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If Sales and Profits Are Up, Why Is Shake Shack Inc Taking It on the Chin?

By Motley Fool Staff – Mar 11, 2016 at 2:50PM

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Bearish trading continues to plague this burger joint, despite posting another quarter of industry-leading growth.

The better burger segment continues to flourish, and there was hardly a name more popular or successful in that niche in 2015 than Shake Shack (SHAK 3.23%), which priced its IPO just over a year ago.

Unfortunately for investors, meteoric growth can only continue for so long. In this clip from Industry Focus Consumer Goods, Vincent Shen and Sean O'Reilly hit the key points of the fast casual chain's fourth quarter earnings report -- comparable store sales, new restaurant openings, and guidance for the coming year -- to determine why a banner 2015 resulted in double-digit declines for the stock.

A transcript follows the video.

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This podcast was recorded on March 8, 2016. 

Vincent Shen: So keep in mind everyone that this is the fifth quarterly earnings announcement from the company since their IPO which was last January. And just a reminder that the company priced at about $21 per share during its IPO and then its first day of trading it more than doubled and closed at $45.90. It's been on a pretty volatile path since then and as I'm sure you've enjoyed a little bit, it peaked at $93 per share in May.

Sean O'Reilly: I was about to ask you, it peaked out somewhere crazy.

Shen: In about four months of pricing it hit over $90 ... it's basically come down. What were you saying?

O'Reilly: It was going to be the next Chipotle, Vince, of course, it had to go to $100.

Shen: Well, even their long-term trajectory doesn't put them at that many locations -- $93 in May, now they're trading down to around $30 to $40, and the thing is, investors who got in on the ground floor I'm sure were sitting back and still are enjoying pretty significant gains right now. [crosstalk] It almost doubled, exactly. But we'll see that, especially with some insider selling that there obviously was a bubble there, so to speak.

O'Reilly: So how were comps, revenues, all that good stuff?

Shen: So getting down to the actual details of the release, the latest round of earnings, total revenue was up for the quarter about 47% to $51 million. Specifically the Shack sales, so excluding the licensing revenue they do internationally, it was up 49% to $49 million. Earnings swung, as you mentioned, from a $0.05 loss per share in the year ago quarter to a $0.08 per share profit. For a fifth quarter in a row, or their fifth release in a row, they bested Wall Street's top and bottom line forecasts, so they're five for five, batting a thousand right now.

Despite that, the stock is down about 7%, 8%, before we came down to the studio. The thing is, even beyond headline figures, I thought there was a lot to like in the press release, at least for the quarter. So same-Shack sales growth was 11% during the holiday period. So what people would generally call same-store sales growth, comparable-store sales growth. And that's up from 7.2% in the year-ago period. For the full year, same-Shack-sales growth was 13.3%, pretty incredible. And that's up from just 4.1% in 2014. Tons of improvement there.

O'Reilly: It's a lot of milkshakes.

Shen: And the Shack-level operating profit just about doubled to $53 million during the year. The big thing here that I want to stress is their operating margin expanded almost five full percentage points to 28.9%, pretty impressive. The restaurant base grew with 13 domestic and eight international Shacks opened last year. Just about a 33% increase in their system, and that includes their first Shack in Asia, open in Tokyo actually.

O'Reilly: Did you ... half these gains, like the operating margins and everything, did you know that half those gains actually came from their original location in Central Park in New York? I'm kidding, but that's what I think. 'Cause, what, they only have like 20-some odd locations.

Shen: No, no. Total they have about 84.

O'Reilly: Oh wow, I'm sorry, OK.

Shen: It's split, 30-ish or so are international and the rest are domestic.

O'Reilly: So what was the guidance, cause that's arguably the reason that the stock fell because this company ... the reason people are paying this valuation is for the growth.

Shen: Well, you just heard the quarterly and the full 2015 numbers, pretty impressive. Same-Shack sales, like, wow, but the guidance is where they're taking the hit on the chin here. So looking forward the company is going to be entering some new markets in 2016. Big ones are, like, Los Angeles and South Korea. Again, they're thinking about 13 domestic locations for new openings and then seven of their international licensed ones and then ...

O'Reilly: That's what I was thinking, they're going to open 20-ish stores. That's what I was thinking. OK, anyway ...

Shen: So in terms of the guidance itself, 2016 revenue is expected between $237 million to $242 million. So the midpoint there would represent about 25.7% growth over 2015. Whereas 2015 saw 61% growth. So that deceleration, obviously people are not happy about that. Same-Shack growth I think this is also what really people got worried, going from that 13%-plus that I mentioned earlier to between 2.5% and 3%. So that's below even 2014 levels.

O'Reilly: That 13% number you're talking about, that's Chipotle quality. Do you remember some of our first episodes a year ago? I mean, we were talking about, how does Chipotle have these ... they're already huge and they're having, like, 8% sales. It was just absurd. Then of course they had the problems that they're running into today with cilantro poisoning, but anyway. But this 2.5%, that's like ... McDonald's in a good year or something.

Shen: It's just such a stark difference from what it was able to log last year, and that, I'm sure, has a lot of people worried.

Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. 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.

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Stocks Mentioned

Shake Shack Stock Quote
Shake Shack
$52.49 (3.23%) $1.65
McDonald's Stock Quote
$272.42 (0.94%) $2.53
Chipotle Mexican Grill Stock Quote
Chipotle Mexican Grill
$1,629.07 (4.92%) $76.34

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