Why Is Shake Shack Stock Erasing Its Gains?

  • Shake Shack stock has fallen about 25% since its third-quarter results on November 4.
  • Given the slump in Shake Shack stock, the downside seems limited.

Shake Shack (SHAK) shares fell about 25% in the last six trading days. Notably, the company posted its third-quarter earnings after the markets closed on November 4. The significant decline in the stock is due to the company’s revenue miss in the third quarter. Also, the sales guidance cut didn’t sit well with investors.

Shake Shack has a long history of beating analysts’ revenue estimates due to new store openings and momentum in its comps. However, the company’s third-quarter revenues were below analysts’ expectations. Also, the comps fell short of analysts’ expectations.

Shake Shack posted revenues of $157.76 million, which missed analysts’ estimates of $157.83. Meanwhile, the comps increased 2.0%—lower than analysts’ estimate of 2.5%. Management stated that the Grubhub transition affected its delivery revenues and comps.

The company expects the Grubhub transition to continue to hurt its comps in the near term and reduced its fiscal comps outlook. The company also removed the direct point-of-sale integrations with other major delivery partners including Postmates, DoorDash, and Caviar.

Shake Shack expects its comps to grow 1.5%, which is lower than its previous growth guidance of 2.0%.

Despite the recent decline, Shake Shack stock has risen about 40% on a YTD (year-to-date) basis as of Tuesday. However, the stock has declined by about 40% from its 52-week high of $105.84.

Will the slump in Shake Shack stock continue?

We expect the guidance cut following the disruption from the Grubhub transition to pressure the stock in the short term. However, given the sharp decline, the downside in Shake Shack stock seems limited. The company lowered comps guidance and increased its fiscal net sales outlook.

Shake Shack expects its net sales to be $592 million–$597 million in 2019—up from $585 million–$590 million. The upward revision in the guidance follows the company’s impressive licensing revenues. Shake Shack’s licensing revenues continue to grow at strong double-digit growth due to opening new licensed shacks.

We think that new shacks could continue to drive Shake Shack’s revenues in the coming quarters. Notably, incremental sales from new shacks have been the company’s primary growth driver. During the last reported quarter, Shake Shack’s revenues increased 32% YoY (year-over-year). Opening 44 domestic company-operated shacks drove sales.

Analysts’ expectations

Wall Street has an average target price of $77.62 on Shake Shack stock. The target price implies a potential upside of 22.6% based on its closing price of $63.30 on Tuesday.

Most of the analysts maintained a “hold” recommendation on the stock. Nine out of 16 analysts recommend a “hold,” six recommend a “buy,” and one recommends a “sell.”

Besides Shake Shack stock, Chipotle Mexican Grill (CMG) and McDonald’s (MCD) shares have taken a beating since their third-quarter results.

Chipotle stock has fallen about 9% since its third-quarter results on October 22. The company expects a delay in new store openings, which didn’t sit well with investors. Meanwhile, McDonald’s posted weaker-than-expected third-quarter results. Also, the CEO’s abrupt exit weighed on the stock.