Should You Buy Shake Shack Stock Before Aug. 5?
Key Points
Revenue growth remains strong despite margin pressures.
Restaurant expansion continues at an impressive pace.
Higher costs are weighing on profitability.
Shake Shack (NYSE: SHAK) reports second-quarter earnings on Wednesday, Aug. 5, but if you're long on Shake Shack, you should focus less on whether the company beats estimates and more on whether its growth story remains intact. So far, it does.
In Q1, revenue climbed 14.3% year over year to $366.7 million, while same-store sales increased 4.6%. The company also opened 17 company-operated restaurants and five licensed locations, continuing one of the fastest expansion plans in the fast-casual industry. I've personally seen quite a few at the travel plazas along the New York Thruway. They're becoming about as common as Chick-fil-A and Starbucks.
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Expansion hasn't been an issue. But the challenge of profitability is very real. That shouldn't be taken lightly.
Image source: Getty Images.
Monitor margin pressure as expansions continue
Higher beef costs, pre-opening expenses, and investments in technology and marketing helped push Shake Shack to a small net loss of $0.3 million in Q1, compared with net income of $4.5 million a year earlier. Those same pressures prompted management to lower its Q2 and full-year profit guidance. The company now expects Q2 revenue of $415 million to $420 million from a previous range of $424 million to $428 million. It also reduced its full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance to $225 million to $235 million, down from $230 million to $245 million.
Shake Shack still has a relatively small footprint compared to larger fast-food chains, though, leaving plenty of room for continued expansion. Management believes Shake Shack can ultimately grow to 1,500 company-operated restaurants in the United States, or more than 4 times its current footprint.
That means Aug. 5 isn't really about one quarter's earnings. It's about whether management can show that restaurant traffic is holding up, margins are recovering, and new locations continue generating attractive returns.
If those pieces remain in place, short-term earnings volatility probably won't matter much five years from now. But if traffic weakens further or margin pressure intensifies, you may have to wait longer for the growth story to play out.
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Jeff Siegel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Starbucks. The Motley Fool has a disclosure policy.
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