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Shake Shack’s Growth Causes Grumbles on Wall Street

Shake Shack plans to open more than 20 new restaurants this year.

New Shake Shack restaurants are celebrated with great fanfare, and they’ve had a major impact on the company’s bottom line for the past couple of years.

But all that excitement may have a downside. Increasingly, analysts think Shake Shack openings are detracting from sales at existing restaurants. This cannibalization -- an unfortunate word for a restaurant chain -- has Wall Street on edge as Shake Shack gets set to release its third quarter earnings on Wednesday. Setyan thinks the stock is worth $36, just under where it was trading on Monday afternoon.

Shake Shack has said it will open 23 or 24 new stores this year. It currently has about 90 U.S. locations and 50 outside the country.

Next year, Shake Shack plans to accelerate its new-store openings, but they could drag on sales at existing stores by as much 1 to 5 percentage points, estimates Wedbush analyst Nick Setyan. That impact “may no longer be offset by top line contribution from new unit outperformance.”

The new-restaurant drag comes at a problematic time for Shake Shack as overall sales at fast casual restaurants are slowing. And the price of food at grocery stores has been down lately, giving consumers another reason to eat at home. That will make it hard for Shake Shack to raise prices to make up for rising labor costs.

All those pressures could force Shake Shack to find more new innovations to drive sales. Breakfast, anyone?

Big Picture: Shake Shack could struggle as the lift it gets from new restaurant openings gets overshadowed by weaker sales at existing locations.


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