Shake Shack Inc. SHAK is poised to benefit from robust Same-Shack sales, digital Initiatives and unit expansion efforts. Also, the emphasis on marketing initiatives bodes well. However, supply-chain challenges and inflationary pressures are a concern.
Let’s discuss why investors should retain the stock for the time being.
Factors Driving Growth
Shake Shack continues to impress investors with robust global Same-Shack sales growth. During the third quarter of fiscal 2022, Same-Shack sales rose 6.3% year over year. The upside was primarily driven by traffic growth (of 2.9%) and price mix. Urban same-shack sales rose 11% on a year-over-year basis. The company reported positive momentum in October, with Same-Shack sales increasing 8.3% compared with the prior-year period’s levels. The upside was driven by menu price and mid-single-digit traffic year-over-year growth in urban markets.
The company’s average weekly sale is continuously increasing over time. In third-quarter fiscal 2022, its average weekly sales came in at $73,000, compared with $72,000 reported in the prior-year quarter. The upside was backed by increased traffic and higher prices. During the quarter, the company reported positive traffic inflections in New York City, Washington D.C. and Chicago.
Shake Shack has been investing in digital transformation, which is crucial to the company’s growth. Digital sales continue to impress investors. During third-quarter fiscal 2022, digital sales increased 1.9% year over year to $78.9 million. Total digital sales, including orders placed on the Shake Shack app, website and third-party delivery platforms, accounted for nearly 36% of Shack sales. During the quarter, the company stated to have retained 73% of digital sales, despite the solid recovery of the in-shack business. The company intends to expand its digital base and improve frequency to drive growth. Also, it emphasizes on acquiring new app users by means of marketing initiatives (including offerings of limited-time hotlines menu) and promotions (focusing on digital-only dayparts).
Shake Shak focuses on store openings to effectively strategize its expansion plans. During the third quarter fiscal 2022, the company opened two new domestic Company-operated Shacks (in New York and Atlanta), three new domestic licensed Shack (Chantilly, Cranbury and Nashville) and three new international licensed Shacks (Chengdu, Shanghai and Seoul). The company, which operates more than 150 licensed restaurants, is targeting to open seven to 10 new licensed Shacks in the fourth quarter of fiscal 2022 and 27 to 30 licensed openings in fiscal 2022. For 2023, the company anticipates opening approximately 40 domestic company-operated Shacks, calling for a 16% unit growth year over year.
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Shares of Shake Shack have declined 38.9% in the past year compared with the industry’s 6.1% fall. The downside was mainly driven by inflationary pressures, uneven consumer mobility, supply chain-related disruptions and development delays. Also, it faced headwinds from COVID lockdowns and intermittent market disruptions in Mainland China Shacks. The company anticipates monitoring the situation to gauge the impacts of COVID-19.
Shake Shack is continuously shouldering increased expenses, which are detrimental to margins. It has been facing significant supply-chain challenges and inflation across most commodities and categories. This resulted in cost pressure in the third quarter of fiscal 2022, including costs related to strategic staffing initiatives. During the third quarter of fiscal 2022, food and paper costs increased 17.0% year over year to $67.8 million, while labor and related expenses increased 11.0% to $64.6 million. The company anticipates inflationary pressures to continue in the near term. For the remaining of fiscal 2022, the company anticipates food and paper costs to be in the high single-digit courtesy of high inflation in dairy, accelerating cost pressures in fryer oil fries and ketchup and low double-digit inflation in paper and packaging.
Zacks Rank & Key Picks
Shake Shack currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks Retail – Restaurants industry are Wingstop Inc. WING, Chuy's Holdings, Inc. CHUY and Chipotle Mexican Grill, Inc. CMG.
Wingstop sports a Zacks Rank #1. WING has a long-term earnings growth rate of 11%. Shares of WING have declined 6.6% in the past year.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the comparable year-ago period’s levels.
Chuy’s Holdings currently carries a Zacks Rank #2 (Buy). CHUY has a trailing four-quarter earnings surprise of 18.6%, on average. Shares of CHUY have increased 1.5% in the past year.
The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and EPS suggests growth of 8.6% and 11.7%, respectively, from the corresponding year-ago period’s levels.
Chipotle currently carries a Zacks Rank #2. CMG has a trailing four-quarter earnings surprise of 4.1%, on average. The stock has declined 12.5% in the past year.
The Zacks Consensus Estimate for Chipotle’s 2022 sales and EPS suggests growth of 15.1% and 31%, respectively, from the corresponding year-ago period’s levels.
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