3 Things to Watch With Monday’s Shake Shack Earnings Report


Shake Shack (NYSE:SHAK) needs a win, and needs it soon. Shake Shack stock is down 24% from its mid-2018 peak, having largely been left out of 2019’s marketwide rally thus far, as doubts about the sustainability of the high-end burger business continue to mount.

3 Things to Watch With Monday's Shake Shack Earnings Report

The hamburger chain, with more than 200 locations, will get a chance to earn that victory after Monday’s closing bell rings. That’s when it’s slated to report its fourth-quarter and full-year numbers. The pros are calling for commendable growth, but growth at a steep price.

Even more than how it fares relative to expectations though, the fate of Shake Shack stock ultimately lies in how investors feel about the company’s performance on three key measures.

Three Things to Watch

For the quarter ending in December, analysts are calling Q4 sales of $118.82 million, up 23.6% from the year-ago top line of $96.1 million. The bulk of that revenue growth stems from new store openings. Profits are projected to roll in at 3 cents per share, down from the Q4-2017 bottom line of 10 cents per share of SHAK stock. Rising costs — cost increases that are growing faster than revenue — are the culprit.

More than the basic accounting measures though, the market is going to qualitatively and quantitatively weigh SHAK stock on three distinct criteria.

1. Rising Costs

Its third-quarter 1.4% decrease in operating profit margins might seem modest enough, but for a low-margin industry like restaurants, it can be a small fortune. “Increased labor and related expenses” were the bulk of the reason for its rising costs, jibing with similar complaints lodged by Texas Roadhouse (NASDAQ:TXRH) and Chipotle Mexican Grill (NYSE:CMG).

It’s not a problem that’s likely to abate anytime soon either, particularly in more metropolitan areas where Shake Shack prefers to set up shop. As CFO Tara Comonte commented in December, “We’ll never take enough price to offset the kind of labor headwinds that we’ve got right now and that we foresee for a period of time to come.”

2. Same Store Sales

As a reminder, it was the third quarter’s same-store sales drop of 0.7% that inspired most of the post-earnings weakness. Although it was an improvement versus the 1.6% dip booked for the third quarter of 2017, analysts were modeling Q3 same-store sales growth of 0.9%.

For perspective, McDonald’s (NYSE:MCD) reported same-store sales growth of 4.4% last quarter, while Chipotle saw same-store sales growth of 6.1% during the final three months of last year.

3. Impact of Food Trucks, Other Innovations

Finally, while it will be difficult to quantify its impact on sales and earnings, SHAK has been tinkering with different approaches to drive more sales.

One new one for 2019 is the launch of food trucks. Only two will be on the streets initially, but if all goes well, more will surface. In the meantime, the company has already been establishing locations in places like airports and sports stadiums, which haven’t been targeted by Shake Shack in the past. The company also introduced a mobile ordering app in December, before the quarter ended.

These shifts, once unnecessary just a few years, are increasingly necessary as the landscape of consumerism evolves. Although it’s unlikely Shake Shack is able to talk about specific impacts of new initiative just yet, the conference call may still shed some light on the upside of such developments.

Looking Ahead for Shake Shack Stock

Before the release of the company’s fourth-quarter results, analysts were calling for 2019 revenue of $576.4 million, up 27% from 2018’s expected top line of $453.7 million. Earnings were projected to grow from 2018’s estimated full-year tally of 68 cents per share to 72 cents per share of Shake Shack stock, suggesting the restaurateur will get a handle on expenses this year.

It remains to be seen if analysts will remain modestly optimistic following its fourth-quarter report. The company’s disappointing third quarter could have been an anomaly, but given that it started to wave same-store sales red flags with last year’s second-quarter report — and never really stopped waving them — the current skepticism may well be warranted.

The good news is, bad or good, the burger chain has been generally forthcoming about what it sees on the horizon.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2019/02/3-things-to-watch-with-mondays-shake-shack-earnings-report/.

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