Shake Shack Up ~61% This Year: Is There More Upside?


Jul. 10 2019, Published 1:51 p.m. ET

Stock performance

As of July 9, Shake Shack (SHAK) was trading at $73.25, which implies a rise of 61.3% since the beginning of this year. Also, the company was trading at a discount of 0.7% from its 52-week high of $73.80, and an 80.1% premium from its 52-week low of $40.67. This year, the company has outperformed the broader equity market, where the S&P 500 Index and the Consumer Discretionary Select Sector SPDR ETF (XLY) have returned 18.9% and 23.2%, respectively. XLY has invested 7.7% of its holdings in restaurant and travel companies. Also, during the same period, SHAK’s peers Chipotle Mexican Grill (CMG) and McDonald’s (MCD) have returned 72.7% and 19.4%, respectively.

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Shake Shack reported its first-quarter earnings on May 2. For the quarter, the company had reported a revenue of $132.6 million, beating analysts’ expectation of $127.2 million. The company’s overall SSSG (same-store sales growth) stood at 3.6% thumping analysts’ expectation of 0.8%. The company’s management had credited growth in digital channels, favorable weather conditions in key markets, and the holiday shift for strong sales. Following the impressive first-quarter performance, SHAK’s management hiked its revenue and SSSG guidance for 2019. You can read more about SHAK’s first-quarter performance in “Shake Shack: Higher Sales Guidance after Q1 Results.”

The impressive first-quarter performance and raising of its guidance by the management appear to have led to a rise in SHAK’s stock price. Also, the lower unemployment rate and wage inflation have increased consumer confidence, prompting customers to spend more at restaurants. The improvement in the consumer sentiment has also contributed to a rise in restaurants’ stock price.

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Revenue growth

For 2019, SHAK’s management has set revenue guidance of $576 million–$582 million with its SSSG to be in the range of 1%–2%. The management is also planning to open 36 to 40 company-owned restaurants and 16-18 franchised restaurants this year.

For the same period, analysts expect Shake Shack to report revenue of $587.0 million, which implies a rise of 27.8% from $459.3 million in 2018. New restaurants and positive SSSG are forecasted to drive the company’s revenue in 2019. SHAK’s management is focusing on the expansion of digital channels, menu innovations, and the enhancement of the customer experience through the remodeling of old restaurants to boost its sales.

With sales from the digital channel continue to rise, SHAK has been remodeling its old restaurants to deliver a great omnichannel experience. The company is also planning to have pickup shelves at restaurants with a higher percentage of digital sales. At its innovative kitchen, the company has been testing various LTOs and longer-term menu items. The company had introduced Chick’n Bites across all of its restaurants in the United States in the first quarter, which has been received well by customers. The company also implemented a monthly shake program at the beginning of this year, whereby it will change its flavors more frequently to attract more customers. To enhance the customer experience, SHAK has been automizing its administrative process with “Project Concrete,” which would allow its employees to focus more on the customers.

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Decline in EPS

Analysts are expecting SHAK to report adjusted EPS of $0.58, which implies a fall of 18.2% from $0.71 in 2018. The decline in EBIT margin and higher effective tax rate are projected to offset the effects of revenue growth to lower the company’s EPS in 2019.

Analysts expect SHAK’s EBIT margin to fall from 7.7% to 4.9%. The higher cost of goods sold and increased SG&A (selling, general, and administrative) and D&A (depreciation and amortization) expenses could lower the company’s EBIT margin in 2019. Higher commodity prices and increased packaging costs could raise the company’s cost of goods sold. The increased labor wages and the higher investments in Project Concrete and the implementation of digital advancements are expected to increase the company’s SG&A expenses.

For 2019, analysts are projecting the company’s effective tax rate to be at 26.7% compared to 22.2% in 2018. The company’s management is expecting its effective tax rate for the year to be at 26.5%–27.5%.

Valuation multiple

The increase of 61.3% in SHAK’s stock price since the beginning of this year had led SHAK’s valuation multiple to rise. As of July 9, the company was trading at a forward PE multiple of 111.0x compared to 75.3x at the beginning of 2019. SHAK is still in the growth phase of its business life cycle and has a considerable potential to expand its business. SHAK’s expansion potential has been valued highly by the market and has allowed it to trade at a higher valuation multiple than its peers. On the same day, Chipotle and McDonald’s were trading at higher forward PE multiples of 49.8x and 24.8x, respectively.

Also, on July 9, SHAK was trading at 126.2 times analysts’ 2019 EPS estimate of $0.58 and 99.5 times analysts’ 2020 EPS estimate of $0.74 with its EPS expected to fall by 18.2% in 2019 and rise by 26.8% in 2020.

Analysts’ recommendations

Analysts favor a “hold” rating for SHAK. 58.3% of the 12 analysts that follow the stock have given it a “hold” rating, while 33.3% are in favor of a “buy” rating, and 8.3% are in favor of a “sell” rating. On average, analysts have given SHAK a 12-month price target of $63.67, which implies a fall of 13.1% from its stock price of $73.25.

Since Shake Shack reported its first-quarter earnings on May 2, J.P. Morgan, SunTrust Robinson, Wedbush, Morgan Stanley, Cowen and Company, Jefferies, Piper Jaffray, and Stifel have all raised the price targets.

  • J.P. Morgan: from $51 to $58
  • SunTrust Robinson: from $50 to $70
  • Wedbush: from $60 to $65
  • Morgan Stanley: from $52 to $56
  • Cowen and Company: from $65 to $66
  • Jefferies: from $45 to $55
  • Piper Jaffray: from $59 to $66
  • Stifel: from $50 to $60

Also, on June 25, Credit Suisse started covering SHAK with an “outperform” rating and a price target of $77.

McDonald’s stock has been on the rise since the beginning of this year. If you are interested in reading more about McDonald’s, please read: Is There More Upside for McDonald’s in 2019?


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