Shake Shack (SHAK) Banks on Expansion Efforts Amid High Costs

Shake Shack Inc. SHAK is likely to benefit from its expansion efforts, digital initiatives and strategic investment plans. However, disruptions related to the COVID-19 pandemic and rising costs remain concerns.

Let us discuss the factors that highlight why investors should retain the stock for the time being.

Factors Driving Growth

Expansion Initiatives: Shake Shack focuses on store openings for effectively strategizing its expansion plans. In second-quarter fiscal 2021, the company opened eight net new domestic company-operated Shacks and 10 new licensed Shacks. Despite COVID-19 continuing to impact the company’s recovery and development plans, it intends to open 35 to 38 new company-operated Shacks within fiscal 2021 in urban and suburban markets. The company anticipates increasing its store count to 45-50 shacks within fiscal 2022.

Robust Digital Initiatives: Investing in digital space is one of the major factors for Shake Shack’s business growth. In second-quarter fiscal 2021, orders placed on the Shake Shack app, website and third-party delivery platforms constituted 47% of total Shack sales. The company-owned app and web channels increased 16.7% compared with first-quarter 2021 to 2.8 million new purchasers since mid-March 2020. The company is optimistic about continuing its digital guest enhancement strategies in the near term, thereby making more digital investments.

Strong Same-Shack Sales: Shake Shack continues to impress investors with global Same-Shack sales growth. Same-Shack sales are the sales for the comparable Shack base for any reported period. During the first and second quarter of 2021, Same-Shack sales rose 5.7% and 52.7% year over year, respectively, primarily driven by increased in-Shack dining in urban and suburban shacks and a high level of digital sales retention. The company is benefiting from sales improvement across all regions. The uptrend continues in July, with Same-Shack sales improving 38% compared with the same period last year.

Moreover, the company reached a milestone in its urban recovery, with the reopening of the Union Station, DC, and Grand Central Station, NYC Shacks in late June and early July, respectively. In the Southeast region, Same-Shack sales are performing better than pre-pandemic level. Encouragingly, the company expects Same-Shack sales during 2021 to increase in the range of mid to high 20%. Notably, during second-quarter fiscal 2021, Shake Shack continued to witness recovery across urban and suburban markets.

Improved Average Weekly Sales: Shake Shack’s average weekly sale is increasing over time. In second-quarter fiscal 2021, its average weekly sales improved to $72,000 from $64,000 in the last reported quarter. For July 2021, Shake Shack reported average weekly sales of $74,000. The growth is mainly attributable to business traffic and tourism to cities like New York City, Chicago and Los Angeles. Meanwhile, Shake Shack informed that its suburban average weekly sales are continuously increasing.

Concerns

Shake Shack has been persistently shouldering increased expenses, which have been detrimental to margins. During the fiscal second quarter, the company’s business was impacted by a rise in labor and other operating costs. Labor cost in second-quarter fiscal 2021 was 29% of Shack sales. The increase in the annual wage rate has primarily driven the rise. General and administrative expenses rose to $20.4 million in second-quarter 2021 from $14 million in the year-ago quarter.

Shake Shack, which shares space with Jack in the Box Inc. JACK, Chipotle Mexican Grill, Inc. CMG and McDonald's Corporation MCD in the Zacks Retail - Restaurants industry has been grappling with the coronavirus pandemic. First reported in India, the Delta variant has been rapidly spreading to other parts of the world, increasing the risk of infections. The variant has now been found in 135 countries, including the United States. We believe that the Delta variant might hurt traffic and sales in the upcoming periods.

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