Shake Shack Inc (NYSE:SHAK) stock fell more than 7% in early trading on Thursday after fourth-quarter earnings at the burger joint came in a bit underdone.
SHAK stock went public in January to a hungry mass of investors who sent shares soaring 130% in its first day of trading.
As with many IPOs, it looks like the initial hype behind Shake Shack set expectations too high. Yesterday was SHAK stock’s first quarterly report since becoming a public company, and after peeling back the onion a bit, investors didn’t like what they saw.
4Q SHAK Earnings
Before slamming SHAK stock too horribly, it’s worth noting a few highlights from the burger joint’s latest quarter. First of all, Shake Shack is growing like wildfire, with revenue soaring 51.5% in the fourth quarter. That explosive revenue growth was driven by “Same-Shack” sales increasing 7.2%, combined with the opening of 10 new stores, or a 19% expansion of its store count.
And with just 63 locations to its name, CEO Randy Garutti vowed to keep pursuing the company’s rapid growth policies (emphasis mine):
“As a result of our successful IPO, we have the financial flexibility to support our robust expansion plans. Near-term, we are targeting at least 10 new domestic company-operated Shacks annually, with the goal of doubling our domestic company-operated store count in three years and tripling our store count in five years. Long-term, we see the potential for at least 450 domestic company-operated Shacks. Our unique and versatile real estate model is built for growth here in the United States and abroad.”
While Garutti’s vision for 450 U.S. company-operated Shacks is certainly ambitious — it represents growth of 1,352% in the store count — it’s so far away from being fulfilled that it’s hard to take too seriously at this point.
In reality, money talks, and SHAK stock disappointed on earnings, losing 5 cents per share against estimates for a 2-cent loss per share in the quarter.
Unfortunately, Same-Shack sales growth is expected to decelerate further this year, and the company now expects the figure to be in the low single digits for 2015. By comparison, Chipotle Mexican Grill, Inc. (NASDAQ:CMG) saw same-store sales roar 16.8% higher in 2014.
While I expect Shake Shack stock to continue growing revenue at breakneck speeds, the problem with SHAK stock today is the same as when it went public in January: there are too many public competitors priced more attractively. InvestorPlace contributor Tom Taulli mentioned this in a cautionary article following SHAK’s 130% run-up on its first day of trading:
“…even in the restaurant space alone, you have several examples of companies where patient investors were able to buy in at much better valuations — Potbelly Corp (NASDAQ:PBPB), Habit Restaurants Inc (NASDAQ:HABT), Noodles & Co (NASDAQ:NDLS) and El Pollo LoCo Holdings Inc (NASDAQ:LOCO).”
At the end of the day, the value just isn’t there with SHAK stock. It’s a good company with great ambition, and it’s expanding its store count rapidly, but as a stock, it sucks. I’ll always appreciate a fine burger and a tasty shake, but I’ll never pay 470 times 2016 earnings for a piece of the company.
If the SHAK stock price ever gets down to $15, I’ll reconsider. Until then, I’m not a fan.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
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