Shake Shack (SHAK -0.73%) recently served up mixed fourth-quarter earnings results for investors. The better-burger chain notched a few operating and financial wins in 2021, including a full sales rebound from the pandemic. Recent menu launches like the black truffle burger were hits with customers and drove higher traffic.
Yet the fast-food specialist is dealing with significant earnings pressures from rising costs and weak traffic at many of its traditionally busy stores in major metro markets in the Northeast. These factors are complicating the growth picture for investors.
Let's dive in.
Shake Shack sales rebound
Revenue has finally eclipsed pre-pandemic levels as comparable-store sales rose 2% compared to 2019. Comps were down 1% on that basis in the prior quarter.
Shake Shack got help from rising prices and popular sandwich and drink launches. "We are pleased to report a strong sales comeback in the fourth quarter with record full-year ... sales," CEO Randy Garutti said in a press release.
The business is still trailing the wider industry's expansion pace, though. McDonald's recently announced 8% higher comps in U.S., after all. Shake Shack's focus on more urban city centers hurt sales. Those areas haven't seen a full traffic rebound as many offices remain shut down.
Cost pressures are affecting Shake Shack profitability
Shake Shack rolled out higher menu prices in October, and management called the move a success since it bolstered profits without turning diners away. The business isn't through this challenge yet, though. Labor and ingredient costs are soaring in early 2022. That shift means restaurant-level profitability will fall to as low as 11% of sales in the first quarter, according to executives.
That's the lowest margin shareholders have seen since mid-2020 when the pandemic severely disrupted the business. Operating margin has been hovering around 15% to 16% for most of the past two years.
Shake Shack is planning another menu price hike in early 2022, but the operating margin is still likely to fall significantly this year compared to 2021. Meanwhile, the company's growth outlook is being held back by an uneven traffic recovery across suburban and urban locations. That's the same trend that helped convince Chipotle Mexican Grill to announce that it is moving more aggressively into smaller markets.
The good news is that Chipotle, McDonald's, and other peers have demonstrated how Shake Shack can accelerate sales growth over time, partly by shifting toward the drive-thru channel. The company will naturally lessen its exposure to a few major metropolitan areas, too, as it adds more locations outside of city centers.
However, Shake Shack hasn't proven to investors that it can book sustainably strong profits in the competitive fast-food space. That concern is more pressing when costs are soaring across the industry like they are today.
It's possible that market share gains will start showing up as stores in and around New York city begin fully recovering from the pandemic over the next few quarters. But, until Shake Shack can boost its financial efficiency, earnings and sales gains will stay muted compared to its peers.