Despite a positive earnings report, Shake Shack (NYSE:SHAK) stock is under pressure. SHAK shares are down nearly 25% since announcing third-quarter earnings after the bell on November 4.
So did the company have poor earnings? No. In fact, SHAK met revenue expectations of $157.8 million. This was a 31.9% year-over-year increase. Most of this gain was attributed to the opening of 17 new stores in the third quarter. The company also had a comfortable beat on earnings (26 cents actual vs. 20 cents estimated). Despite that, Shake Shack fell as the company reported a 2% increase in same-store sales which was lower than the 2.5% that analysts were forecasting. The company also lowered its future guidance.
Analysts are skeptical about SHAK’s short-term investments
Shake Shack is making short-term investments in improving the guest experience. To that end, the company will be closing some stores – temporarily – in 2020 as they undergo a renovation. As part of the renovations the company will be using the company’s mobile app along with in-store kiosks to streamline ordering for customers and workers. SHAK is also testing a revised smaller footprint store in urban areas that will facilitate digital ordering and order pickup.
“During these remodels, we’ll be updating and improving the layout to ensure optimal flow from multiple ordering channels, upgrading our kitchen equipment to maximize throughput and installing kiosks and bring even further convenience to the guest experience,” said CEO Randall Garutti on the earnings call. Garutti went on to say that the company would provide more guidance on its total revenue outlook when it reports fourth-quarter earnings.
The company also was forecasting some headwinds for revenue with their decision to streamline their delivery partnerships to one – GrubHub. Previously SHAK had used DoorDash, Postmates, and Caviar in addition to GrubHub. In its second-quarter earnings call, the company had warned that this decision could result in volatility. However, also on the call, Chief Financial Officer Tara Comonte noted that SHAK’s results-to-date combined with “expected volatility from the delivery transition” was reflected in the downwardly revised year-end same-store sales guidance of 1.5%.
Comonte conceded that many customers will have to change built-up behaviors and will have to be convincing them to switch to GrubHub.
However, analysts are taking a wait-and-see approach. A couple of notable analysts (Stifel and SunTrust) downgraded their price targets for the stock. Wedbush analyst Nick Setyan said of the decision to partner exclusively with GrubHub, was surprising since the industry trend is to go to multiple providers.
The bearish case for Shake Shack (NYSE:SHAK) has never held up
The primary argument that Shake Shack bears stand behind is competition. They will argue that the market is already saturated. Even in the “premium” end of the fast-casual burger segment, Shake Stack faces competition.
Those concerns have been unfounded. The way I see it, it’s sort of like the strong brand preference many consumers have for either Starbucks or Dunkin Donuts coffee. Despite consumers digging in their heels for one brand or the other, there’s room for both. And that is reflected in the stock price for both companies. The same is true for Shake Shack.
A second argument against SHAK stock is the trend towards healthy eating. But healthy eating does not preclude consuming burgers. And as the recent furor regarding the Chik-Fil-A chicken sandwich shows, consumers want what they want. Yes, there are some interesting things happening with plant-based burgers coming from Beyond Meat
and other companies. But it still remains to be seen if this trend will grow into a sustainable niche.
As for the company’s decision to use one delivery provider, I think the company’s solution is found in the perceived problem. Consumers who use delivery providers may have a preference but it doesn’t mean they only use one app. I view this in a similar way to the “streaming wars” that are breaking out. Yes, eventually some apps will get filtered out, but in the case of food delivery apps, it costs nothing for consumers to have the app. Ultimately, it’s about the product not how the product arrives.
It’s time to buy the dip on Shake Shack (NYSE:SHAK)
There’s no secret sauce behind the surge in Shake Stack stock. The company makes a premium product, charge a premium price, and voila they build a loyal following.
The stock has been on a tear in 2019. Prior to the earnings report, Shake Shack stock had gained 85% since the first of the year. Even with Monday’s pullback, the stock is still up over 40% in 2019, comfortably beating the S&P 500 which is up 22.7% over the same period. The company has a market cap of $2.41 billion. This is a small company that is still in the growth phase.
However, once again, it’s important to emphasize that there is a difference between trading and investing. As a trader, SHAK may be a poor choice in the next year. But as a long-term play, there is no reason to believe that SHAK should not continue to grow.
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|Shake Shack (SHAK)||$59.40||-0.9%||N/A||83.66||Hold||$74.53|