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Weak Q2 Same-Store Sales Growth Lowers Shake Shack’s Valuation

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Valuation multiple

As Shake Shack (SHAK) is in the growth phase of its business life cycle, we chose the forward EV-to-sales (enterprise value to sales) ratio for our analysis. During the growth phase, the company’s operating expenses will be higher, and EPS (earnings per share) can’t be fairly considered in the valuation. The forward EV-to-sales ratio is calculated by dividing the company’s current enterprise value with analysts’ sales estimates for the next four quarters.

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SHAK’s EV-to-sales ratio

The lower-than-expected 2Q16 same-store sales growth (or SSSG) and lowering of 2017 SSSG guidance by Shake Shack’s management have made investors skeptical about the company’s future earnings, which led to a fall in the company’s stock price and its valuation multiple. As of August 7, 2017, Shake Shack was trading at 2.78x, compared to 2.91x. On the same day, its peers Chipotle Mexican Grill (CMG) and Jack in the Box (JACK) were trading at 1.86x and 2.75x, respectively.

Being in a growth phase of its business life cycle, Shake Shack has huge scope to expand its business. The growth potential has allowed the company to trade at a higher valuation multiple.

Growth prospects

To drive its SSSG, the company is focusing on menu innovations, the implementation of technological advancements such as the introduction of an Android version of the Shack app, and expansion of delivery services.

For the next four quarters, analysts are expecting the company’s revenue to grow 25.2%, which could have been factored into the company’s current stock price. If the company posts revenue lower than analysts’ expectations, selling pressure can lower the company’s stock price as well as its valuation multiple.

Next, we’ll look at analysts’ recommendations.

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