It could be a rough ride for Shake Shack (NYSE:SHAK) on Friday, and for the next couple of weeks. SHAK stock fell nearly 5% in after-hours trading after its Q2 earnings report.

The report truthfully wasn’t that bad. Q2 numbers actually were quite strong. But they weren’t strong enough, with investors focusing on disappointing same-store sales guidance for the rest of the year.

With SHAK stock up 70% from February lows heading into the report, investor expectations were clearly higher. And with SHAK trading at 82x forward EPS, anything less than a perfect report could be a problem. The long-term bull case for SHAK remains intriguing, but the current performance and valuation suggest the near-term could be troublesome.

Shake Shack Earnings

From a headline perspective, Shake Shake’s Q2 earnings actually look rather strong. In fact, they’re reminiscent of the Q1 beat in early May that sparked a rally in SHAK shares.

Revenue rose 27% year-over-year, nearly six points better than consensus estimates. Same-store revenue rose 1.1% YoY, while units rose 34%. Adjusted pro forma earnings-per-share of $0.29 was up 45% year-over-year, and came in $0.11 ahead of the Street.

Simply from those two figures, an investor might expect SHAK stock to rise, not fall, after the report. But there are some concerns in both the numbers in Q2 and the guidance given for the full year. Top-line guidance of $446-$450 million was below consensus. That shouldn’t necessarily be a big deal, as management explained on the Q2 conference call that construction issues (among them labor and permitting) were pushing back new openings.

But same-store sales guidance of 0-1% was below expectations for a 1.2% increase, and it implies a deceleration in the second half. Guidance actually suggests a 1-2% decline in same-restaurant sales in the second half. Some of the weakness is coming from new openings “cannibalizing” existing restaurants. Still, for a new concept, that type of comp performance raises real concerns. And with SHAK running up so strongly into the report, there simply wasn’t much, if any, room for error.

An Overreaction

There’s certainly an argument not to overreact to Shake Shack earnings. This is a store expansion story, with the company targeting a base of 450 U.S. stores, roughly quadruple its current count. International expansion continues, and offers another long-term growth driver. A stock trading at ~32x 2018 EBITDA can grow into that valuation simply by adding new restaurants, even if comps in the existing base remain relatively muted.

Meanwhile, Q2 earnings were strong. Margins remain hugely impressive. Shack-level operating margin is guided to 24.5-25.5%, which compares to 16-17% at casual dining operator Brinker International (NYSE:EAT) and ~20% at fellow burger restaurant Red Robin Gourmet Burgers (NASDAQ:RRGB).

This still is an attractive story. Comp growth isn’t quite as important to that story as it might be elsewhere. But even understanding the bull case, there are reasons to be very cautious with SHAK at the moment.

Concerns for SHAK Stock

The first is that comp sales weakness is coming despite price hikes. Traffic actually is declining rather sharply, with traffic down 2.6% in Q2 after a 4.2% decline in Q1. Margins are weakening as well, with the midpoint of Shack-level guidance suggesting a 20 bps compression year-over-year. Shake Shack might not need existing stores to grow double-digits to support its valuation. But some growth from existing restaurants seems required.

After all, the second problem here is that the expansion plans will take some time. Shake Shack is targeting 200 restaurants by the end of 2020, only half its long-term target. If existing Shacks aren’t growing profits, and it takes a decade to get to 450, it’s very difficult to support a 32x EBITDA multiple. Competition is only rising, with McDonald’s (NYSE:MCD) returning to its value menu and “fast casual” concepts like Chipotle (NYSE:CMG) and Zoe’s Kitchen (NYSE:ZOES) looking for turnarounds.

And the third concern is the valuation, and the recent rally. SHAK is one of the most-shorted stocks in the market, with 29% of the float sold short. But that figure actually has come down quite a bit of late: it was over 50% as recently as last year. Some of that covering no doubt has helped SHAK stock of late. A disappointing Q3 could embolden shorts ahead of what guidance suggests will be weaker Q3 and Q4 results.

At early year prices in the low 40s, the Q2 report would have been seen as a positive. Keeping same-Shack profits relatively stable would be enough given the multi-year contributions from new, owned, U.S. restaurants and international licensing opportunities. At $64, however, declining traffic and disappointing guidance become much more prominent. And I expect that to be the case for the next couple of weeks, if not the next couple of quarters.

As of this writing, Vince Martin has no positions in any securities mentioned.