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Shake Shack (SHAK) Down Despite Q4 Earnings & Revenue Beat

Zacks Equity Research

Shake Shack Inc. SHAK reported impressive fourth-quarter 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Despite delivering better-than-expected results, shares of the company declined nearly 3% in after-hours trading on Feb 25 as investors were unhappy with the 2019 revenue guidance. Also, a 0.3% decline in guest traffic negatively impacted investor sentiment. However, the stock has gained nearly 40% in a year’s time.

Adjusted earnings of 6 cents per share trumped the Zacks Consensus Estimate of 4 cents but declined 40% year over year.

Revenues jumped 29.3% year over year to $124.3 million and outpaced the consensus mark of $120.6 million. Rise in Shack sales and licensing revenues aided the company’s top-line growth.

Revenues in Detail

Shack sales improved 29.6% year over year to $120.7 million primarily owing to the opening of 34 new domestic company-operated Shacks and rise in same-Shack sales. Shake Shack’s cult following and successful expansion into various cities across the globe provided a boost to Shack sales.

Licensing revenues in the quarter under review totaled $3.5 million, up 17.9% year over year. The upside can be attributed to the opening of 15 new licensed Shacks stores and robust performance of Shacks in Hong Kong and Japan. Meanwhile, Shake Shack continues to cash in on the diversification of its licensing business and the opportunity to reach places that it could not domestically.

Same-Shack sales (or comps) rose 2.3% year over year. The figure compared favorably with the year-ago quarter’s 0.8% increase. In the reported period, comparable SHAK base, which includes restaurants open for 24 full months or longer, was 61 compared with 43 in the year-ago quarter.

Shake Shack, Inc. Price, Consensus and EPS Surprise

Shake Shack, Inc. Price, Consensus and EPS Surprise | Shake Shack, Inc. Quote

Operating Performance

Shack-level operating profit (non-GAAP operating income) of $27.2 million improved 15.6% year over year. The metric margins, as a percentage of Shack sales, contracted 270 basis points (bps) to 22.5% primarily due to increased labor and related expenses, and certain fixed expenses and cost.

Adjusted EBITDA decreased 3.2% to $14.5 million. However, as a percentage of total revenues, adjusted EBITDA margins contracted roughly 390 bps to 11.6% on a year-over-year basis.

General and administrative expenses summed $15.2 million, up from $11.7 million a year ago. As a percentage of total revenues, general and administrative expenses were 12.2%, up 10 bps from the prior-year quarter. Growth initiatives and investment across the business, which includes costs related to Project Concrete, led to the upside.

2019 View

Shake Shack anticipates total revenues between $570 million and $576 million, below the consensus estimate of $578.4 million. It projects Same-Shack sales to be flat to up 1% and licensing revenues in the band of $15-$16 million.

Shack-level operating profit margin is projected between 23% and 24%, while general and administrative expenses are anticipated between $66.4 million and $68.2 million, excluding roughly $3-$3.5 million of costs associated with Project Concrete.

For 2019, the company expects to launch of 36-35 domestic company-operated and 16-18 net-licensed Shacks.

Zacks Rank & Key Picks

Shake Shack carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Brinker International, Inc. EAT, El Pollo Loco Holdings, Inc. LOCO and Darden Restaurants, Inc. DRI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brinker International has an impressive long-term earnings growth rate of 14.5%.

El Pollo Loco Holdings delivered positive earnings surprise in three of the trailing four quarters, the average beat being of 5.5%.

Darden Restaurants reported better-than-expected earnings in three of the trailing four quarters, the average beat being 4%.

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