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Why Shake Shack Inc. Stock Tumbled Today

By Jeremy Bowman – Nov 2, 2018 at 1:41PM

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Shares of the fast-casual burger chain sold off after its earnings report missed the mark on some key metrics.

What happened

Shares of Shake Shack Inc. (SHAK -0.21%) were sliding today after the fast-casual burger chain posted weaker-than-expected comparable sales and a disappointing outlook in its third-quarter earnings report. Despite the company's beating estimates on top and bottom lines, the stock was still trading down 13.6% as of 12:11 p.m. EDT.

A Shake Shack burger in a paper dish

Image source: Shake Shack.

So what

Shake Shack's revenue jumped 26.5% to $119.6 million in the period, beating estimates of $116.8 million, though that growth was driven by new restaurants rather than comparable sales. Same-store sales dipped 0.7% (missing estimates of 1.1% growth) as guest traffic dropped 4% in the quarter, a potential warning sign. But higher prices and a change in sales mix offset it by 3.3%.

Restaurant-level operating margin slipped from 25.8% to 27.2%, as labor costs continue to creep higher and the company opens lower-volume stores in new markets.

On the bottom line, adjusted earnings per share increased from $0.17 to $0.21, which easily beat estimates of $0.13, continuing a historical pattern of earnings beats. CEO Randy Garutti sounded optimistic about the performance, saying: "We're pleased to report that Shake Shack's overall growth remains strong as we head into the end of 2018."

Now what

Looking ahead, Shake Shack actually raised its full-year revenue forecast to $450 million to $452 million, up from a previous range of $446 million to $450 million, but still short of the analyst consensus of $453.4 million. Management did not give detailed guidance for 2019, but said it would open another 36 to 40 company-operated restaurants; this would grow the base by about 30%, indicating another year of strong growth.

Shake Shack trades at a lofty valuation, at a price-to-earnings ratio of over 60 even after today's sell-off; that may explain today's slide as much as anything else, as high expectations are baked into the price. While the quarter's comparable-sales figures, especially traffic, may have been disappointing, the overall growth story remains intact. Still, Shake Shack shares are likely to remain volatile given the pricey valuation.

Jeremy Bowman owns shares of Shake Shack. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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