Shares of quickly growing burger and milkshake chain Shake Shack (SHAK 8.37%) are down 11% as of noon ET on Tuesday after the company provided a disappointing business update for the upcoming second quarter. Instead of delivering 19% sales growth in Q2 as previously guided, management now believes revenue will only rise 17% at the midpoint. Similarly, same-store sales growth guidance slipped from 4% to 2.75% at the midpoint, while restaurant-level operating margins look to be at least a percentage point worse than expected. Following today's decline, Shake Shack shares are down 61% from their 52-week high.
NYSE: SHAK
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Speaking about the business update, Chief Executive Officer Rob Lynch explained, "Our updated guidance reflects the current macroeconomic uncertainty, competitive landscape, and related impacts now that we are more than two-thirds through the quarter, but it's important to emphasize that our fundamental business drivers remain strong."
Image source: The Motley Fool.
I understand the market's reaction to today's news -- but I also think Shake Shack stock is becoming attractively valued as it navigates the unavoidable cyclicality of being a fast-casual restaurant chain. Though it is impossible to say when broader consumer confidence may improve -- things could still get worse, even -- the company's risk-reward ratio has become too promising to ignore in my opinion. Management plans to reach 1,500 company-operated restaurants over the long haul -- compared to 390 today -- and expects sales and new store count to grow by a low-teens percentage over the next three years.
Having reached breakeven profitability -- and funding its growth in-house with cash from operations (CFO) -- Shake Shack's growth story isn't just a pie-in-the-sky notion. Shake Shack currently trades at near an all-time low 11.5 times CFO, highlighting its very reasonable valuation. If the company wasn't spending heavily on new store growth, it would be producing solid free cash flows to return to shareholders -- but obviously, the growth story is what makes Shake Shack exciting.
This discounted valuation, paired with Shake Shack's potential growth story, improving cash generation, and cult-like following, has me keeping the company on my shortlist of growth stocks to consider buying in June.
