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Shake Shack activist investor Engaged Capital seeks to acquire three board seats in new proxy move

Yahoo Finance food correspondent Brooke DiPalma examines shares of Shake Shack and the burger chain's forward guidance as its activist investor currently seeks to secure three board seats.

Video transcript

RACHELLE AKUFFO: Activist investor Engaged Capital is gunning to start a proxy fight for three board seats at Shake Shack. Engaged currently has a 6.6% stake in the restaurant chain, which has seen its shares cut in half because of inflation pressures and a slowdown in lunchtime traffic. Joining us now is our own Brooke DiPalma to discuss this more. So Brooke, break this down for us.

BROOKE DIPALMA: Good morning, Rachelle. Well, shares this morning of Shake Shack rising after Wall Street got wind of this activist investor. Now, as you noted, Engaged Capital plans to start a proxy fight with the now global hamburger chain, Shake Shack. And as you noted, they have a nearly 7%-- approximately 6.6%-- stake in Shake Shack, including swaps. And here they are seeking three seats on the board.

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Now the activist investor reportedly sent a letter to Shake Shack's board back in March outlining a proposal for new directors. They also asked for changes to help boost shares of Shake Shack, including asking Shake Shack to retain a consulting firm to help improve operating efficiency and make changes to its super voting share structure. In addition to that, they're also asking here, Engaged Capital, they're saying that they have ways to double Shake Shack's profitability within two years.

And taking a closer look, as you could see, shares now are far lower than the highs that they were back in 2021 when we saw shares more than $130 per share. But in a statement from Shake Shack to Yahoo Finance the company said, quote, "we are executing our strategic plan and making substantial operational and financial progress. We are guiding full year 2023 to be a record year with expectations to return restaurant-level margins to 19% to 20%."

Now in addition to that, Engaged Capital did not return our requests for comment. But this is not the first time that the Street has seen Engaged Capital do something like this. Back in 2015, it pushed Jamba Juice, its parent company, to slash costs. And from there, Engaged Capital founder Glenn Welling gained a seat on the board. In addition to that, back in 2014, it played a role in a board shakeup over at Abercrombie with the settlement announced after one month. And so this might just be the beginning of a potential fight here.

RACHELLE AKUFFO: So with that in mind, right now Shake Shack is positioning itself for massive growth. So break down how that's all going to work.

BROOKE DIPALMA: Right. Well, this is something that we spoke about many times on Yahoo Finance, Shake Shack's global plans to really become a leader in burger chain across the globe. Right now they operating more than 460 locations globally, including about 300 here in the US. In addition to that, they plan to open nearly 40 in the US and 30 to 35 license operations this fiscal year. And in addition to that, they're also investing heavily in drive-through. They said that they plan to open about 15 drive-throughs this year.

But keep in mind, Rachelle, that's something that the Street is watching. Is the cost to build these new locations [INAUDIBLE] a drive-through? On the call, we heard that this year's new locations built will cost more than last year on average. And in addition to that, as you noted earlier, we're seeing a changeup in terms of consumer behavior here. Urban locations for Shake Shack prior to the pandemic saw a lot of volume. But now, with workers perhaps not coming in daily, Monday through Friday, they're seeing perhaps less volumes on Mondays and Fridays. And so lots to watch here when it comes to Shake Shack.

RACHELLE AKUFFO: Well, appreciate you getting us up to speed on that. Brooke DiPalma there for us. Thanks so much.