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Shake Shack Earnings: What to Watch

By Demitri Kalogeropoulos - Oct 31, 2019 at 12:54PM

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Investors will get more clarity on the burger upstart's growth outlook this week.

Investors have sent shares of Shake Shack (SHAK -5.90%) far higher in 2019, with the stock doubling at one point in the year compared to low-double-digit gains for the wider market and for fast-food rivals like McDonald's.  

The "better burger" upstart might add to those gains following its fiscal third-quarter earnings results set for Nov. 4, or it might sink if investors don't like what they hear from CEO Randy Garutti and his team. Below, we'll look at a few key metrics that will make the difference for Shake Shack's upcoming quarterly report.

A man about to bite into a burger

Image source: Getty Images.

Growth drivers

Shake Shack's small selling footprint means that most of the phenomenal growth that investors are hoping for over the next few years will come from the addition of new restaurants to the base. Yet the company still needs to show healthy sales gains both at its existing stores and at newly launched locations.

Each of those key growth pillars showed up in Shake Shack's second-quarter report, which paired a 4% comparable-store sales increase with the addition of 11 new restaurants to push revenue higher by 31%. Most investors who follow the stock are expecting a similar level of growth this quarter as sales improve to $158 million from $120 million a year ago. Beyond that top-line figure, the focus will be on Shake Shack's ability to continue relying on a balance of higher prices and increasing customer traffic, which has been eluding companies like McDonald's and Dunkin' Brands in recent quarters.

How about profits?

There are some big questions about Shack Shack's profitability as it matures into a national and global industry player. One thing that investors know for sure is that operating margin will decline because stores located outside of the high-volume New York City region will necessarily be less efficient and less profitable.

There has been extra noise in this metric recently, too, with operating margin last quarter diving by 4 percentage points. Management said most of that slump was due to one-time windfalls in the prior-year period, plus temporary cost surges from the ramp up of home delivery. We'll find out whether profitability began stabilizing this week to help Shake Shack's adjusted earnings margins begin climbing back toward 20% of sales.

Updated outlook

Shake Shack back in early August updated or affirmed over a dozen financial forecasts for the full 2019 year, but the focus this week will be on just three of these. Specifically, the fast-food upstart is aiming for the addition of 39 restaurants, plus comps gains of about 2%, to support annual sales of between $585 million and $590 million. Garutti and his team lifted each of those growth component predictions in the second quarter and might strike a similarly optimistic tone on Monday.

On the flip side, the restaurant stock reduced its profitability outlook to call for margins to shrink to around 23% of sales in 2019 following last year's drop to 25% from 27% in 2017.  It's no surprise to see this metric fall as the chain expands into new metropolitan markets, but investors will be watching for signs that margins will stabilize in this week's report.

Demitrios Kalogeropoulos owns shares of McDonald's. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

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