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Shake Shack (SHAK) Q4 Earnings to Reflect Top-Line Strength

Zacks Equity Research

Shake Shack Inc. SHAK is scheduled to report fourth-quarter 2017 numbers on Feb 15, after the market closes.

In the quarter, we expect the company to post an encouraging top-line performance driven by significant growth in both licensing revenues and Shack sales. However, Same-Shack sales (or comps) are likely to stay under pressure due to a soft consumer spending environment.

In the last six months, Shake Shack stock has rallied 20.7% significantly outperforming the industry’s 5.1% growth.

Expansion, Diversification and Digital Initiatives Should Boost Topline

The Zacks Consensus Estimate for the company’s revenues in the to-be-reported is pegged at $93 million, reflecting an increase of $27.4 million from the year-ago figure. Both licensing revenues and Shack sales are expected to grow in the quarter.

Shake Shack’s cult following and successful expansion into various cities around the world are likely to boost Shack sales and continue driving traffic. Notably, the Zacks Consensus Estimate for Shack sales is $90 million, reflecting a year-over-year increase of 26.8%.

We also expect the company to continue cashing on the diversification of its licensing business, the resource-light and efficient model, the low-risk royalty stream and the opportunity to reach places that it could not reach domestically. The Zacks Consensus Estimate for licensing revenues in the quarter stands at $3.1 million, reflecting an improvement of 29.2% year over year.

Although various sales and digital initiatives such as menu extension and innovation, limited time offerings, menu price increase along with mobile ordering Shack App for iOS bode are in place, a soft consumer spending environment in the U.S. restaurant space might limit revenue growth to some extent and hurt comps. The Zacks Consensus Estimate calls for the quarter’s comps to witness a decline of 1.1%. Comps grew 1.6% in the year-ago quarter.

Shake Shack, Inc. Revenue (TTM)

Shake Shack, Inc. Revenue (TTM) | Shake Shack, Inc. Quote

Costs and Currency May Hurt Profitability

For the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 5 cents, reflecting a year-over-year decline of 44.4%. Elevated labor and pre-opening costs are likely to dent the quarter’s profitability. Further, macroeconomic and political challenges in some of the key operating markets and unfavorable foreign exchange translations might hamper the quarter’s performance.

What Our Model Predicts

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided, especially if these have a negative Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Shake Shack has a Zacks Rank #3 and an Earnings ESP of -1.76%, a combination that suggests that the company is not likely to beat estimates this time around.

Stocks to Consider

Here are a few stocks that investors may consider, as our model shows that they have the right combination of elements to post some earnings beat this quarter:

Choice Hotels CHH has an Earnings ESP of +1.84% and a Zacks Rank #1. The company is scheduled to report its quarterly numbers on Feb 20. You can see the complete list of today’s Zacks #1 Rank stocks here.

Domino's Pizza DPZ has an Earnings ESP of +1.06% and a Zacks Rank #2. The company is scheduled to report its quarterly numbers on Feb 20.

MGM Resorts International MGM has an Earnings ESP of +42.50% and a Zacks Rank of 2. The company is scheduled to report its quarterly numbers on Feb 20.

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