Will Higher Revenues Drive Shake Shack's (SHAK) Q3 Earnings?

Shake Shack Inc. (NYSE:SHAK) is scheduled to report third-quarter 2017 numbers on Nov 1, after the market closes.

Last quarter, the company delivered a positive earnings surprise of 25.00%. In fact, it outpaced/met earnings estimates in the trailing four quarters, with an average beat of 12.50%.

Markedly, Shake Shack’s shares have also gained 9.2% in the past three months, outperforming the industry’s growth of 3.1%.

Additionally, the Zacks Consensus Estimate for current-quarter earnings is pegged at 15 cents, reflecting an increase of 1% over the prior-year quarter. Also, revenues are expected to improve 27.2% year over year to $94.9 million. An increase in Shack sales and licensing revenues are likely to aid the top line in the quarter.

Factors Likely to Influence Q3 Results

Shake Shack’s cult following and successful expansion into various cities around the world are likely to boost Shack sales and continue driving traffic. This, in turn, may drive Same-Shack sales (or comps). Notably, the Zacks Consensus Estimate for Shack sales is pegged at $92 million, reflecting a year-over-year increase of 27.8%.

Also, we expect Shake Shack to continue cashing on the diversification of its licensing business, the resource-light and efficient model, the low-risk royalty stream and the opportunity to reach places that it could not reach domestically. In fact, the Zacks Consensus Estimate for licensing revenues in the quarter is currently pegged at $3.4 million, reflecting an improvement of 24.8% year over year.

Meanwhile, various sales and digital initiatives undertaken by the company such as menu extension and innovation, limited time offerings, menu price increase along with nationwide launch of its mobile ordering Shack App for iOS bode well for comps growth.

However, a soft consumer spending environment in the U.S. restaurant space might limit revenue growth and hurt comps. The recent hurricanes may further impact Shake Shack’s results in the third quarter. Notably, the Zacks Consensus Estimate calls for the quarter’s comps to witness a decline of 2.5%. Comps grew 2.9% in the year-ago quarter.

In addition, elevated labor and pre-opening costs are likely to dent the quarter’s profitability and margins. Further, macro economic and political challenges in some of the key operating markets and unfavorable foreign exchange translations might hamper the quarter’s performance.

Taking into account the headwinds, our quantitative model predicts that Shake Shack does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: Shake Shack has an Earnings ESP of -4.25%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Shake Shack carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of an earnings beat.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Here are a couple of stocks, which, as per our model, have the right combination of elements to post an earnings beat this quarter.

El Pollo Loco Holdings, Inc. (NASDAQ:LOCO) has an Earnings ESP of +1.65% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Noodles & Company (NASDAQ:NDLS) has an Earnings ESP of +66.67% and a Zacks Rank #3.

DineEquity, Inc. (NYSE:DIN) has an Earnings ESP of +5.14% and a Zacks Rank #3.

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