Shares of fast-casual burger chain Shake Shack (SHAK 4.41%) were down nearly 15% following the company's fourth-quarter and full-year 2019 report. As I suspected, the high-flying restaurant stock had a tough go during the holiday quarter. Industry researcher Black Box Intelligence reported flat year-over-year comparable store sales (or "comps" from here on out, a blend of foot traffic and average guest ticket size) to finish out 2019 -- with fast-casual reportedly lagging behind the curve. Worse still was bad weather in the northeastern states where the bulk of Shake Shacks are located, putting extra pressure on the company's results.
Sure enough, all of the above conspired to ding the burger chain, and share prices are responding in kind. Management isn't forecasting a quick snap-back in traffic either, which could mean some more pain is ahead for the stock. As in times past, though, this kind of pessimism should spell a buying opportunity for the fast-growing restaurant chain.
Not a great report but not totally unexpected
Shake Shack's fourth-quarter revenue increased 22% year over year to $151.4 million. Within the total, high-margin royalty fees from franchised locations (international and domestic airport Shacks) surged 59% higher to $5.6 million. And since this is a growth stock, the increase of only 9.4% in Shack-level operating profit to $29.7 million isn't totally concerning.
Image source: Getty Images.
However, this is a period of transition of sorts for Shake Shack. The company has opened at least a store or two in most of the busiest U.S. cities -- especially on the Eastern Seaboard -- and the company is now strengthening its presence by opening locations in those existing markets. For example, all 12 of the new company-operated stores that cut ribbon in the fourth quarter were in areas where Shake Shack already has a presence.
It ultimately means lots of new sales, but it also means a little less foot traffic at existing stores. As a result of new openings (plus the inclement weather, one fewer post-Thanksgiving shopping week, and possibly no new menu items compared with a year ago), Shake Shack reported a 5.4% drop in traffic partially offset by a 1.8% increase in menu price and item mix for a 3.6% total decrease in comps. The end result? Weekly sales for the company-operated domestic Shacks fell $10,000 from 2018 to $71,000, which meant Shack-level operating profit margins contracted by 2.1 percentage points to 20.4%.
It isn't the end of the world, but it does put a damper on the full-year picture and companywide EBITDA (earnings before tax, depreciation, and amortization).
|
Metric |
12 Months Ending Dec. 25, 2019 |
12 Months Ending Dec. 26, 2018 |
YOY Change |
|---|---|---|---|
|
Revenue |
$595 million |
$459 million |
30% |
|
Total expenses |
$569 million |
$428 million |
33% |
|
Earnings per share |
$0.61 |
$0.52 |
17% |
|
Adjusted EBITDA margin |
13.8% |
16.1% |
(2.3 pp) |
Data source: Shake Shack. EBITDA = earnings before interest, tax, depreciation, and amortization. PP = percentage point.
Stay calm and focus on the long term
Since I like to end on a high note, here's the last bit of bad news: Management said to expect full-year 2020 comps to decline in the low single-digit percentage range as it continues to focus on expanding in existing markets. Black Box Intelligence did report a 2.3% rally in industry comps in January with the East Coast showing a particularly strong rebound, but it's too soon for the fast-casual chain to offer any previews of its specific first-quarter numbers.
But here's the upside on 2020 guidance: 40 to 42 new company-operated Shacks and 20 to 25 licensed ones, total revenue of $712 million to $720 million (up 20% year over year at the midpoint), and still one of the industry's best average annual sales per unit of $3.7 million to $3.8 million. Put another way, store profit margins might take another slight hit, but they can afford to for the sake of the company's overall expansion.
After the fourth-quarter drubbing, Shake Shack's share price is now up "only" 39% since the beginning of 2019, much more aligned with sales expansion. And since sales are the primary driver of pricing at this point, this sets Shake Shack stock up for another rally. I'll start looking at making a purchase now that the last 2019 report is in the rearview mirror.
