Wedbush On Shake Shack: 'Continue To Expect Intensifying Headwinds In 2017'

While Shake Shack Inc SHAK reported its Q3 results marginally ahead of expectations, the company is expected to face intensifying SSS (same-store sales) headwinds in 2017, Wedbush’s Nick Setyan said in a report. He maintains an Underperform rating on Shake Shack, with a price target of $30.

The company reported its Q3 EPS at $0.15, beating consensus expectations by a penny. SSS growth came in at 2.9 percent, ahead of the consensus estimate of 1.9 percent.

SSS Growth Headwinds

“Given very strong new unit openings, we do not expect SHAK to benefit from a multi-year maturation cycle that serves as a tailwind for other growth restaurants. We also believe that while driving upside today, the strength of SHAK's current openings may result in a comp drag even entering the comp base in their 25th month vs. the 19th month for most peers,” Setyan wrote.

Moreover, as the company adds units to the markets it is now entering, cannibalization may intensify.

While unit volume upside could boost EPS in the near term, the upside beyond 2016 would likely be lower, with the mix of marquee market entry openings declining and the mix of openings in existing markets increasing, Setyan stated.

Shake Shack’s current valuation reflects an opportunity sufficiently higher than management’s guidance, and valuation could continue to contract, “as near- and medium-term results decrease the likelihood of more optimistic scenarios,” the analyst commented.

In Thursday's pre-market session, Shake Shack was up 9.86 percent at $36.59.