Shake Shack (SHAK) bets on store expansion, innovation to tide over crisis

Quick-service restaurant Shake Shack, Inc. (NYSE: SHAK) has been expanding its store network globally, and added several new outlets in the final months of 2019. The first quarter proved unpleasant for the company, like most of its peers, due to the covid-19 pandemic.

Last month, the company disappointed shareholders with lower-than-expected revenues for the December-quarter and poor guidance, mainly reflecting weakness in comparable sales. However, there is optimism that the growing footprint, combined with innovations in menu offerings and cost-cutting initiatives, would help it get back on track.

Margins Woes

The store network has enough room for continued expansion, which gives the company an edge over its more saturated rivals. If the past performance is any indication, however, it is unlikely to complement the steady top-line growth with a proportionate uptick in margins. Despite conditions being favorable for the food industry, Shake Shack’s margins remained weak last year.

Like many Wall Street firms, the near-term prospects look bleak for Shake Shack as it might face difficulty in executing the expansion plan in the next few months. It is certain that the general slump triggered by coronavirus will reflect on its performance, putting pressure on cash flow.

High Valuation

The stock, which was valued pretty high before the recent plunge, is not very cheap even now. With not many factors playing in favor of the company, investors would want to wait and watch. Market watchers, on average, recommend holding the stock, with a price target that points to handsome long-term gains. It needs to be noted that even at the current lows the stock is trading several times above the projected full-year earnings per share.

Weak Q4

For the final three months of last year, the fast-food chain reported earnings of 0.06 per share, which was unchanged from the year-ago period. Revenues grew in double digits to about $151 million, despite a decline in same-store sales. While earnings topped the Street view, revenues missed.

Last week, the stock plummeted to the lowest level in two-and-half years, but regained momentum later. The stock, which on Tuesday traded sharply below last year’s peak, is down 30% since the beginning of the year.