Shake Shack (SHAK) Stock Plunges on “Not Good Enough” Q2

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SHAK stock - Shake Shack (SHAK) Stock Plunges on “Not Good Enough” Q2

Source: Abdullah AlBargan via Flickr (Modified)

“Better burger” restaurant chain Shake Shack Inc (NYSE:SHAK) earned itself a flogging after Wednesday’s bell. Despite a beat on the top and bottom lines, SHAK stock was off by nearly 10% in after-hours trade.

shake shack SHAK stock

Shake Shack posted a non-GAAP profit of 14 cents per share in its recently completed quarter on a revenue improvement of 37% to $64.4 million. Analysts were collectively expecting the company to report a profit of 13 cents per share of SHAK stock and sales of $63.15 million. In the same quarter a year earlier, Shake Shack earned 9 cents per share on $48.45 million worth of revenue. Margins were higher than anticipated on lower-than-expected food costs and relatively lower labor costs.

The beat did not impress investors, however. SHAK stock was down more than 10% in after-hours trading on same-store sales growth of only 4.5%, versus expectations of 4.9%.

CEO Randy Garutti commented on the numbers:

“For the second quarter, we increased revenue over 2015 by 37.2%, opened four new company-operated Shacks domestically, three licensed Shacks and grew comps by 4.5%, on top of an impressive 12.9% increase last year. We continue to execute on our growth strategy, while delivering industry-leading AUVs and, in this past quarter, our 30.8% Shack-level operating profit margin set a new record. Innovating around our core menu continues to be a key driver of our success with the addition of our Chick’n Shack, launched in January, and our most recent LTO, the Bacon Cheddar Shack, launched in June.”

Shake Shack: A Growing Disappointment

Shake Shack was all the rage when it went public in January 2015, serving up custom-ordered, quality-ingredient hamburgers.

It boasted 63 locales at the time, with its popular burgers prompting rapid expansion of the company’s footprint. The restaurant chain has grown by about a third of that number since then, though better-burger-mania has cooled dramatically in the meantime. During the first quarter, the company’s revenue growth rate fell by 23%. That measure perked up again in Q1 2016, but not enough to satisfy shareholders.

It’s just a taste of a headwind that could disappoint SHAK stock owners looking for the company’s growth of yesteryear.

Analysts at Wedbush recently initiated coverage of Shake Shack at a “sell” rating, saying:

“Continued valuation contraction as near-and-medium-term results decrease the likelihood of more optimistic scenarios. … Given very strong new unit openings, we do not expect SHAK to benefit from a multi-year maturation cycle that serves as a tailwind for other growth restaurants.”

The headwind hasn’t deterred the restaurateurs’ plans to continue adding more units, however, A quarter ago, Shake Shack projected 16 new units for 2016 and just as many for next year. The 2016 projection has since been upped to 18 new builds, according to the company’s Q2 press release.

Some of those locales will be at malls — a venue that Shake Shack has mostly steered clear of until now.

SHAK Stock Needs Growth to Live, But …

The burger chain has been branching out from just burgers of late in an effort to maintain its historically impressive growth rates. Early this year, SHAK unveiled a chicken sandwich in all its locations, and it’s testing a breakfast menu in one location.

Even so, the bigger Shake Shack gets, the more difficult it becomes to sustain its strong double-digit growth rate. The restaurant chain reported same-store sales growth of 12.9% during the second quarter of 2015, but clearly slowed down last quarter. This spurred the brunt of the bearish response from investors.

Looking ahead, Shake Shack now foresees revenue of between $253 million and $256 million, versus prior guidance of between $245 million and $249 million. Same-store sales growth is expected to roll in between 4% and 5%. Analysts are (or were) expecting Shake Shack to earn 44 cents per share this year, on revenue of $252.0 million.

Both compare favorably to the prior year’s bottom line of 32 cents per share of SHAK stock and sales of $190.6 million. That growth is/will be both organic as well as the result of new stores.

But it’s a good guess that Shake Shack will need to clobber those numbers to keep the bears at bay.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/shake-shack-inc-shak-stock-q2/.

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