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Has Shake Shack Stock Bottomed Out?

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As of Thursday, Shake Shack (NYSE:SHAK) was trading at $61.67—a fall of 16.2% since it reported its fourth-quarter earnings. For the quarter, the company reported an adjusted EPS of $0.06 compared to analysts’ expectation of a loss of $0.01. However, the revenue and SSSG (same-store sales growth) fell short of analysts’ expectations. The company’s management blamed one less week during the holiday season, fewer menu innovations, and changes in its delivery strategy for weak sales during the quarter. Also, Shake Shack provided weaker-than-expected sales guidance for 2020. The lower-than-expected fourth-quarter sales and weak 2020 sales guidance led to a fall in the company’s stock price.

Meanwhile, Shake Shack was trading at a discount of 41.7% from its 52-week high of $105.84 and at a premium of 21.5% from a 52-week low of $50.77. So, has SHAK’s stock price bottomed out? First, we’ll look at analysts’ expectations and management’s guidance for 2020.

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Analysts’ revenue expectation for SHAK

For 2020, Shake Shack’s management provided revenue guidance of $712 million–$720 million. They expect the company to open 40–42 company-owned restaurants and 20–25 licensed restaurants this year. Management expects the SSSG to fall by low single-digits. Analysts expect Shake Shack to report revenue of $719.1 million—21% growth from $594.5 million in 2018.

We expect new restaurant openings to drive the company’s revenue. However, the lower SSSG could offset some of the revenue gains. The company plans to focus on menu innovations, improving guest convenience through new restaurant formats, and developing a separate digital pickup area for delivery orders. Also, SHAK will open a new office in Hong Kong, which could support its expansion plans in Asia.

In August 2019, SHAK selected Grubhub to be its only integrated and marketed delivery partner. However, by the end of the fourth quarter, only one-quarter of SHAK restaurants were solely integrated with Grubhub. The delay in integration led to slower sales growth from delivery. So, management expected considerable volatility in delivery sales in 2020. Shake Shack’s management also cautioned that the coronavirus outbreak in Asia could impact its SSSG and new restaurant openings in the region. The coronavirus could lower the company’s revenue from the licensed segment. Also, management announced that two of its high volume restaurants in New York will for 14–18 weeks for renovations.

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Analysts EPS expectations from SHAK

For 2020, analysts expect Shake Shack to report an adjusted EPS of $0.53—a fall of 26.6% from $0.72 in 2018. The lower EBITDA margin, higher depreciation costs, and increased interest expenses could lower the company’s EPS. However, increased revenues could offset some of the declines. Analysts expect SHAK’s 2020 EBITDA margin to fall from 13.8% to 12.1%. We expect the sales deleverage from negative SSSG, increased general and administrative expenses, and wage inflation to bring the company’s EBITDA down. However, management projects slight leverage in food and paper costs in 2020.

Analysts’ recommendations

Since Shake Shack reported its fourth-quarter earnings, J.P. Morgan, SunTrust Robinson, Morgan Stanley, Deutsche Bank, Credit Suisse, Piper Sandler, and Jefferies have lowered their target price. Also, CFRA downgraded the stock from “hold” to “sell” and cut its target price from $80 to $60. Overall, analysts favor a “hold” rating for Shake Shack. As of Thursday, 18 analysts covered the stock. Among the analysts, 66.7% recommend a “hold,” 22.2% recommend a “buy,” and 11.1% recommend a “sell.” As of Thursday, analysts’ average target price is $71.46, which implies a 12-month return potential of 15.9%. Compared to January 26, analysts’ average target price fell 4.5%.

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My take on SHAK

Last year, Shake Shack returned 62.0% and outperformed the S&P 500 Index, which increased by 28.9%. Despite the recent fall, the company is still trading 3.5% higher this year as of Thursday. Also, Shake Shack has outperformed its peers and the S&P 500 Index. McDonald’s (NYSE:MCD), Chipotle Mexican Grill (NYSE:CMG), and Wendy’s (NASDAQ:WEN) have returned 1.7%, -9.7%, and -9.6% YTD, respectively. Meanwhile, the S&P 500 Index has fallen by 7.8% during this same period. Earlier this month, Chipotle reported impressive fourth-quarter results. Read Is There More Upside to Chipotle’s Stock Price? to learn more.

I’m optimistic about Shake Shack’s growth prospects. In the near term, there’s a weakness in the broader equity market due to concerns about the coronavirus. The weakness could put pressure on SHAK’s stock price. However, I expect management’s initiatives, like separate digital pickup areas and focus on menu innovation, to drive the company’s sales and stock price.

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