Sorry, Shake Shack Inc (SHAK). Your valuations just aren’t welcome here in 2016. At least, that’s the market consensus as shares of the burger chain plunge upward of 10% in mid-day trading.
SHAK stock’s dive comes after reporting fourth-quarter results, but Shake Shack didn’t have a bad quarter. Revenue was up 47%, beating expectations on both the top and bottom lines.
Shake Shack’s undoing came from tepid forward growth expectations, promptly sending SHAK into a spiral — such is life in 2016, when investors crave safety above all else.
And while Shake Shack can offer customers a delicious burger, fries and shake, it can’t offer its investors a dividend or much in the way of safety.
That was SHAK’s downfall on Tuesday, and it will continue to be its Achilles’ heel going forward this year.
SHAK Q4 Earnings by the Numbers
Revenue jumped 47% to $51.1 million, topping calls for $50.4 million. The company swung to a profit from the same quarter a year before, jumping from a loss of $1.4 million, or 5 cents per share, to a profit of $1.2 million, or 7 cents per share. That was in line with estimates.
What really disappointed investors was the guidance, which makes SHAK stock seem like less of a growth stock than ever before. When you trade at 78 times forward earnings after a selloff like this, you’d better offer a bright and shiny future.
Instead, 2016 looks to be a year of abrupt transition for the fast-casual burger joint that prides itself on quality and service. Same-store sales are perhaps the single most important metric for any restaurant chain or brick-and-mortar retail operation. Without positive SSS, there’s little to be gained from opening new locations. With it, growth can quickly compound.
One of the reasons SHAK stock shot up after its initial public offering early last year — from $21/share to nearly $97/share — was its explosive same-store sales growth, which the company calls “same-shack sales” growth. Last quarter, it came in at a blistering 11%, and for all of 2015 it clocked in at 13.3%.
For 2016? Shake Shack is projecting same-shack sales growth of just 2.5% to 3%. That is dramatic deceleration, and although Wall Street was somewhat prepared for this, it fell below even the bleakest of expectations calling for SSS growth of 3.1% in 2016.
Of course, the restaurant is also still expanding its store base, though that growth rate, too, will decelerate in 2016. Last year, Shake Shack opened 21 new locations, taking its store count from 63 to 84 and growing its base 33%. In 2016, Shake Shack plans to open another 21 locations, growing to a total of 105 stores, representing growth of 25%.
Of those 21 locations, 13 are expected to be company-owned and eight will be licensed Shake Shacks, of which seven of the former will be overseas.
At the end of the day, we’re seeing some pretty decent growth out of the chain, but nothing that truly justifies SHAK stock’s current insane valuation, which at 78 times forward earnings, still could fall quite a bit before coming to a fair value.
While I would happily eat one of its delicious burgers, I wouldn’t touch Shake Shack stock with a ten-foot pole.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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