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How’s Shake Shack Coping amid COVID-19?

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  • Shake Shack’s (NYSE:SHAK) same-store sales growth fell in March. The company expanded its integrated delivery partnerships to drive its sales. Meanwhile, the company announced several cost-cutting measures.

Amid the grim environment due to the lockdown, Shake Shack provided an update on its first-quarter performance. The company discussed the necessary action that it took to cope with the unprecedented situation. The company announced that it temporarily closed nine company-owned restaurants, while other restaurants only operate through to-go and delivery services. In the first two months of the first quarter, Shake Shack’s SSSG fell by 2%, which was in line with the company’s guidance. However, the company added that as the intensity of the COVID-19 outbreak rose, its SSSG declined in March. The decline became sharper as the month continued. For March, the company’s SSSG fell by 29%.

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Shake Shack’s franchised restaurants reported weak sales

In China, Shake Shack’s sales started to fall in January. Later, the decline spread to other countries. The company has closed its restaurants in the Philippines. Meanwhile, the company’s sales fell in Japan, Korea, and Singapore. In the UK and the Middle East, the company closed restaurants or operated under modified hours with only the delivery service. Shake Shack closed all of its restaurants in stadiums. Meanwhile, the company said that its restaurants in airports are still open. There have been fewer passengers due to travel restrictions. On a brighter note, the company added that its restaurants in Shanghai and Hong Kong have started to rebound. Currently, the franchisees have opened only 70 of the total 120 restaurants.

Measures to cope with COVID-19

To arrest the decline in its SSSG and move towards growth, Shake Shack expanded its integrated delivery partnerships to include Postmates, DoorDash, Caviar, and Uber Eats. The company announced that these partners will be available for delivery services in the next one to two weeks. Meanwhile, the company moved away from its earlier announced exclusive partnership with Grubhub to a non-exclusive agreement.

Moving to Shake Shack’s cash position, the company had $104 million of cash and marketable securities as of Apri 1. The company expects the cash to be adequate for the foreseeable future.

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Shake Shack has also undertaken several initiatives to cut its expenditures. The company announced that 20% of its home office headcount has either been furloughed or laid off. The company has reduced executives and home office employees’ salaries. Shake Shack has frozen all hirings and suspended designing and developing new restaurants. The company has also stopped all non-essential capital expenditures. Let’s look at analysts’ recommendations and reactions after the operational updates.

Analysts lowered their target price

On Thursday, after Shake Shack provided operational guidance, Credit Suisse downgraded the stock to “neutral” from “outperform.” Credit Suisse also lowered its target price from $76 to $40. Piper Sandler lowered its target price from $89 to $37. Overall, there has been a big fall in analysts’ consensus target price in the last month. On March 2, analysts’ consensus target price was $71.46. However, the target price fell to $44.54 on April 2, which represents a decline of 37.7% from the previous month. The new consensus target price represents a 12-month return potential of 35.5%. Meanwhile, analysts favor a “hold” rating for the stock. Among the 18 analysts, 14 recommend a “hold,” two recommend a “buy,” and two recommend a “sell.”

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Shake Shack’s stock performance

So far this year, Shake Shack has lost 44.8% of its stock value. The announcement of a lockdown in the US, a weak fourth-quarter performance, and weakness in the broader equity markets dragged the company’s stock down. Shake Shack has underperformed its peers and the broader equity markets this year. YTD, Chipotle Mexican Grill (NYSE:CMG), McDonald’s (NYSE:MCD), and Wendy’s (NASDAQ:WEN) have fallen by 24.7%, 18.3%, and 39.9%, respectively. The S&P 500 Index has fallen by 21.8%.

My take on Shake Shack

On March 29, President Trump announced a lockdown extension. The lockdown will go until April 30 due to an increase in the number of COVID-19 cases. I think that Shake Shack will have to face the brunt of the COVID-19 outbreak. The company has many restaurants located in the worst-hit states including New York and California. By the end of last year, the company owned and operated 59.3% of its restaurants. So, the impact of restaurant closures and operating with limited services will likely have a greater impact on the company. Despite the recent correction, I think that investors should avoid Shake Shack stock. Meanwhile, investors could look at McDonald’s, which has a stable source of income. Notably, 93% of McDonald’s restaurants are franchised. Read Should You Consider Buying McDonald’s Right Now? to learn more.

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