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Shake Shack Stock Could Rise after Q3, Unlike Chipotle

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  • Shake Shack will announce its third-quarter earnings after the markets close today.
  • New store openings will likely drive the company’s revenues.
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Shake Shack’s third-quarter earnings

Shake Shack (SHAK) will report its third-quarter earnings after the markets close today. We think that adding new stores could continue to drive the company’s revenues and stock. Notably, Shake Shack stock has risen about 82.2% on a YTD basis due to phenomenal growth in its top line. The recent correction in the stock might support the upside.

Notably, new store openings and delivery expansion continue to drive quick-service restaurants’ top lines. As a result, any delay or disruption in store openings will likely hurt restaurants’ stock prices.

For example, Chipotle (CMG) stock took a beating despite posting stellar sales and earnings growth in the third quarter. Chipotle’s management announced a delay in new store openings since it plans to add drive-thru lanes. The delay irked investors. Chipotle shares have fallen about 10% since its third-quarter results on October 22.

Shake Shack’s revenues have increased more than 30% in the first half of 2019. The phenomenal growth was due to better-than-expected growth in comps and opening new domestic company-operated stores. Unlike Chipotle, we expect Shake Shack to continue to add new stores at a brisk pace. In the third quarter, we think that the company’s new stores could continue to drive its top line. Meanwhile, digital initiatives will likely drive Shake Shack’s traffic and comps.

Despite stellar sales growth, Shake Shack’s bottom line could continue to fall in the third quarter. Higher investments in growth and increased taxes could be a drag. Also, increased costs related to packaging, marketing, labor, and commodities could pressure the bottom line.

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Analysts’ expectations 

Shake Shack has a strong history of beating analysts’ estimates. During the last reported quarter, the company posted an adjusted EPS of $0.27 on revenues of $152.7 million. The sales and earnings beat analysts’ estimates. The comps grew 3.6% compared to analysts’ expectations of 2% growth.

For the third quarter, analysts expect Shake Shack to post revenues of $157.83 million, which implies YoY (year-over-year) growth of about 32%. An increase in new domestic company-operated stores, higher licensing revenues, and sustained momentum in the comps will likely drive the company’s third-quarter sales.

Analysts expect Shake Shack to post an adjusted EPS of $0.21, which implies a YoY decline of about 5%. Cost pressure and increased business investments could continue to hurt the company’s earnings in the third quarter.

In comparison, McDonald’s (MCD) had disappointing third-quarter earnings. The company missed analysts’ sales and earnings forecasts. Also, McDonald’s adjusted EPS fell on a YoY basis. The stock has risen 9.2% YTD. However, the stock has fallen about 8% since its third-quarter earnings on October 22.

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