Shake Shack (SHAK) remained on its growth tear in the third quarter, handily topping estimates, and significantly beefing up the top and bottom line from year-ago levels.
And yet, Shake Shack stock is no longer being treated like the slam dunk traders were deeming SHAK to be during the first half of the year when the concept — and SHAK stock itself — were just fresh off the proverbial griddle.
A reason to worry? Maybe, or maybe not.
The pace of corporate expansion continues to impress, but now the euphoria is fading and investors are starting to think about things like long-term viability and plausible valuations, it’s becoming clear that Shake Shack stock isn’t any more bulletproof than any other name.
Shake Shack Earnings
In its third quarter of 2015, Shake Shack earned 12 cents per share on revenue of $53.3 million.
Those figures beat the top and bottom lines for the third quarter of 2014, when Shake Shack earned three cents per share and did $31.8 million in sales. More importantly, the third-quarter numbers for this year rolled in firmly higher than the profit of 7 cents per share of Shake Shack stock and revenue of $47 million analysts had collectively predicted.
A great deal of that growth was fueled by new stores. The company opened four new Shake Shacks in Q3, while the five opened in the second quarter were still getting up to speed and just turned in their first full-quarter results.
A great deal of that growth, however, was fueled organically. Same-store sales were up 17%.
Looking ahead, the restaurant chain is now looking for full-year sales between $189 million and $190 million, well up from prior guidance of between $171 million and $174 million. Moreover, the same-store sales outlook for 2015 has been revised from single-digit improvement to a range between 11% and 12%.
The Problem Remains
The growth the company has mustered is, and likely will be, impressive for the foreseeable future, and the buzz surrounding the story is palpable. Suspiciously, though, SHAK stock didn’t soar following a sizzling third-quarter earnings report and equally stellar outlook. Indeed, SHAK was down nearly 3% as of this writing.
It raises one significant question: Why?
The only plausible answer won’t come as a shock to anyone who has followed the saga of Shake Shack stock since its January IPO — even factoring in past and projected growth, SHAK is still one expensive stock. The forward-looking P/E is a frothy 155.
Not every investor or analyst is completely deterred. For instance, Longbow analyst Alton Stump noted following the company’s earnings report:
“While we still have concerns related to the valuation carried by SHAK, the company’s impressive comp acceleration reported over the last four quarters could set the stage for further comp upside in coming quarters driven in large part by incremental rate pricing/mix.”
Extreme caution is still merited with SHAK, though.
While investors are betting on future growth that will eventually allow profit margins to widen to more palatable levels, Shake Shack CEO Randy Garutti made a point of acknowledging that labor costs are firmly on the rise.
In response, the restaurant chain plans to put modest price increases in place come January. But with an average Shake Shack meal already costing in the vicinity of $13 (more than comparable meals at its competitors), it remains to be seen if customers can stomach even slightly higher prices.
Bottom Line for SHAK
From a sales and growth perspective, Shake Shack is another well-loved, all-American success story. From an earnings-right-now point of view, though, there’s no denying Shake Shack is spending big in the name of future growth.
It’s not an uncommon tale. But it does nothing in the way of answering the question of whether or not the company is actually capable of turning a decent profit at any point in the future. Then again, with a story stock like SHAK, the prospects of respectable profit margins are not the point … at least not yet.
The fact that Shake Shack stock fell after the strong quarterly report suggests that earnings (present and/or future) are starting to become part of valuation equation.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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