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Shake Shack (SHAK) Up on Q1 Earnings Beat, Raised View

Shake Shack Inc. SHAK posted robust first-quarter 2016 results, wherein both earnings and revenues beat the respective Zacks Consensus Estimate for the sixth consecutive quarter. The company also raised its guidance for 2016, following which its shares gained almost 6% during aftermarket hours yesterday.

Earnings and Revenue Discussion

Shake Shack’s adjusted earnings of 8 cents per share beat the Zacks Consensus Estimate of 6 cents by 33.3%. Meanwhile, earnings grew substantially from the year-ago figure of 4 cents. The upside reflects an increase in revenues and margins.

Revenues surged 43.3% year over year to $54.2 million and beat the Zacks Consensus Estimate of $53 million by 2.3%. Strong comps, along with an increase in Shake Shack sales and licensing revenues, led to the improvement.

Behind the Headline Numbers

Same-Shack sales (or comps) grew 9.9% year over year. Sales growth was driven by a 7.3% increase in traffic and a 2.6% rise in price and mix. Traffic improved mainly due to the introduction of Chicken Shack to the menu and unseasonably warm temperatures in some of the company’s most important markets. However, comps growth was lower than the prior-quarter growth of 11% and the prior-year quarter growth of 11.1%.

Total operating expenses, as a percentage of revenues, plunged 3,770 basis points (bps) to 91.3% on a 3590 bps decline in general and administrative (G&A) expenses. The decline in G&A expenses resulted from the absence of IPO-related expenses and compensation expenses that had been incurred last year.

Labor costs remained flat, while food and paper costs fell 170 bps.

As a percentage of Shack sales, Shack-level operating profit margins increased 250 bps to 28.2% due to lower-than-anticipated food costs and leveraging of other operating expenses on the increased Shack sales.

Adjusted EBITDA surged 54.4% to $10.8 million. Adjusted EBITDA margins increased approximately 140 basis points to 19.9%, compared with 18.5% for the year-ago period.

Guidance for 2016

For 2016, Shake Shack has raised its guidance. The company now expects revenues in the range of $245 million to $249 million, up from $237–$242 million projected earlier.

Same-Shack sales growth is expected within 4% and 5%, up from the prior guidance of 2.5–3%.

Further, as a percentage of Shack sales, labor and related expenses are expected to deleverage by 75–100 bps. It had previously guided labor and related expenses in the range of 100–150 bps.

Shake Shack currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the same industry include Carrols Restaurant Group, Inc. TAST, Dave & Buster's Entertainment, Inc. PLAY and Restaurant Brands International Inc. QSR. All these stocks sport a Zacks Rank #1 (Strong Buy).

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SHAKE SHACK INC (SHAK): Free Stock Analysis Report
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