- Shake Shack stock price has continued its downward slide even after the company delivered blowout Q3 2015 results.
- Shake Shack said same-store growth was likely to be in the low-single digits in 2016, which seems to have rattled investors.
- The company, however, still has a lot going for it and remains a reasonably safe long-term investment.
Shake Shack (NYSE:SHAK) shares are down 10.5% over the past five days (down 40% over the past 6 months) despite the company having delivered blowout Q3 2015 results about two weeks ago. The company reported revenue of $53.3 million, good for 67.4% Y/Y growth and $5.81 million better than consensus estimates. Non-GAAP net income of $4.4 million, or $0.12 per share, was a 252.3% improvement over the previous year’s comparable quarter and $0.05 better than estimates.
Meanwhile, same-shack (same-store) sales were up a blistering 17.1%Y/Y.
Unsustainable price increases
Investors seem to have been nonplussed by the fact that Shake Shack’s impressive top line and same-store growth was given a huge boost by menu price increases. Shake Shack raised prices by 3% in September last year and another 3% in January. The price increases resulted in a 9% boost to comps, meaning that same store growth could have clocked in at just 8% without the price hikes. Price hikes is not something that restaurants do very often, meaning that it’s highly unlikely that Shake Shack will repeat its impressive growth feat in the coming year. In fact, management guided for low-single digit growth in 2016.
While Shake Shack may not match the kind of growth it recorded in Q3 2015 come next year, this does not automatically mean that it’s a bad investment. After all, McDonalds (NYSE:MCD) received the thumbs up from analysts after reporting same-store growth of 0.7%, the first time it reported positive comps in many quarters, though of course a young growth company like Shake Shack is measured using a different yard stick.
To be sure, this year has been an exceptional one for Shake Shack. The company’s comps have been gradually falling--comps in 2012 clocked in at 7.1%; 5.9% in 2013, and 4.1% last year. This year’s same store growth is expected to be in the 11%-12% range, which is probably due to the stronger American economy. The company projected comps of 2.5%-3% in 2016, which seems to be more in-line with the industry average, but which, I believe, it will exceed by a good margin.
Despite the lower anticipated growth, there are a few reasons to like Shake Shack. The company has a total of 78 locations, with 43 of those being company-owned, 5 are domestic licensed and 30 are internationally licensed. The company reported that it has opened 10 company-operated shacks this year, and plans to open at least 12 company-owned shacks every year in the coming years. Expanding from such a small base assures the company of ample growth runways for years to come.
And there is no reason why people should stop flocking to Shake Shacks’ stores. The company has managed to garner quite a following by building a reputation as a pure fast casual chain--Shake Shack uses 100%-all natural Angus beef from cattle that have not been fed with antibiotics or hormones. The restaurant chain also serves frozen custard and shakes as well as one of its signature dishes--cheese crinkle fries. The company’s strong brand recognition should help the company to keep growing even when the American economy slows down.
One potential problem that could emerge from Shake Shack is in relation to its frequent secondary share offerings. Shake Shack recently filed a prospectus for 26.16M shares -- 5.12M by selling stockholders, and 21.04 million by the company. The company had announced another secondary offering of 4 million shares during its second quarter earnings call. Investors, however, need not worry about the latest offering because the purpose of this sale is to allow insider investors to sell their previously locked up shares.
Shake Shack’s true colors, however, will emerge when it publishes its full year fiscal 2015 results. Investors should keep a keen eye on how much stock-based compensation the company will dole out to its executives. This is usually a big problem for young growth companies since many tend to reward their executives with too many shares which not only leads to serious share dilution but also acts as a big drag on profitability.
Shake Shack does not appear to be in any real danger of facing a dramatic slowdown in growth any time soon. The company is growing from a small base and its fast casual theme remains popular. Despite the rather pricey shares, Shake Shack can grow into its steep valuation and remains a safe investment over the long haul.