2017 has been a middling year for Shake Shack Inc ( SHAK -3.55% ) ; shares of the better-burger chain have increased just 5% this year, short of the S&P 500's gains of 16%. In fact, Shake Shack stock has traded sideways for the last two years, a disappointing result after a splashy IPO in January 2015.
Looking ahead to 2018, should investors expect more of the same? Let's take a closer look.
Accelerating store openings
The most promising news the fast-casual chain has revealed about next year is that it plans to open 32-35 new domestic company-operated restaurants and 16-18 licensed Shacks. That figure is up from 24-26 company-owned restaurants to be opened this year, meaning the store base should grow by more than a third next year from about 90 at the end of 2017, a promising sign for continued revenue and bottom-line growth. As I've argued before here and here, Shake Shack's average unit volumes are so high that new store openings may be a more important factor in determining performance than same-store sales -- especially since the majority of its restaurants still aren't in the comparable base, since management doesn't include them until they've been open for two years.
Shake Shack has also consistently hiked its own store-opening guidance since it had its IPO in 2015, and that year it had originally called for just 10 new domestic company-owned stores. Two years later, Shake Shack is growing much faster than investors expected it would.
The restaurant recession
Another key issue for investors to watch next year is the restaurant recession. Industrywide, same-store sales at restaurants have fallen nearly every month for the past year-and-a-half, with the malaise weighing on fast-casual and casual-dining chains in particular. Shake Shack has not been able to escape the headwinds: same-store sales are down 1.9% this year, and management called for the metric to drop 1.5% to 2% for the full year. Meanwhile, average weekly sales fell from $103,000 to $91,000 in the most recent quarter, showing that new stores are not as strong as the mature base, though management has long predicted that that would happen.
The good news is that some of Shake Shack's competitors are beginning to cut back on store openings or even close stores in response to oversaturation in the industry. That could alleviate some of the causes of the so-called restaurant recession, which would surely benefit the fast-growing chain. If the company can return to positive comps next year, that should give the stock a boost.
Shake Shack has staked its brand on hospitality, and founder Danny Meyer has built a reputation as one of the country's finest restaurateurs, in part due to his focus on the customer. However, like other restaurant chains, Shake Shack is increasingly relying on technology to improve service and convenience. This year, Shake Shack launched its first-ever mobile-ordering app, which allows customers to order and pay remotely, leading to shorter pick-up times and added convenience. Shake Shack also made delivery available through third-party apps like DoorDash and Caviar. But its biggest move came in October when the company opened its new Astor Place location. The restaurant has kiosk-only ordering, is fully cashless, and management said it has an optimized kitchen for increased throughput. The company also started all employees at $15/hour at the new location, and will use it to experiment with other high-tech concepts. Management has said the response to the new restaurant has been positive.
Looking ahead to 2018, you can expect the company to continue to leverage technology as fast-food chains increasingly look to things like kiosks to save money and help customers save time.
What will most determine the company's performance next year is how its results compare with expectations. Currently, analysts see revenue increasing 29.4% to $460.2 million, but only expect earnings per share to increase from $0.52 to $0.55 as labor costs are expected to increase. Still, that looks like a low bar for the company given its aggressive store opening forecast.
Shake Shack stock has been on a roll lately, up 22% over the last three months, and the stock could continue to rise into next year if management executes. If new store openings and technology rollouts go well and the macroeconomic environment improves for restaurants, 2018 could be a promising year for the better-burger upstart.