Are Investors Overreacting to Shake Shack's Q3?

Shake Shack Inc. (NYSE: SHAK) reported its third-quarter financial results after the markets closed on Monday. Although it was a solid quarter, it just wasn’t enough for investors who have seen the stock nearly double in 2019 alone (excluding Tuesday’s move). While concerns about slowing growth may be overstated in light of this quarter, analysts remain cautiously optimistic for the future of Shake Shack.

24/7 Wall St. has included some highlights from the earnings report, as well as what analysts are saying after the fact.

The burger joint said that it had $0.26 in earnings per share (EPS) and $157.8 million in revenue, compared with consensus estimates that called for $0.21 in EPS and $156.9 million in revenue. In the same period of last year, it posted $0.21 in EPS and $119.6 million in revenue.

Same-Shack sales (SSS) increased 2.0% for the third quarter of 2019, versus a decrease of 0.7% in the third quarter last year. The increase in SSS consisted of a 1.2% increase in guest traffic and a combined increase of 0.8% in price and sales mix.

Average weekly sales for domestic company-operated Shacks decreased to $80,000 for the third quarter of 2019, compared to $86,000 for the same quarter last year, due to the addition of newer Shacks at a broader range of average unit volumes.

During the quarter, the company opened 11 domestic company-operated Shacks, including its launch in the new markets of Louisiana, Kansas and Utah, as well as further expanding in New Jersey, Michigan, Florida and Texas. Additionally, the company opened six net international licensed Shacks.

Looking ahead to the 2019 full year, the company now expects to see total revenue in the range of $592 million to $597 million, with SSS growth of roughly 1.5% and an operating profit margin in the range of 22.0% to 22.5%. Consensus estimates call for $0.65 in EPS and $598.85 million in revenue for the year.

The boutique brokerage firm Wedbush reiterated a Neutral rating but cut its price target to $75 from $84. After seeing this report, the firm expects investors’ long-term focus to remain the key driver of valuation over near-term and medium-term risks, given Shake Shack’s industry-leading unit growth. Wedbush went on to say in its report:

2019 SSS growth guidance was lowered to about 1.5% from 2.0% previously, implying a sharp deceleration from Q3 trends into the -3.0% range (vs. 0.5% consensus). In addition to Q4’s tough compare, guidance reflects headwinds from the exclusive delivery partnership with Grubhub as other delivery partners are dropped. Given the limited visibility into the impact of dropping non-GRUB delivery partners, somewhat offset by a ramp in deliveries with Grub, we believe it is prudent to expect negative SSS growth beyond just Q4. Additionally, we believe cannibalization and new comp base units will remain ongoing headwinds to medium- to long-term SSS growth.

Here’s what a few other analysts had to say:

  • Morgan Stanley reiterated an Equal Weight rating and cut its price target to $76 from $84.
  • Barclays reiterated an Equal Weight rating and cut its target price from $70 to $66.
  • JPMorgan reiterated an Underweight rating and cut its price target to $63 from $69.

Shares of Shake Shack traded down about 16% to $70.64 on Tuesday, in a 52-week range of $40.67 to $105.84. The consensus price target is $84.08.

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