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Is Shake Shack’s Rising Guidance Telling Us Something?

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Shacks growing

One of the factors leading toward optimism for Shake Shack’s (SHAK) stock is the positive signals given by its management each quarter. Shake Shack operated about 79 restaurants, a small footprint compared to other fast-casual players such as Chipotle Mexican Grill (CMG), Panera Bread (PNRA), and Wendy’s (WEN).

To give you some context, Chipotle operated about 1,900 plus restaurants by the end of the 3Q15 quarter. You can also access Chipotle through the Consumer Discretionary Select Sector SPDR ETF (XLY), which holds 1% of the company’s stock as a percentage of its total portfolio.

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Positive signals

As the result of its smaller footprint, a larger portion of Shake Shack’s future growth is hinged on its unit additions. Therefore, it’s important to get positive confirmation on developments in this direction. Shake Shack earns about 95% of its revenue from company-operated domestic restaurants.

When the company filed for an initial offer in January this year, it stated that it plans to open ten new domestic restaurants “each year for the foreseeable future.” So, it had planned to add at least ten new units in 2016.

During the company’s 2Q15 earnings call, its management raised this target to 12 new domestic company-operated restaurant openings in 2016. In 3Q15, the management again raised this target to 14 restaurants in the domestic market in 2016. In the recent investor presentation, the management reiterated this target.

Platform validation

Shake Shack initially started out in the Manhattan market and then expanded into other parts of the United States. Earlier during the year, the management indicated that most of the unit additions would take place outside of Manhattan.

During the past three quarters, the company opened new outlets outside of Manhattan, as you can see in the chart above. While it may not be surprising to find long lines outside Shake Shack in any of its outlets located in Manhattan, the management’s rising guidance is a sign that markets outside Manhattan are also showing strength in platform validation from customers. Over the long run, this should translate into strong same-store sales growth.

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