Decelerating Comps Take A Bite Out Of Shake Shack's Q4 Results

Shake Shack Inc’s SHAK same-store sales growth came in below expectations, although the EPS of $0.09 was in line with the consensus due to a lower tax rate.

The lower tax rate also offset the significantly lower than expected unit-level margins.

“With current valuation implying an ultimate opportunity well above our base case scenario and management guidance, we expect continued valuation contraction as near- and medium-term results decrease the likelihood of more optimistic scenarios,” Wedbush’s Nick Setyan said about Shake Shack.

The analyst maintained an Underperform rating on the company, with a price target of $30.

Decelerating Comps

Setyan believes same-store sales growth headwinds could intensify going forward, and stated, “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.”

The analyst also mentioned that although Shake Shack’s current openings were driving upside at present, their strength might lead to a comp drag.

In addition, Setyan believes “cannibalization may intensify as the company adds units to markets it is now.”

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Outlook

The analyst noted that 75 percent of the openings in 2017 were targeted as in-fill for existing markets, as compared to the two-thirds in the recent past.

Therefore, the 2-3 percent comp guidance for 2017 could prove realistic, although risk to the achievement of this guidance did exist.

“While we estimate near-term unit volume upside will likely drive revenue ahead of 2017 guidance of $349-353M even in a soft comp environment, we expect less upside than in 2016,” Setyan went on to say.

However, the analyst believes the unit-level margin guidance, which Shake Shack has reaffirmed, might be difficult to achieve, with lower volume units and lower same-store sales growth pressuring system margins to a greater degree than expected.