Why Shake Shack’s Q1 Earnings Weren’t Impressive


May. 5 2020, Published 6:47 a.m. ET

On Monday, Shake Shack (NYSE:SHAK) reported its first-quarter earnings after the market closed. For the quarter, the company posted an adjusted EPS of $0.02 on revenues of $143.2 million. The company’s adjusted EPS beat analysts’ expectations of $146.3 million, while its revenue was lower than analysts’ estimates of $145.1 million. Also, Shake Shack’s management added that it has witnessed higher beef prices due to meat-processing plant closures amid COVID-19. The company’s stock price fell due to weak first-quarter sales and the expectation that higher beef prices could have a negative impact on its margin. The company fell 1.0% in after-hours trading on Monday. Let’s look at Shake Shack’s first-quarter performance in more detail.

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Shake Shack’s revenue rose in Q1

Shake Shack’s revenue grew 8.0% YoY from $132.6 million in the first quarter of 2019. During the quarter, company-owned restaurants generated revenue of $138.0 million, while franchised restaurants generated $5.1 million. Company-owned restaurants’ sales grew by 7.4% YoY. The net addition of 38 company-owned restaurants in the trailing four quarters drove the revenue. Meanwhile, the lower SSSG offset some of the growth. During the same period, the revenue from franchised restaurants grew 26.8% to $5.1 million. Opening 31 franchised restaurants drove the segment’s revenue, while the negative SSSG offset some of the revenue growth.

For the first quarter, Shake Shack’s overall SSSG declined by 12.8% compared to an increase of 3.6% in the corresponding quarter of the previous year. The company’s SSSG fell by 2% in the first two months, which was in line with the company’s guidance. However, as the COVID-19 outbreak intensified in March, the company’s SSSG fell by 29% during the month.

In the first quarter, SHAK’s customer traffic declined by 14.9%, which dragged the company’s SSSG down. However, some of the declines were offset by an increase of 2.1% in the check size. Due to the outbreak, many restaurants closed temporarily. Also, the restaurants that were open just operated their takeout and delivery services. These factors caused the company’s SSSG to fall.

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Why did the EPS decline?

For the quarter, Shake Shack reported a loss of $0.03 per share during the quarter. However, removing special items, the company’s adjusted EPS was $0.02, which represents a fall of 84.6% from $0.13 per share in the first quarter of 2019. The decline in the EBITDA margin, higher D&A (depreciation and amortization) expenses, and higher interest expenses dragged the company’s EPS down.

SHAK’s EBITDA margin contracted by 3.5% during the quarter to 10%. Increased investments in G&A (general and administrative) expenses and lower restaurant-level profits dragged the company’s EBITDA down. During the quarter, the company’s G&A increased from $13.9 million to $16.2 million. The company increased its investments in technology and marketing. Shake Shack raised its headcount to support its growth initiatives, which caused the G&A expenses to rise. Meanwhile, the company’s restaurant-level profit margin declined by 1.9% during the quarter to 19.1%. Sales deleverage from the negative SSSG caused the company’s restaurant-level profit margin to fall. Meanwhile, lower food and paper costs offset some of the declines. For the quarter, Shake Shack’s D&A expenses increased from $9.0 million to $11.8 million.

Shake Shack’s outlook

Shake Shack’s management withdrew its guidance for this fiscal year due to uncertainty amid COVID-19. However, management added that its SSSG has shown a gradual improvement week-over-week. For the week ending on March 25, the company’s SSSG declined by 73%. However, the company’s SSSG improved to a decline of 45% for the fiscal week that ended on April 29. The company has credited its digital strategies and flexible teams to improve its SSSG.

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Amid social distancing, the company plans to improve its guest experience by providing a curbside pickup service and a digital pre-ordering service. The company also plans to build makeshift drive-thrus. The company has expanded its delivery partnerships to include Uber Eats, DoorDash, Postmates, and Caviar. With these initiatives, the sales from digital channels contributed 80% of the total sales in the second quarter until April 29.


As a precaution, Shake Shack availed a $50 million revolving credit facility on March 24. On April 17, the company raised $150 million through an equity offering. Following these transactions, the company had $247 million in cash and marketable securities as of April 29. With a weekly cash burn of $800,000 per week, the company has enough cash at its disposal. Meanwhile, the company has taken measures to lower its G&A expenses by 25%.

Analysts react to Shake Shack’s Q1 earnings

Analysts reacted positively to Shake Shack’s first-quarter earnings. After the company reported its first-quarter earnings, Jefferies, Credit Suisse, Cowen, and Piper Sandler all raised their target prices. CFRA upgraded the stock from a “sell” to a “hold” rating. Jefferies increased its target price from $45 to $50, while Credit Suisse raised its target price from $40 to $48. Cowen hiked its target price from $40 to $55, while Piper Sandler increased its target price from $44 to $55. As of today, analysts’ consensus target price is $47.8, which represents a fall of 9.5% from its current stock price of $53.50. Overall, 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.”


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