Shake Shack (NYSE:SHAK) released its first earnings report as a publicly traded company last night, and it seemed to be an acquired taste for investors. At first, the market sent the stock down as much as 10% this morning, but by the afternoon, it had recovered to be up as much as nearly 6%. By 2:30 p.m. the stock was up about 1.3% from the previous day's close. Investors seemed to jump at the buying opportunity presented this morning.
Let's take a closer look at the report.
Shake Shack's results were actually better than expected, as revenue grew 51.5% in the quarter to $34.8 million, topping estimates of $33.1 million, while on the bottom line, the burger chain reported a net loss of $0.05 per share -- though without IPO expenses, the loss would have just been a penny per share. That was better than the analyst consensus of an EPS loss of $0.02.
2015 revenue guidance was also on target, at a range of $159 million to $163 million, against analyst estimates of $160.7 million. Wall Street seemed to be initially disappointed that the revenue estimate did not exceed guidance, as the stock is already dearly priced, and investors are counting on strong growth.
Still, this was a solid quarter, especially since same-store sales came in at 7.2%, better than expectations at 4%. For 2015, management projects low-single-digit same-store sales, but it's important for investors to understand that only 13 Shacks are included in the same-store base, meaning the number may not be as representative for Shake Shack as it is for other retailers and restaurants.
Same-Shack sales, as the company calls them, also only include stores that have been in operation for 24 months, since the brand is so strong that first-year performance of new stores is often stronger than the second year because of an extended honeymoon period. As of Dec. 31, 2014, the company had 63 Shacks open, including company-operated and licensed locations: 36 domestic and 27 international. The company expects to open at least 10 domestic company-operated Shacks annually.
New store openings
Because Shake Shack's sales at individual restaurants are so high, averaging upward of $4 million, the stock's story is really about future openings, and maintaining a solid operating margin. In the most recent quarter, Shake Shack had a restaurant-level operating margin of 22.3%, which is above average for the industry, and down slightly from 22.7% in the fourth quarter of 2014. Higher beef costs also ate into margins.
In the fourth quarter, Shake Shack opened new company-operated stores in Atlanta, Chicago, New York, New Jersey, and Las Vegas, its first location west of the Mississippi, and the buzz for new openings continues to be strong.
Thus far in 2015, the chain has opened two locations in the Boston area and one in Baltimore. At the opening of the Chestnut Hill, Mass., location, some fans lined up as early as an hour before opening on its first day in what was much more of a media spectacle than your average restaurant opening.
The lack of profits may be a concern for Shake Shack investors, but this is a company with a long path of growth ahead of it. And despite concerns about its pricey valuation, on a sales basis, Shake Shack is cheaper than Chipotle Mexican Grill at a P/S of 4.5 versus 5 for Chipotle, and with a faster growth rate.
In other words, if Shake Shack can rein in its corporate expenses, part of which are pre-opening costs that should naturally stabilize, the stock could become a virtual steal, or at least much cheaper than most on the market consider it.