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Is Shake Shack's Selloff a Buying Opportunity?

Shares trade about 50% above the GF Value

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Panos Mourdoukoutas
May 07, 2021
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Shake Shack Inc. (

SHAK, Financial) reported good financial results for the first quarter, but they still failed to meet the inflated expectations of bullish investors who have been chasing after the stock throughout the pandemic.

The New York-based fast-casual restaurant chain reported earnings of 4 cents per share, beating analysts' estimates of a loss of 8 cents per share. Revenue came at $155.3 million, slightly below the $161.6 million analysts were anticipating.

Management was quick to cheer the results.

"Spring has ushered in a great energy around the country and in our hometown of New York City," CEO Randy Garutti said. "With COVID cases stabilizing and more regions steadily loosening restrictions, we are optimistic that improving trends can continue for our industry."

He further noted that the company plans to open between 35 and 40 new stores this year and 45 to 50 stores next year in both urban and suburban markets.

Wall Street wasn't pleased with the company's results, sending shares sharply lower on Friday.

Quo Vadis Capital President John Zolidis wasn't impressed either. In a note, he reminded investors that things weren't great for Shake Shack before the pandemic. "2019 transactions at existing Shacks fell, RLM contracted >300 bps, EBITDA margins fell 240 bps," he wrote. "EPS declined 12%. However, 2019 was hardly the first tough year."

How bad things have been?

"We estimate that profit per average restaurant has fallen year-over-year every quarter of the company's history, excepting a brief moment right after the IPO. Including 1Q21, this metric (profit per average Shack) has experienced five and a half years of continuous declines," Zolidis said.

Things do not look that great for Shake Shack when compared to its peers. For example, the company lags behind McDonald's (

MCD, Financial) and Chipotle's (CMG, Financial) revenue growth, Ebitda growth and economic profit.

Company

Three-year

Revenue

Growth

Three-year

Ebitda

Growth

ROIC

WACC

Economic Profit (value-added)

Chipotle

10.4%

18.7%

9.27%

8.77%

0.30%

Shake Shack

0.5%

-72.4%

-3.49%

10.94%

-14.43%

McDonald's

-2.9%

-3%

12.82%

4.54%

8.28%

Meanwhile, shares trade about 50% above the GF intrinsic value, hardly making it a buying opportunity even after Friday's selloff.

Disclosure: No positions.

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