not know how young Mark Zuckerberg still is?)
  But the spookiest bit has nothing to do with the age thing, or the “astonishing lack of diversity” (did he think poverty-trapped kids from Harlem are actively recruited by young affluent suburban white kids?), it’s the cultish behavior reinforced from the top, most notably in the way in which employees who’ve been fired are NOT said to have been “fired” or to have “resigned to pursue other interests.”
   They are said to have “graduated.”
   “Nobody ever talks about the people who graduate,” writes Lyons, “and nobody ever mentions how weird it is to call it ‘graduation.’”   Yet “graduations” happen quite a lot, apparently: the best line in the book being “People just go up in smoke, like Spinal Tap drummers.”
  Of course, Lyons himself eventually “graduates” after the culture clash starts to get to him (which it actually did on his first day at HubSpot, but he persevered)  and he begins to set himself up in ways that make you scratch your head and wonder if he ever actually worked in a corporate environment.
  Exhibit A in the did-he-really-not-see-this-coming-a-mile-away setup to his own graduation is when Lyons pitches a new online magazine—an idea his direct boss had already rejected—to his boss’s bosses without his boss knowing Lyons was going over his head.
  “They love the idea,” he says of the meeting with HubSpot’s co-founders.  “That night I go home feeling like a conquering hero.”
  Poor bastard, you think, reading that line.
  Exhibit B in the did-he-really-not-see-this-coming-a-mile-away department is when Lyons is shocked—shocked!—that nothing subsequently happens, because he didn’t have anyone else at the meeting to verify that the two co-founders actually approved the idea. 
  As one colleague far wiser than Lyons in the ways of corporate politics tells him, “You should have had a witness.”
  Exhibit C in the did-he-really-not-see-this-coming-a-mile-away department, naturally, is when Lyons’ boss-who-rejected-the-idea-before-Lyons-chose-to-go-over-his-head appropriates the idea as his own.
  By now, however, even Lyons has figured out what’s happening: “At this point the message could not be more clear,” he writes.   His boss “is doing everything short of hiring a skywriter to scrawl GET OUT, DAN in the airspace above HubSpot headquarters.”
  Lyons at least has some fun as the clock winds down.   At an anything-goes marketing idea meeting he proposes putting an “unbearably ambitious and energetic young woman who recently graduated from college, loves HubSpot more than life itself, and would do just about anything to get a promotion” in an orange (the Hubspot color) jumpsuit and helmet and firing her “right through an open window and into a cubicle.  Bang!  There she is!  She doesn’t miss a beat.  She just starts giving a lecture about marketing.”
  To a cynical career journalist, HubSpot was a gift that kept on giving.
  On the downside, however, Lyons stretches at times to make bigger points—something book editors tend to encourage authors to do in order to gin up the meaning of an otherwise highly enjoyable, and very telling fish-out-of-water memoir.
  For example, trying to turn his time at HubSpot into a lesson about the cheerful heartlessness of the Web 2.0 revolution, he actually quotes Carl Icahn—the slimeball takeover artist who bankrupted TWA while pocketing a sweet discount airline ticket deal for himself, among many other things that make Donald Trump look magnanimous and would normally set a cynical journalist's hair on fire—about Marc Andreessen from back when they were fighting over eBay, which is stupid because Andreessen (think Netscape, Facebook, Twitter, among other life-changing companies he’s been involved in) has added more value to the current quality of life in America than even Carl Icahn has managed to extract for himself.
  Lyons also quotes, of all things, a snarky Robert Reich “Facebook post” about the sharing economy having become a “share the scraps” economy—tell that to the next Uber driver you get who’s paying his way through college or saving for a condo or running a non-profit and wouldn’t have the flexibility to earn extra income without Uber.
 Finally, Lyons surveys the money-losing business models of so many Web 2.0 start-ups and naively wonders “why there are so many companies that remain in business while losing money”—this after he has started the book with a chapter about getting fired from his prestigious and well-paying job at Newsweek Magazine, which, like most dead-tree publications “has been losing money for years.”
  Losing money, whether for a start-up with vast potential, like Amazon.com, or for a fading franchise like Newsweek, has never stopped anybody from trying.  That is, after all, Capitalism.
  But the big-picture stuff feels like an editor made him do it, because the other 98% of the book moves fast, tells a great story, and actually will make you laugh. 
  Out loud.
—JM



  NB: Just for the record, prior to its publication, the author of Disrupted asked, and I answered, a couple of questions about my perspective on the SAAS business model of Salesforce.com.