Shake Shack Stock collapses as diners flee

Actions of the fast casual burger chain Shake Shack (NYSE: SHAK) fell almost 15% after the company’s report for Q4 and full year 2019. As I suspected, the high-flying restaurant stock struggled during the holiday quarter. Industry researcher Black Box Intelligence reported comparable store sales flat year-over-year (or “coms” from now on, a mix of foot traffic and average guest ticket sizes) to end 2019 – with fast-casual seemingly lagging the curve. The worst was yet bad weather in northeastern states where the bulk of the Shake Shacks are located, putting additional pressure on the company’s bottom line.

Sure enough, all of the above conspired to ding the burger chain, and stock prices are reacting accordingly. Management also does not foresee a quick recovery in traffic, which could mean that the stock will be even more painful. As in the past, however, this kind of pessimism should present a buying opportunity for the fast-growing restaurant chain.

Not a great report but not totally unexpected

Shake Shack’s fourth-quarter revenue rose 22% year-over-year to $151.4 million. In total, high-margin royalties from franchise locations (international and domestic airport cabins) jumped 59% to $5.6 million. And since it is a growth stockthe increase of just 9.4% in operating profit at the Shack level to $29.7 million is not entirely concerning.

However, it’s kind of a transition period for Shake Shack. The company has opened at least a store or two in many of the busiest US cities, particularly on the East Coast, and the company is currently expanding its presence by opening stores in these existing markets. For example, the 12 new company-operated stores that cut the ribbon in the fourth quarter were in areas where Shake Shack already has a presence.

That ultimately means a lot of new sales, but it also means a little less foot traffic in existing stores. Following new openings (plus bad weather, one less shopping week after Thanksgiving, and perhaps no new menu items compared to a year ago), Shake Shack reported a 5.4 drop % of traffic, partially offset by a 1.8% increase in menu price and combination of items for a total decrease of 3.6% in compositions. The final result ? Weekly sales at company-operated domestic Shacks fell $10,000 from 2018 to $71,000, meaning operating profit margins at the Shack level contracted by 2. 1 percentage points to 20.4%.

It’s not the end of the world, but it does put a damper on the full year image and the company’s EBITDA (earnings before tax, depreciation and amortization).

Data source: Shake Shack. EBITDA = earnings before interest, taxes, depreciation and amortization. PP = percentage point.

Keep calm and focus on the long term

Since I like to end on a high note, here’s the latest bad news: Management has said it expects comps for the full year 2020 to decline into the single-digit percentage range as it continues to focus on expanding into existing markets. Black Box Intelligence reported a 2.3% rise in industry comps in January, with the East Coast showing a particularly strong rebound, but it’s too early for the fast-casual channel to offer insights into its specific figures for the first quarter.

But here’s the benefit of the forecast for 2020: 40-42 new Shacks operated by the company and 20-25 licensed, total revenue of $712 million to $720 million (up 20% from year-over-year mid-term), and still one of the best in the industry. average annual sales per unit of $3.7 million to $3.8 million. In other words, store profit margins could take another slight hit, but they can afford it for the sake of overall business expansion.

After the fourth quarter beating, Shake Shack’s stock price is now up “just” 39% since the start of 2019, much more in line with the sales expansion. And since sales are the main price driver at this point, that drives Shake Shack stock up for another rally. I’ll start considering making a purchase now that the latest 2019 report is in the rearview mirror.