The Shake Shack Inc Stock Growth Story Is Starting to Stumble

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Shake Shack stock - The Shake Shack Inc Stock Growth Story Is Starting to Stumble

Source: Abdullah AlBargan via Flickr (Modified)

Shake Shack Inc (NYSE:SHAK) is proving, once again, that real things don’t scale as well as virtual things. SHAK’s fourth-quarter report shows the New York hamburger chain is growing as quickly as it can, that people still like the product, but the growth behind Shake Shack stock is inevitably slowing as the company gets bigger.

As a result, SHAK stock, which has traded like a tech stock at over four times annual revenue, fell almost 5% in overnight trading after earnings were posted, giving up all its gains on Feb. 15, and more. Shake Shack stock is now down roughly 11.5% for the year.

The SHAK earnings results — sales growing over 33% for 2017 — weren’t the disappointing factor for analysts; it was the outlook. Sales are expected to grow just 24% in 2018. The “hockey stick” is flattening out for Shake Shack stock, and growth is costing money.

What is shocking is that anyone is shocked.

Shake Shack Stock: Why You Shouldn’t Be Surprised

Shake Shack’s menu is similar to what McDonald’s Corporation (NYSE:MCD) seemed to be offering two generations ago, except the burgers and shakes are bigger, the prices are much higher, and the ingredients are fresh.

Ray Kroc famously found the McDonald brothers in San Bernardino, California because he was selling them milk shake mixers, and the rest is a little business history, now immortalized on film.

It’s not just that the pace of growth slows even as “The Shack” opens new stores at a similar rate as before. It’s that same store sales didn’t grow during the fourth quarter as it raised prices. (They were up 8% for the year.)

As a result, the 2018 forecast fell 3% below the level analysts were modeling, and they turned cautious about the SHAK stock price. They weren’t even excited by the fact that the Trump tax cut turned a 9-cents-per-share loss into a small, 10-cents-per-share profit for SHAK.

Shake Shack is trying to maintain quality as it grows. It opened 45 new outlets in 2017 and it plans to open up to 44 this year. While it is the King of New York, it finds itself facing local champions as it expands to places like San Diego, where the local press prefers the local champ.

SHAK Stock: No Gloom, Yet

Shake Shack’s penchant for freshness will inevitably get some analysts on watch for a scandal, as Chipotle Mexican Grill, Inc. (NYSE:CMG) has suffered. But the two are not analogous. Chipotle must do a lot of in-restaurant prep, cooking ingredients and laying them out on a steam table before opening. Shake Shack is dealing with lettuce, tomatoes and burgers that can be kept chilled until they’re ready for service.

Still, Shake Shack stock is now becoming a “battleground” stock, one facing bears as well as bulls, and it’s going to face even more local champions as it continues its nationwide expansion, stores like Roark Capital’s Culver’s and privately-held Whataburger in Texas.

The national chains are going to focus their big guns on SHAK as it gets bigger. There are also certain to be local copycats awaiting it in other markets — you can’t patent or copyright a hamburger, crinkle-cut fries and a milk shake. Opening a new outlet right across the street from one-offs isn’t necessarily going to work, either.

The Bottom Line

I never got Shake Shack. I tried it, once it arrived in Atlanta, and I found it didn’t live up to the hype. Nothing could. I make a pretty good hamburger myself, and when you do it from scratch you can, too.

SHAK’s price-to-sales ratio is going to go down, and it needs to start delivering a solid bottom line, if Shake Shack stock is going to maintain its current level. The fourth quarter was the first hint of just how difficult that is going to be.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/shake-shack-inc-shak-stock-growth-story-stumble/.

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