What The Street Thinks About Shake Shack's Q4 Print, Stock Drop

Shake Shack Inc SHAK reported fourth-quarter results that fell short of expectations. Management acknowledged it suffered from a "significant slowdown" in its growth business, which contributed to the stock's sell-off.

Shake Shack reported quarterly earnings of 6 cents per share, unchanged from the same period last year. The company reported quarterly sales of $151.4 million, which missed the analyst consensus estimate of $153.2 million.

Here is a summary of how some of the Street's top analysts reacted to the print and management's outlook.

Q4 Review

Longbow Research analyst Alton Stump noted that comparable sales were down 3.6% in the quarter, which was worse than the 3% the research firm expected while EBITDA of $11.7 million also missed estimates of $14.2 million.

Management's 2020 guidance consists of revenue of $712-$720 million, low single-digit decline in comparable sales and new U.S. store openings of 40 to 42 units.

The burger chain's report includes a mix of positive and negative takeaways, MKM Partners analyst Brett Levy said. After a year of "moderate" menu innovation, 2020 will feature new items and management expects to see commodity improvements in 2020, which would help ease cost of goods sold (COGS).

On the other hand, negative takeaways include traffic was down around 5.4% in the quarter and the international business is suffering from closures in Russia, weakness in Asia, and potential timing issues with new store opens.

Related Link: PreMarket Prep Stock Of The Day: Shake Shack

Delivery Impact

Investors knew heading into the print that Shake Shack's decision to establish an exclusive delivery relationship with GrubHub Inc GRUB would have some sort of impact. It's still unclear what impact the delivery decision posed on fourth quarter same-store sales, Stifel analyst Chris O'Cull said.

During the quarter, 25% of restaurants were exclusive to Grubhub and it's unclear how effective the restaurant was in pushing customers to GrubHub at these locations. Meanwhile, other delivery platforms started to "push back" through less prominent placement for the brand on their delivery apps.

"Management continues to defend the decision that an exclusive relationship will result in a superior customer experience and the most efficient operational performance over the long term, but we are reluctant to fully endorse this view," the analyst wrote in a note.

Morgan Stanley: Worse Start To 2020

Shake Shack exited 2019 with weaker traffic and a same-store sales miss and management's outlook for 2020 implies the start of the year was "similar or modestly worse," Morgan Stanley analyst John Glass wrote in a note. The start of the year was likely negatively impacted by the coronavirus as Asia represents around one-third of all licensing revenue.

Management is wisely investing for the long-term but at the expense of appeasing investors looking for strong earnings growth in 2020. Instead, the company wants to ensure it builds out a much bigger international presence with customer engagement.

Back Half Of 2020

Management's full-year comp guidance assumes an inflection in the back half of the year as Shake Shack transitions to a fully exclusive relationship with GrubHub, Wedbush analyst Nick Setyan wrote in a note. Management's guidance of 1.5% to 2.0% menu pricing increase is also based on the success of a menu innovation pipeline after the GrubHub transition.

Piper Sandler analyst Nicole Miller Regan said Shake Shack's store growth should double in size, which will help EBITDA also double throughout the next five years. But over the near-term, the company faces a lower EBITDA outlook for 2020 along with negative comps. As such, "committed investors" may want to continue accumulating shares of Shake Shack.

SHAK Price Action

• Longbow maintains at Neutral, no price target.
• MKM maintains at Neutral, price target lifted from $65 to $70.
• Stifel maintains at Hold, unchanged $60 price target.
• Morgan Stanley maintains at Equal-weight, price target lowered from $63 to $62.
• Wedbush maintains at Neutral, $75 price target.
• Piper Sandler maintains at Overweight, price target lowered from $97 to $89.

Shares of Shake Shack were trading lower by more than 14% Tuesday afternoon at $63.