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Why Shake Shack Is Celebrating a 45% Sales Decline

By Demitri Kalogeropoulos – May 8, 2020 at 8:15AM

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That figure represents a major improvement in weekly sales rates, which cratered in late March.

Shake Shack (SHAK 5.41%) recently announced first-quarter earnings results that were about as bad as investors had feared. Sales slumped due to the restaurant closures that started in March, particularly around New York where the better burger chain has a major geographic focus.

Yet in a conference call and slide presentation with investors, CEO Randy Garutti described some hopeful signs about the strength of the business as management plans for the eventual resumption of normal operating routines.

Let's take a closer look.

A body blow to the business

"In the last three weeks of our fiscal period ending the 25th of March, same [store] sales decreased 10%, 46% and 73%, respectively, compared to the same fiscal weeks last year." -- CFO Tara Comonte

Shake Shack endured a serious hit to the business as social distancing took hold around the country, with sales falling by over 70% in the final week of March. That's worse than the 50% drop that McDonald's noted around the same time, likely due to the burger specialist's more focused store portfolio.

Chart showing digital sales as a percentage of overall sales by week.

Image source: Shake Shack.

The good news is that the weeks that followed have demonstrated the draw of Shake Shack's brand. Sales trends have improved in each of the last four weeks to cut year-over-year declines down to about 45%, executives said. Shake Shack's digital channel made the difference by expanding to take up 84% of the sales mix, compared to 18% in the days before COVID-19.

Cash priorities

"We remain focused on preserving cash, yet strategically continuing to invest in key areas of the business that will solidify our position of strength and ensure we're well-positioned to move quickly back to our long-term growth agenda as market conditions continue to improve." -- Comonte

A woman takes a bite of a burger.

Image source: Getty Images.

The fast-food company has paused the design and construction of all new stores during the crisis; additional stores are its main source of long-term revenue growth at the moment. Management is optimistic that they'll simply restart this pipeline once retailing conditions improve.

In the meantime, the company is predicting some new costs around sanitation and contact-less services that should pressure profitability for the foreseeable future. "We expect that the majority of our increased cleaning and sanitation procedures are here to stay," Garutti said.

Ready to move

"We'll be ready to capture the white space ahead in what could be a forever-changed retail and restaurant environment." -- Garutti

Management warned investors to expect plenty of volatility ahead, along with potentially significant changes to the company's expansion strategy for 2020 and beyond.

But the restaurant's early sales trend improvements, plus its bulked-up cash reserves, give executives flexibility as they look to capitalize on changing consumer preferences that might value seamless ordering, pickup, and delivery services.

A slide showing contactless ordering and pickup during COVID-19.

Image source: Shake Shack.

Management even sees the potential for better leasing terms and discounted real estate costs ahead, which would lay the groundwork for stronger earnings once the COVID-19 threat passes. That optimism assumes there won't be major economic challenges that persist long after the restaurant industry resumes its normal operations.

As of early May, Shake Shack's management team sees support for the conclusion that the pandemic didn't do lasting damage to its consumer business or its long-term growth potential. "We fully intend to keep building those necessary community gathering places the world will need, while evolving our model to be more convenient, more rewarding, and more accessible than ever," Garutti said.

Demitrios Kalogeropoulos owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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