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Should You Avoid Shake Shack before Its Q1 Earnings?


May. 1 2020, Updated 11:09 a.m. ET

Amid the meltdown in global financial markets due to COVID-19, Shake Shack (NYSE:SHAK) stock fell to a low of $30.01 on March 17. Since then, the stock has made a significant recovery. As of April 30, Shake Shack was trading at $54.51, which represents a rise of 81.6% from the lows on March 17. Despite the recent surge, the company is still trading 48.5% lower than its 52-week high of $105.84.

Shake Shack will likely report its first-quarter earnings after the market closes on May 4. So, should you consider buying Shake Shack before its first-quarter earnings? First, we’ll discuss what analysts expect from Shake Shack.

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Analysts’ revenue expectations for Shake Shack

On April 17, Shake Shack’s management announced preliminary results for the first quarter. The company announced that its first-quarter revenue was $143.0 million. Company-owned restaurants contributed $138 million, while franchised restaurants contributed $5 million. The amount represents a 7.8% growth from $132.6 million. The net addition of new restaurants in the trailing four quarters could drive the company’s revenue. However, the negative SSSG could offset some of the declines. Meanwhile, analysts expect Shake Shack to report revenues of $146.3 million, which represents a YoY growth of 10.3%.

In the first quarter, Shake Shack opened four company-owned restaurants and eight franchised restaurants. So, the new restaurants could take the number of company-owned restaurants to 167 units and the number of franchised restaurants to 130 units. The numbers represent a rise of 38 company-owned restaurants and 41 franchised restaurants compared to last year.

In the first months of the quarter, Shake Shack’s SSSG declined by 2%, which was in line with the company’s previous guidance. However, as the severity of the outbreak increased in March, the company’s SSSG declined by 28.5% for the month.

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Due to COVID-19 and social distancing, the company temporarily closed some of its restaurants. Meanwhile, the restaurants that stayed open have only operated their takeout delivery services. To drive digital sales, Shake Shack expanded its delivery service to include DoorDash, Caviar, and Uber Eats. The company already had Grubhub and Seamless as delivery partners.

Shake Shack’s EPS could decline

For the quarter, analysts expect Shake Shack to report an adjusted EPS of $0.006, which represents a fall of 95.7% from $0.13 in the same quarter last year. The lower EBIT margin, higher interest expenses, and a higher number of shares outstanding could lower the company’s EPS. However, revenue growth and a lower effective tax rate could offset some of the declines.

Meanwhile, Shake Shack’s expects its operating loss to be at $0.8 million or 0.5% for the quarter. These figures include impairments charges of $1.1 million on property and equipment. The company’s restaurant-level operating profit margins were 19.1% compared to 21% in the same quarter of the previous year. Meanwhile, the sales deleverage from negative SSSG could lower the company’s restaurant-level operating profit margins.  

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Analysts’ recommendations

Since the beginning of 2020, many analysts have downgraded Shake Shack stock. Jefferies, Cowen, JPMorgan Chase, Credit Suisse, and SunTrust Robinson have all lowered their target prices. Meanwhile, Credit Suisse downgraded the stock from “outperform” to “neutral.” Wall Street favors a “hold” rating for the stock. Among the 19 analysts, 78.9% recommend a “hold,” 10.5% recommend a “buy,” and 10.5% recommend a “sell.” As of April 30, analysts’ consensus target price was $44.77, which represents a fall of 17.9% from the closing price on Thursday.

Shake Shack’s stock price

So far in 2020, Shake Shack has lost 8.5% of its stock value. The company’s stock price fell due to weakness in the broader equity market and its weak fourth-quarter performance. Despite the fall, the company has outperformed the broader equity market. The S&P 500 Index has fallen by 11.5% during the same period. Meanwhile, McDonald’s (NYSE:MCD), Chipotle Mexican Grill (NYSE:CMG), and Jack in the Box (NASDAQ:JACK) have returned -5.1%, 5.0%, and -22.7%, respectively.

Although the Trump administration looks eager to reopen the economy, I don’t think that customers will be visiting restaurants soon. By the end of April 25, US jobless claims reached 30.3 million. Due to increased unemployment, people will have less disposable income, which could reduce frequent visits to restaurants. All of these factors could continue to drag Shake Shack’s sales lower. Meanwhile, the company owns and operates more than 50% of its restaurants. So, weak sales could have a greater impact on Shake Shack’s margin. I think that investors should avoid the stock before its first-quarter earnings.

Last month, McDonald’s and Chipotle reported their earnings. To learn more, read Why Did McDonald’s Stock Fall after Its Q1 Results? and Chipotle Stock Rises Due to Strong Q1 Performance.


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