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Shake Shack: Upcoming Earnings and Stock Performance

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Shake Shack (SHAK) is scheduled to report its second-quarter earnings after the market closes on August 5. For the second quarter, analysts expect the company’s revenues to rise 28.6%. However, the adjusted EPS will likely fall 24.1%.

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Shake Shack’s revenue growth

Notably, analysts expect Shake Shack to report revenues of $149.5 million in the second quarter. The company’s revenues will likely rise 28.6% YoY (year-over-year) from $116.3 million in the second quarter of 2018. Opening new restaurants in the last four quarters could drive the company’s revenues.

By the end of the first quarter, the company operated 129 domestic company-owned restaurants and 89 franchised restaurants. Compared to the second quarter of 2018, Shake Shack operated 22 more company-owned restaurants and eight franchised restaurants. These restaurants and the restaurants opened in the second quarter could drive the company’s revenues.

Shake Shack’s management has focused on enhancing the customers’ experience. The company remodeled its legacy restaurants and automized its administrative process. Through “Project Concrete,” the company automized its administrative processes to allow employees to focus on the customers. Last year, the company opened “Innovation Kitchen” in the basement of its corporate headquarter in New York. Also, the company has been testing different menu items before introducing them to other restaurants. For example, Shake Shack introduced Chick’n Bites at all of its US restaurants in the first quarter.

At the beginning of this year, Shake Shack introduced a monthly shake program. As part of the program, the company introduced the Cherry Blossom Shake at the end of March. All of these initiatives will likely drive the Shake Shack’s second-quarter same-store sales growth.

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Will Shake Shack’s EPS fall?

Despite the expectation of strong revenue growth, analysts expect Shake Shack’s EPS to fall. For the second quarter, Shake Shack will likely report an adjusted EPS of $0.22—a fall of 24.1% from $0.29 in the second quarter. Also, the lower EBIT margin and a higher effective tax rate could lower the company’s EPS.

For the second quarter, analysts expect Shake Shack’s EBIT margin to fall from 11.5% in the second quarter of 2018 to 7.5%. Higher food and paper costs, labor wage inflation, and higher G&A (general and administrative) and D&A (depreciation and amortization) expenses could lower the company’s EBIT margin.

Commodity inflation and higher packaging costs could increase Shake Shack’s food and paper costs. The company’s investments in Project Concrete and equity-based compensations will likely increase its G&A expenses. Opening new restaurants, remodeling old restaurants, and implementing digital advancement could increase the company’s D&A expenses.

For the second quarter, analysts expect the company’s effective tax rate to be 26.1%—compared to 17.5% in the second quarter of 2018.

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Shake Shack’s stock performance

After returning 5.1% in the last year, Shake Shack had a phenomenal run this year. Overall, the stock increased 64.4% and outperformed the broader equity market. Meanwhile, the S&P 500 Index has risen 18.9% year-to-date. During the same period, Chipotle Mexican Grill and McDonald’s have returned 84.2% and 18.7%, respectively.

Valuation multiple

With enormous scope to expand, Shake Shack continues to trade at a higher valuation multiple than its peers. The company was trading at a forward PE ratio of 111.7x on Wednesday. On the same day, Chipotle and McDonald’s were trading at forward PE ratios of 51.0x and 25.0x, respectively.

On Wednesday, Shake Shack was trading at 126.8x analysts’ 2019 EPS estimate of $0.59 and at 100.8x analysts’ 2020 EPS estimate of $0.74. The company’s EPS will likely fall 17.0% in 2019. The EPS will likely rise 25.7% in 2020.

Analysts’ recommendations

Analysts favor a “hold” recommendation for the company ahead of its second-quarter earnings. Among the 13 analysts that follow Shake Shack, 53.8% recommended a “hold,” 38.5% recommended a “buy,” and 7.7% recommended a “sell” rating. On average, analysts’ 12-month target price for the company is $69.10—a fall of 7.5% from its stock price of $74.66.

Since the beginning of June, Cowen and Company, Stifel, and Piper Jaffray have all raised their target prices.

  • Cowen and Company increased in its target price from $65 to $66.
  • Stifel hiked its target price from $50 to $60.
  • Piper Jaffray raised its target price from $66 to $84.

Chipotle reported better-than-expected second-quarter results on July 23. To learn more about Chipotle’s second-quarter performance, read Chipotle Stock Rose Due to Impressive Q2 Performance.

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