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Shake Shack plunges after Q3 sales miss expectations

Heidi Chung

Shake Shack (SHAK) reported earnings that beat expectations; however, revenue and same-store sales fell short of Wall Street estimates, sending its stock reeling.

Following the results, shares of the burger chain, which closed Monday’s trading up nearly 2% at $84.30 — tanked by more than 12% in after-hour trading. Shake Shack shares opened Tuesday’s session down more than 17%.

Here were the numbers for Shake Shack’s third quarter, compared to Bloomberg-compiled estimates:

  • Revenue: $157.8 million vs. $157.92 million expected

  • Adjusted earnings per share: 26 cents vs. 21 cents expected

  • Same-store sales: +2% vs. +2.9% expected

The burger chain boosted its full-year revenue guidance and now expects between $592 million to $597 million, up from the previously expected $585 million to $590 million. However, Shack Shack slashed its same-store sales growth expectations for the full year. It now anticipates 1.5% growth, down from the previously expected 2% growth.

“This has been the biggest development year in Shack history as we’ve grown our presence around the country and internationally in the new markets of Mainland China, Singapore, the Philippines and Mexico,” CEO Randy Garutti said in a statement.

“In 2020, we will continue to expand even further within key domestic and international markets. Overall, we continue to execute this year’s plan while gearing up for the key strategic initiatives of 2020,” Garutti said. “We’ll be focused more than ever on putting our people first, simplifying and supporting our operations, and enhancing our winning guest experience."

WASHINGTON, DC - JANUARY 28 :  Shown is the ShackBurger and fries at the Shake Shack on January 28, 2015 in Washington, D.C. The burger chain is expecting its IPO later this week. (Photo by Ricky Carioti/The Washington Post via Getty Images)
ShackBurger and fries. (Photo by Ricky Carioti/The Washington Post via Getty Images)

Third quarter restaurant level operating margin was 23.1% and missed analysts’ expectations for 25.8% year over year. Shake Shack said that higher food costs related to the Chick’n Bites contributed to the decreased profit margin.

Shake Shack’s third quarter results come on the heels of a strong second quarter. The company beat on both the top and bottom lines, and same-store sales were also better than Wall Street estimates. The company also boosted its full-year revenue guidance.

Last quarter, Shake Shack jumped on the delivery bandwagon by partnering up third-party delivery service provider Grubhub (GRUB). The burger chain announced the new partnership early August and updated investors on the company’s earnings call that nearly all Shake Shack locations now offer delivery through Grubhub exclusively. In the fourth quarter, Shake Shack will be phasing out its delivery integration with DoorDash, Caviar and Postmates.

Management said that the exclusive Grubhub partnership will likely pressure sales for some time. “We believe the transition to Grubhub caused some noise in our Q3 numbers and will certainly have an impact through the fourth quarter and into next year. As we remove direct point-of-sale integrations with DoorDash, Postmates and Caviar, we expect an impact to our delivery revenue, especially in those regions where Grub may not be the current market leader,” Garutti said on the conference call. “Any difference in pricing, placement or regional strength in non-Grub marketplaces will affect our sales for a period of time. How much volatility this will cause during this transitional period is uncertain, but the reality is this represents short- to mid-term revenue risk.”

Some analysts on the call were not convinced following management’s defense of its exclusive delivery strategy with Grubhub. “Although no integrated platforms have yet been removed from Shack's systems, the company saw a meaningful reduction in the level of promotional support and offers from existing 3P carriers after the company's announcement of its upcoming move to an exclusive partnership with GrubHub,” Stifel analyst Chris O’Cull wrote in a note following the call. “Management defended the thesis that an exclusive relationship would result in the best customer experience and the most efficient operational performance over the long term, but we are hesitant to fully endorse this view, especially given GrubHub's lack of market leadership in key markets for Shake Shack.”

O’Cull advised investors to closely monitor Shake Shack’s fourth-quarter digital sales to see if there is a meaningful slowdown in the near term. He maintained his Hold rating on Shake Shack stock and lowered his price target to $60 from $80.

Ahead of the earnings announcement, shares of Shake Shack surged a whopping 82% this year, while the broader market rose 24% in the same time period.

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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