Categories Analysis, Earnings, Retail

Shake Shack Q4 Earnings Preview: Watch out for comp-store sales and store expansion

Shake Shack (NYSE: SHAK) is scheduled to report its fourth quarter 2018 results on Monday after the bell. The fine-casual burger chain has seen its stock price surging 39% in the last 12 months and it is already up 15% this year. Investors would expect Shack’s Q4 earnings to benefit from strong consumer spending and a robust holiday season.

For the fourth quarter, analysts expect revenue to increase 23.6% touching $118.82 million over last year, and earnings to come in at $0.03 per share. Last quarter, the stock plunged 7% despite the headlines numbers surpassing estimates primarily due to weaker comp-store sales reported by the firm.

Comp-Store Sales Growth

One of the key metrics watched by the street when it comes to gauging restaurant performance is the same-store sales trend. The industry has been hurt by the weaker traffic growth with the likes of McDonald’s (MCD) and Starbucks (SBUX) reporting lower comps. Shake Shack also followed the trend with its same-store sales decreasing 4% due to reduced footfalls. It’s a far cry from 4% comp growth reported by the burger chain in 2016. It would be interesting to see whether the firm is able to buck the trend in Q4.

Related: Bj’s Restaurants stock falls after mixed Q4 results

Expanding Footprint

Shake Shack has been opening Shacks at a brisk pace over the last six years. In the US, the burger chain has been expanding its footprint with new Shacks opening at a CAGR of 43% since 2012. Last year, it opened 34 Shacks in the US, which has been a record. On a preliminary basis, the company plans to add 36 to 40 domestic stores and 16 to 18 licensed ones for the current fiscal year.

When it comes to licensed Shacks, it has been growing at a CAGR of 44% in the last six years and expected to touch 100-102 range in 2019. In the first quarter, Shacks is opening its maiden chain in Mainland China, marking its entry into the world’s populous country. It has also unveiled its plans to enter new markets like Singapore, Mexico, and the Philippines.

Shacks have boosted its top and bottom line numbers due to aggressive expansion. Margins have been hurt by more number of restaurants opened coupled with a drop in traffic. Last quarter, the company margins reduced to 25.8% compared to 27.2% reported last year. We have to wait and watch whether the company is able to report better margins in the fourth quarter.

You may also like: The Habit Restaurants Q3 2018 Earnings Transcript

Consumer Spending

With the fast-casual industry expanding rapidly, competition is going to increase amongst the burger joints. Industry watchers alert that the expansion spree exceeds what consumers can spend, putting pressure on margins. Reduced footfalls are putting pressure on margins offset by increased pricing. The industry is cyclical in nature hinging on the spending capacity of consumers. Any decrease in expenses by guests would directly impact Shacks and its peers’ financials.

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