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What Factors Led to SHAK’s 1Q16 Earnings Margin Expansion?

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May. 18 2016, Updated 10:07 a.m. ET

EBITDA margins

In 1Q16, Shake Shack (SHAK) posted EBITDA (earnings before interest, tax, depreciation, and amortization) of $7.8 million, which indicated an EBITDA margin of 14.4% compared to -23.2% in 1Q15.

Sales Leverage and Lower Commodity Prices Expand SHAK’s 1Q16 EBITDA Margins

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Factors affecting EBITDA

With favorable commodity prices and sales leverage due to same-store sales growth of 9.9%, SHAK’s food and paper costs as a percentage of its total revenue fell to 28.8% from 30.5% in 1Q15.

Compared to 1Q15, beef prices fell by 11%. Menu prices rose, and supply chain enhancements also contributed to the fall of food and paper expenses. Other operating expenses and occupancy and related expenses fell by 0.3% and 0.5%, respectively, due to sales leverage.

Sales leverage offset the rise in employees’ hourly wages from $10.5 to $12, keeping the company’s labor expense flat at 25.2% of total revenue.

The general and administrative expenses of SHAK, which forms 0.01% of the holdings of the iShares Russell 2000 ETF (IWM), fell to 12.7% from 48.6% in 1Q15. In 1Q15, G&A (general and administrative) expenses were high due to costs related to SHAK’s initial public offering.

Peer comparison

In 1Q16, Panera Bread (PNRA), Chipotle Mexican Grill (CMG), and Jack in the Box (JACK) posted EBITDA margins of 14.2%, -1.2%, and 19.3%, respectively, compared to 14.5%, 21.4%, and 19.5%, respectively, in 1Q15.

Outlook

With commodity prices expected to be on the lower side for the rest of 2016 and same-store sales growth expected to be in positive territory, analysts estimate that SHAK’s EBITDA margin will rise to 16.1% in 2016 compared to 10.6% in 2015.

In the next article, we’ll discuss how the company’s 1Q16 results have affected analysts’ estimates.

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