Wedbush Says Shake Shack's Valuation Is Still Unjustified

Wedbush’s Nick Setyan expects continued valuation contraction for Shake Shack Inc SHAK, driven by near and medium term results decreasing the potential for more optimistic scenarios.

Setyan reiterated an Underperform rating on the company, with a price target of $30.

Shake Shak reported its Q2 results with the EPS in line with the estimate and a penny above the consensus. “Food cost deflation and labor leverage ahead of expectations drove the EPS upside,” the analyst mentioned.

However, same-store sales growth missed expectations, coming in at 4.5 percent. Transaction growth was also below the estimate at 1.3 percent.

Related Link: Shake Shack Beats Estimates, But Shares Fall

Guidance

The company reiterated the high end of the same store sales growth guidance for 2016, while raising the revenue guidance from $245-$249 million to $253-$256 million, based on higher unit growth guidance.

“Given decelerating comp trends on even tougher comparisons ahead, we believe the high end of comp guidance may be at risk,” Setyan stated.

Headwinds

In fact, the analyst expects the same-store sales growth headwinds to increase going forward, given the “very strong” new unit openings.

In addition, Setyan expects cannibalization to intensify, as Shake Shak adds units to markets that it is now entering.

“While we estimate near-term unit volume upside could contribute $0.02-0.09 in EPS in 2H:16, we expect less upside beyond 2016 as the mix of marquee market entry openings declines and the mix of openings in existing markets increases,” the analyst added.

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