Better-burger chain Shake Shack Inc (NYSE:SHAK) is set to report third-quarter earnings on Nov. 5. The upstart brainchild of famed restaurateur Danny Meyer has been on a rocky ride since its debut in January, and now trades close to its post-IPO lows.
For a new stock especially, an earnings report can be a catalyst for a stock pop, and shares jumped 11% after its last report when the fast-casual chain blew past estimates, posting earnings of $0.09 per share against estimates of $0.03, while revenues jumped 75%, ahead of expectations as well. The company also raised its full-year guidance. With last quarter's momentum, and with the stock having tumbled since then, it could be primed to bounce back.
Let's take a look at three potential catalysts to look for in Shake Shack's earnings report.
Average weekly sales
Though same-store sales tends to get headline coverage for restaurants and retailers, the metric can be misleading for a company like Shake Shack. The fast casual chain's restaurants aren't included in the comparable base until they are two years old, as the company's tremendous buzz means that sales often decline in the second year but grow in their third year and beyond. Because Shake Shack has been accelerating its store openings lately, only 16 of its 47 domestic locations are included in the comparable base. That means that same-store sales are not the best reflection of the company's overall trend. A better figure to use is average weekly sales, which includes sales from all stores. In its most recent quarter, average weekly sales jumped 7.4% to $102,000. Any increase in this category should be cheered by investors, and not only because it will drive restaurant-level profitability, but also because management actually expects average sales volume to moderate over time as the company expands outside its core Manhattan base where average unit volumes are significantly higher.
With average unit volumes around $5 million, Shake Shack essentially does double the sales of any other fast-food chain. Even Chipotle Mexican Grill (NYSE:CMG), the standard-bearer of the fast-casual movement, derives $2.5 million from its stores, a strong number but only half of Shake Shack's total. That's a huge advantage for Shake Shack, and one that will only get stronger if average weekly sales continue to grow.
Shake Shack introduced its first chicken sandwich, the ChickenShack, at all three of its Brooklyn locations in July. The new menu item received rave reviews and sold out within two days, but there is no word yet on whether the sandwich will be rolled out nationwide. CEO Randy Garutti played it coy on the August earnings call, saying it was "really early" in the testing process, but there seems to be little reason why the company wouldn't deploy the ChickenShack to all its stores. Not only have customers been asking the chain for such an item, but poultry prices are much lower than beef prices these days, so the addition would help lower food costs. Look for a potential update on that note, as expanding the menu is another way the company can grow sales.
Another intriguing new offering from Shake Shack in recent months has been partnerships with celebrity chefs to serve original, gourmet burgers for one day only. In London, the company teamed up with Michelin-starred chef Sat Bains to make 500 burgers he dubbed the Major Oak, inspired by Nottingham Forest, while in Atlanta chef Ford Fry pulled a similar stunt with a burger called the Carpetbagger that came with a fried oyster on top. Such partnerships showcase Shake Shack's fine dining pedigree, and are part of what sets it apart from virtually every other fast food restaurant. Danny Meyer likes to call his burger chain "fine casual," instead of fast casual, and bringing in celebrity chefs for one-day events reinforces that branding and generates buzz. Look for management to share information about future tie-ups on the call as well as report on the results of those two in the past quarter.
One of the biggest factors driving Shake Shack's share price down since August is insider selling. The company issued a secondary offering shortly after its second-quarter report came out, sending shares down 16% in a single day when major stockholders offered 4 million shares at $60. Though Shake Shack wasn't issuing new stock, and therefore not collecting proceeds or diluting shareholders, the notice still sent a message that insiders were angling to get out of a stock that many analysts have called overvalued.
Then, in October, shares fell again when the company issued a similar filing, this time for as many as 26 million shares at a price no greater than $47.28. Shake Shack has a complicated share structure, and this filing converted those 26 million shares from Class B to A, giving early investors a chance to sell it on the open market if they wanted to. The move isn't a guarantee that those investors, including top holder and private equity firm Leonard Green, will sell, but it gives them the option. I'd like Garutti to address these concerns on the call, as the perception of widespread insider selling will continue to put downward pressure on the stock.
Still, I'm expecting Shake Shack to soar past estimates once again this earnings report. Analyst estimates seem low at $0.07 EPS, as the company posted a $0.09 EPS in its second-quarter report, and the summer months are generally the strongest in the restaurant industry, especially for the New York-based company, which thrives off of tourism in the warm months. Same-store sales should continue their strong growth, as a much of last quarter's bump came from price increases.
If Shake Shack can deliver the kind of results it did last time, with restaurant-level operating margins around 30%, profits should grow much faster than expected, pushing the stock price higher and bringing the valuation down to a reasonable level.
Jeremy Bowman owns shares of Chipotle Mexican Grill and Shake Shack. The Motley Fool owns shares of and recommends 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.