uploads/2016/11/4-2.jpg

Why Analysts Expect SHAK’s Margins to Contract in 3Q16

By

Updated

EBIT margins

In 3Q16, Shake Shack (SHAK) is expected to post EBIT (earnings before interest and tax) of $8.7 million, which represents an EBIT margin of 12.6%. The company posted an EBIT margin of 14.7% in 3Q15.

Article continues below advertisement

Factors affecting EBIT margins of SHAK

SHAK’s management expects commodity prices to be on the low side and the cost of sales to fall due to improvements in efficiency in its enhanced supply chain. The company reported that it has restructured its purchase agreements and now has a geographically well-diversified supplier base. The sales leverage from positive same-store sales growth is also expected to contribute to margin expansion.

Despite these initiatives, the increase in labor expenses due to increase in their wages, higher G&A (general and administrative) expenses, and SHAK’s commitment to move to cage-free eggs are expected to lower SHAK’s margins. The increase in revenue percentage from company-owned restaurants should also lower margins because the margins from company-owned restaurants will be lower than the margins from franchised restaurants.

Peer comparisons and outlook

For 3Q16, Chipotle Mexican Grill (CMG) and Panera Bread (PNRA) posted EBIT margins of 3.4% and 7.7%, respectively. CMG and PNRA posted EBIT margins of 19.3% and 8.2%, respectively, in 3Q15.

For the next four quarters, analysts are expecting SHAK to post EBIT margins of 11.2%, as compared to 11.5% in the corresponding quarters of the previous year. The marginal fall in margins was due to the expectation of higher labor wages and rising revenue from company-owned restaurants.

Next, we’ll look at SHAK’s 3Q16 EPS estimates.

Advertisement

More From Market Realist