Shake Shack (SHAK) Stock Down Despite Q2 Earnings Beat

Shake Shack Inc. (NYSE:SHAK) posted robust second-quarter 2016 results, wherein both earnings and revenues beat the Zacks Consensus Estimate.

However, the company’s shares declined over 9% in afterhours trading on Aug 10 owing to lower-than-expected comps growth.

Earnings and Revenue Discussion

Shake Shack’s adjusted earnings of 14 cents per share beat the Zacks Consensus Estimate of 13 cents by 7.7%. Earnings also grew 75% from the year-ago figure of 8 cents. The upside reflects an increase in revenues and margins.

Revenues surged 37.2% year over year to $66.5 million and beat the Zacks Consensus Estimate of $63 million by 5.6%. An increase in Shack sales and licensing revenues, led to the improvement.

Behind the Headline Numbers

Same-Shack sales (or comps) grew 4.5% year over year, driven by a 1.2% increase in traffic and a 3.3% rise in price and mix. Traffic improved as the company continued to gain from positive mix shifts from the Chicken Shack, as well as strong results from its new limited time offer (LTO), the Bacon Cheddar Shack.

However, comps growth was lower than the prior quarter growth of 9.9% and the prior-year quarter growth of 12.9%. Notably, economic and political uncertainty in key international markets has been hurting sales. Particularly, the company continues to face challenges in the Middle East, given the volatility in the oil market.

Moreover, the ongoing slowdown along with weaker consumer spending trends in U.S. has been hurting comps. Also, negative currency translation coupled with uncertainty related to Brexit adds to the concern.

Total operating expenses, as a percentage of revenues, plunged 50 basis points (bps) to 86.6% mainly on a 120 bps decline in general and administrative (G&A) expenses. Also, labor costs and food and paper costs fell 30 bps and 130 bps, respectively, while other operating expenses rose 30 bps.

As a percentage of Shack sales, Shack-level operating profit margins increased 50 bps to 30.8% due to lower-than-anticipated food costs and leveraging of labor and related expenses on increased Shack sales.

Adjusted EBITDA surged 39.3% to $15.6 million. Adjusted EBITDA margins increased approximately 40 bps to 23.5%, compared with 23.1% in the year-ago quarter.

2016 Outlook

Shake Shack has updated its full-year 2016 guidance.

The company now expects revenues in the range of $253 million to $256 million, up from $245–$249 million projected earlier.

Meanwhile, the company reiterated its guidance for Same-Shack sales growth at 4%–5%.

Further, as a percentage of Shack sales, labor and related expenses are expected to deleverage by 50 bps. It had previously guided labor and related expenses in the range of 75–100 bps.

The company expects to open 18 new domestic company-operated Shacks in 2016, up from 16 guided earlier.

Zacks Rank & Stocks to Consider

Shake Shack has a Zacks Rank #3 (Hold). Better-ranked restaurant stocks are Jack in the Box Inc. (NASDAQ:JACK) , Del Taco Restaurants, Inc. (NASDAQ:TACO) and Papa John's International Inc. (NASDAQ:PZZA) . All the three stocks carry a Zacks Rank #2 (Buy).

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