Shake Shack Inc (NYSE:SHAK) smashed expectations in its second quarter earnings report released last week
Revenue shot up 74.7% to $48.5 million, well ahead of Wall Street expectations at $42.8 million, while earnings per share came in at $0.09, topping the $0.03 consensus. Same-store sales of 12.9% also beat estimates of 8.6%, and the company raised its full-year guidance across the board.
The stock may have fallen significantly following a secondary stock offering, but the report still bodes well for the future.
Same-store sales growth near 13% may have attracted headlines, but news sources are burying the lede, here. Comparable sales tend to be a key focus for retail and restaurant stocks since that number represents organic growth without the effect of new store openings, but things are a little different for Shake Shack. Retailers and restaurants generally add stores to the comparable base after they have been open for a year, but Shake Shack restaurants often experience a decline in sales from the first to the second year due to an extended honeymoon period after opening. After the second year, sales generally begin growing again, so Shake Shack waits for new stores to enter their third year before adding them to the comparable base.
Therefore, in its second quarter, Shake Shack comparable sales base only represented 16 of its 37 domestic company-operated restaurants. With more than half of domestic restaurants excluded from the comparable base, same-store sales are a poor indicator of the company's overall performance.
A better way
Instead of focusing on comparable sales, or same-Shack sales, as the company calls them, the restaurant offers another metric that serves as a better proxy for store performance: average weekly sales, which encompasses all of its locations. In the second quarter, that figure rose 7.4% to $102,000 from $95,000 the year before, a sign that new store openings continue to be strong.
Notably, Shake Shack had said when it went public that it expects average unit volumes, or average weekly sales, to fall as it expanded outside of its core Manhattan market. However, instead of falling, those average weekly sales are rising, a sign of high demand at new restaurants.
Shake Shack averages unit volumes of close to $5 million, well ahead of any other major restaurant competitor. McDonald's and Chipotle, by comparison, are among the best, with about $2.5 million in average sales. Given that discrepancy, it seems natural to expect Shake Shack average unit volumes to fall as the buzz wears off and the brand enters new markets, but that has not happened -- at least not yet.
If average weekly sales continue to move higher, it may indicate that the company can to expand past management's goal of 450 domestic company-operated units.
The second key indicator of its performance is restaurant-level operating margin, or Shack-level operating margin. This is the percentage of sales that go back to corporate headquarters and ultimately, to the bottom line.
Again unsurprisingly, Shake Shack tops the industry as its restaurant-level operating margin improved a whopping 470 basis points to 30.3%. That is a remarkable jump, especially since it comes at a time when other restaurant chains are complaining about rising beef costs. Management credited a lower than expected jump in food costs, higher prices, and greater leverage in labor and other operating costs for the improved margins.
If we extrapolate those figures for the entire year, that would mean the average Shake Shack delivers roughly $1.5 million in profit. For perspective, most fast-food restaurants do not generate that much in revenue, and Shake Shack's average profit would be higher than the average unit sales at competitors like Burger King and Five Guys.
The third piece of good news in the report is that management has upped its projected new store openings from 10 to 12 a year. And why not? It is clear that America cannot get enough of its burgers and shakes.
Investors will continue to debate the stock valuation until the bottom-line picture clears up, and I expect continued volatility for now. But analyst estimates look woefully short with an earnings per share consensus of just $0.26 for next year. After two strong earnings beats this year, Shake Shack looks like it is on track to crush that target. If the stock continues to fall, it should represent a juicy buying opportunity for investors.
Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.