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Why Shake Shack Stock Dropped 16% Tuesday Morning

By Daniel Miller - Updated Feb 25, 2020 at 2:59PM

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Fourth-quarter results disappointed investors as the costs of rapid growth hurt near-term results.

What happened

Shares of Shake Shack (SHAK 3.07%), a burger chain with more than 280 locations in 30 states, dropped more than 16% early Tuesday morning as the market absorbed disappointing fourth-quarter results.

So what

Fourth-quarter sales increased 22% to $151.4 million, falling short of analysts' estimates of $153 million. But much of that increase was due to store openings as the company's same-store sales declined 3.6%. Shake Shack lost $2.1 million, or $0.06 per share, during the fourth quarter, which was a sequential turn for the worse after three consecutive quarters of GAAP profits. Adjusted earnings per share checked in at $0.06 per share, better than analysts' estimates for a breakeven quarter.

Management noted that the disappointing GAAP performance was due to food and labor headwinds and investments across the business. Another disappointing metric was Shake Shack's 2020 revenue guidance between $712 million and $720 million, well below analysts' estimates of $735.5 million.

Cheeseburger and fries

Image source: Getty Images.

In a press release, CEO Randy Garutti said:

2019 was another milestone year at Shake Shack. We opened our largest class of Shacks ever, with 73 across the globe, 39 company-operated and 34 licensed. A total of 49 of those new Shacks were here in the United States, and internationally, we unlocked tremendous revenue growth by entering important new markets for the first time, namely Shanghai, Mexico City, Singapore and Manila.

Now what

One development for investors to keep an eye on is Shake Shack's decision to partner exclusively with Grubhub (GRUB) for delivery, when previously many Shake Shacks had multiple partners. The partnership could result in lower delivery sales, but Shake Shack could benefit from receiving customer ordering data in the deal, information most chains don't receive from third-party delivery companies.

While Shake Shack is indeed expanding its store count, investors must understand that the cost of that will have a near-term negative affect. Management believes that despite this, expansion will be crucial to building long-term sales and profitable growth in a brutally competitive industry.

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