In reaction to worse than expected guidance last night,
shares of Shake Shack (SHAK 48.85, -5.95, -10.9%) fall to worse than six-month
lows as the company’s outlook, coupled with unimpressive third quarter
comparable store sales, overshadowed its top and bottom line beats.
Were it not for the worse than expected Same-Shack sales decline of 0.7%, the third quarter wouldn’t have been all that bad. Management highlighted that the Same-Shack sales decline consisted of a 4% decrease in traffic partially offset by a 3.3% increase in price and mix. The comparable Shack base includes those restaurants open for at least 24 full fiscal months. For the third quarter of 2018, the comparable Shack base included 54 Shacks versus 39 Shacks for the third quarter of 2017. Also, weekly sales for domestic company-operated Shacks decreased to $86,000 for the third quarter compared to $91,000 for the same quarter last year, primarily due to the addition of newer Shacks at a broader range of average unit volumes.
All told, third quarter earnings per share of $0.21 and revenue growth of 26.5% year/year to $119.65 mln was enough to beat market expectations. Shack sales for the third quarter were $115.9 mln, an increase of $24.8 mln, or 27.2%, due primarily to the opening of 28 new domestic company-operated Shacks. Licensing revenue for the third quarter was $3.8 mln, an increase of 7.3%, due primarily to the opening of 17 new licensed Shacks.
Food and paper costs as a percentage of Shack sales in Q3 decreased slightly to 28.2% compared 28.3% in the prior year. Looking forward to Q4, SHAK’s expectation is that food and paper costs will slightly deleverage potentially from Q3 to Q4 or be relatively flat compared to the prior year on a full-year basis.
Labor and related expenses as a percentage of Shack sales increased roughly 90 basis points year/year to 27%, driven primarily by minimum wage increases and the introduction of new lower volume Shacks to the system.
As mentioned, outlook was a point of weakness, as SHAK modestly raised its total FY18 revenue guidance to $450-452 mln from $446-450 mln prior. The company also continues to expect Same-Shack sales to be 0-1% for the full-year, which is consistent with prior guidance -- albeit slightly toward the lower end of the range. The company now expects the core G&A expense to be between $48-58 mln, excluding Project Concrete and other one-time charges, versus previous guidance of $49-51 mln. Management sees FY18 average annual sales volume for total domestic company-operated Shacks between $4.2-4.3 mln compared to prior expectations of $4.1-4.2 mln.
SHAK also now sees between 33-34 new domestic company-operated Shacks opening in fiscal 2018 (vs. 32 to 35) and between 14-16 net new licensed Shacks opening in fiscal 2018 (vs. 16 to 18, net). Looking further down the road, SHAK gave preliminary expectations for the opening of 36-40 new domestic company-operated Shacks in fiscal 2019 and between 16-18 net new licensed Shacks in fiscal 2019.
The company expects modest headwinds within food and paper costs in 2019 driven primarily by expected increases in distribution costs. Management also expects continued deleveraging on the labor line driven by ongoing pressure from a historically low unemployment market and regulatory minimum wage increases as well as the impact of lower average unit volume Shacks.
An up and down end to October had shares of SHAK jostling with its 200-day simple moving average (53.75) for the better part of the last week. Shares took back the technical indicator yesterday with a 3.6% gain into the print but gave that level back this morning with the stock now just 12.5% higher YTD vs gains of 62% YTD in mid-July.
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