Habit Restaurants Inc (NASDAQ:HABT) shares have been on a roll since the company reported first-quarter earnings last week. After a 6% gain on Friday, the stock jumped another 12% on Monday on heavy volume. Here's what the company served up last week:
- Same-store sales jumped 12.6%, in line with its pre-earnings announcement.
- Revenue increased 44% to $54.6 million.
- Earnings per share came in at $0.09 against expectations of $0.06.
The company raised forward guidance, but not as much as some might have expected as management predicted full-year revenue of $221 million to $225 million with comparable-store sales growth of 4%-4.5%. Those numbers seemed to be conservative, however, as an extrapolating of the first quarter's sales performance throughout the year would bring revenue to almost within that range. The winter period is a historically slow one for restaurants, and Habit is growing quickly with plans to add 26 to 28 company-owned restaurants this year, expanding the store base by about 25%. Even if same-store sales fall dramatically, the new stores should give revenue enough of a bump to clear that range.
Similarly, the 4%-4.5% expected comps increase would indicate management believes organic sales growth would slow to just 1%-2% for the year. While some slowdown may be expected as the company laps its IPO and the Consumer Reports No.1 burger rating from last summer -- both of which may have driven a spike in sales -- in a strengthening economy, it seems unlikely that a company with 45 straight quarters of comparable sales growth would see that figure flatten so suddenly.
Finally, management projected a restaurant contribution margin of 20.7% to 21%. In 2014, restaurant contribution margin, or the profit from individual restaurants that goes back to corporate, was 21.3%, which was its lowest mark in the past five years. Higher beef costs may account for the downward momentum, but first-quarter contribution margin was 22.5%, a sign that the full-year margin could surpass the projected range.
Why shares could keep moving higher
Despite the seemingly weak guidance, there were a number of strong signs in the report.
First, the company's track record of 45 straight quarters of comparable sales growth, or more than 11 years including through recession, is a testament to the strength of the brand, and proof of the company's ability to consistently grow sales.
Though it's still a small, relatively unknown company with just over 100 locations nationwide, its restaurant-level operating margins are strong, in the 21%-22% range, on par with better-burger star Shake Shack, and better than many of the legacy chains such as McDonald's. That's evidence that Habit's restaurants are more profitable on a margin basis than many of the fast-food chains operating today, and with consistently growing same-store sales, demand appears to be increasing as well. From 2009 to 2014, average unit volumes climbed 46% to $1.8 million, meaning restaurants in the comparable base are now delivering about $400,000 in annual profit. That number should continue to grow as same-store sales improve.
Finally, the company's prices offer a happy medium between fast-casual chains like Shake Shack and Five Guys and the legacy chains like McDonald's. Prices for a Charburger, as the company calls its hamburgers, start at just $3.25, while the Double Charburger with Cheese is only $4.80. Therefore, the company can compete with chains like McDonald's and Burger King on price, but can also match the quality of the fast-casual chains as it offers a number of more gourmet items including an albacore tuna sandwich.
That price point may be a unique strength of Habit's going forward. On the earnings call, management underscored that the traditional burger chains had over 30,000 locations, and that Habit has already been pulling customers away from them. As it opens up more locations, that migration should become a more entrenched pattern.
Though investors should expect a decline in comparable sales as the company laps the strong performance in the second quarter last year, Habit's momentum seems to be stronger than guidance would indicate. I would expect the company to continue topping analyst estimates this year, which will continue to send the stock higher.