Shake Shack (NYSE:SHAK) will report its fourth-quarter earnings on February 24. For the quarter, analysts expect the company’s revenue to rise in the double-digits, while its EPS could fall. Let’s look at analysts’ expectations in detail.
Shake Shack’s revenue growth
In the fourth quarter, analysts expect Shake Shack to report $153.1 million in revenue. The amount represents a rise of 23.2% from $124.3 million in the fourth quarter of the previous year. The net addition of new company-owned and franchised restaurants and positive SSSG (same-store sales growth) could drive the company’s revenue. In the first three quarters of 2019, the company opened 27 company-owned restaurants and 19 franchised restaurants. Along with these restaurants, the restaurants that opened in the fourth quarter should drive the company’s revenue. Shake Shack’s management expects to open 11–13 company-owned restaurants and five to nine franchised restaurants in the fourth quarter.
Shake Shack is working to strengthen its digital infrastructure and experience, streamline its systems and processes, and improve its kitchen and front-of-the-house guest flow to drive its SSSG. In the third quarter, the company formalized its partnership with Grubhub. The company also announced that its delivery service is available across all of its company-operated restaurants. However, during the third-quarter earnings call, management announced that the removal of point-of-sale integrations with DoorDash, Postmates, and Caviar could have a negative impact on the company’s SSSG in the fourth quarter.
EBIT margin could fall
Analysts expect Shake Shack to report an EBIT of $0.45 million, which represents an EBIT margin of 0.3% compared to 2.9% in the fourth quarter of 2018. The increase in food and paper costs, labor costs, other operating costs, depreciation and amortization (or D&A) expenses, and pre-opening costs could lower the company’s EBIT margin. Higher beef and dairy prices and an increase in paper costs due to growth in delivery could make Shake Shack’s food and paper expenses higher. With 11–13 new restaurants expected to open in the fourth quarter, the company’s labor and pre-opening expenses could rise. The addition of new restaurants in the last four quarters could increase Shake Shack’s D&A expenses. Meanwhile, the investment in Project Concrete could also increase the company’s G&A expenses.
Will Shake Shack report a negative EPS?
Analysts expect Shake Shack to report a negative adjusted EPS of $0.005 in the fourth quarter. The amount represents a significant decline from a positive EPS of $0.06 in the fourth quarter of 2018. The lower EBIT margin and a higher effective tax rate could lower the company’s adjusted EPS. For the quarter, Shake Shack’s effective tax rate could be 25.9% compared to 13.8% in the fourth quarter of 2018.
Analysts favor a “hold” recommendation for Shake Shack before of its fourth-quarter earnings. Among the 18 analysts that follow Shake Shack, 61.1% recommend a “hold,” 27.8% recommend a “buy,” and 11.1% recommend a “sell.”
On January 9, Street Insider reported that Brian Vaccaro of Raymond James initiated coverage on Shake Shack with an “underperform” rating. Vaccaro thinks that analysts’ expectations for 2020 and 2021 are overly optimistic. He said that the expectations created a downside risk for the company from its high valuation levels. Vaccaro stated that Shake Shack has long-term growth prospects. However, he thinks that investors could get better entry points in the next few quarters. On January 21, SunTrust Robinson lowered its target price from $85 to $82.
As of February 14, Shake Shack was trading at $73.28, which represents a fall of 13% since reporting its third-quarter earnings on November 4. Weaker-than-expected sales and a lower sales guidance for 2019 led to a fall in the company’s stock price. However, since the beginning of 2020, Shake Shack stock has increased by 23%. Also, optimism about management’s growth initiatives led to a rise in the company’s stock price. The company has outperformed McDonald’s (NYSE:MCD), Chipotle Mexican Grill (NYSE:CMG), and Jack in the Box (NASDAQ:JACK) this year. McDonald’s, Chipotle, and Jack in the Box have returned 9.9%, 10.1%, and 13.2%, respectively.
Shake Shack’s valuation multiple
As of February 14, Shake Shack was trading at a forward PE ratio of 122.4x compared to 110.8x before its third-quarter earnings. Although the stock has fallen by 13% during the same period, its valuation multiple has increased. The decline in analysts’ EPS expectations might have led to a rise in the company’s valuation multiple. Being in a growth phase, the company trades at a premium compared to its peers. On the same day, McDonald’s, Chipotle, and Jack in the Box were trading at a forward PE ratio of 25.6x, 51.2x, and 18.4x, respectively.