Shake Shack (SHAK, Financial), who’s IPO in January, saw share prices rising from $21 a share to almost $46 on its first day of trading, disappointed investors with mixed Q4 results for fiscal 2014 in its first earnings report. While sales surged 51.5% to $34.8 million in the fourth quarter, beating the consensus estimate figure of $33.0 million, the company’s overall earnings slumped to a loss of 5 cents per share compared to the consensus estimate of a 2 cents per share loss. However, Shake Shack’s quarterly loss of $1.4 million includes a $1.1 million after-tax expense related to the company’s recent IPO. Following the results, the Shake Shack stock plunged 7% during the day’s trading to $43.80 but swung back to close at $46.90.
IPO Expenses, Higher Beef Costs Drag Earnings
Shake Shack’s $34.8 million revenue for the fourth quarter was aided by a 7.2% growth in same-restaurant sales compared to a 5.9% growth in 2013, as well as the opening of new restaurants. Licensing revenue grew 49.7% to $1.72 million, due mainly to the opening of new international licensed restaurants. The company also logged $7.4 million in non-GAAP operating profit, up 49.2% from the prior-year quarter, and a 58.5% growth in adjusted non-GAAP pre-tax earnings to $4.8 million. However, operating margins at the restaurant level declined to 22.3% from the year-ago quarter’s 22.7%, mainly due to higher costs of beef. After costs and expenses, Shake Shack reported a net loss of $0.01 a share, a shade better than the estimated net loss of $0.03 per share.
For the full fiscal 2014, Shake Shack reported a 43.7% growth in revenues to $118.5 million, compared to $82.45 million in the previous year. While overall sales climbed 42.6% to $112.0 million, same-restaurant sales grew 4.1%. The company’s non-GAAP operating profit at the restaurant level grew 31.5% to $26.9 million and adjusted non-GAAP pre-tax earnings grew 30.6% to $18.9 million. Shake Shack’s net income for the fiscal 2014 stood at $2.1 million or $0.07 per diluted share, including an after-tax expense of $0.09 per diluted share related to the company’s IPO.
The company competes with other niche burger-chain businesses such as Habit Restaurants Inc. (HABT, Financial), which saw a 10.7% growth in fiscal 2014, and traditional quick-service restaurants such as Burger King.
The Year Ahead
During the three fiscal years ended December 25, 2013, Shake Shack grew from 7 restaurants in two states to 40 restaurants across six states and eight countries, representing a compound annual growth rate of around 79%. Further, the company’s overall revenue grew to $82.5 million from the initial $19.5 million, representing a 62% compound annual growth rate.
Looking ahead, Shake Shack plans to open 10 new restaurants in the US every year for the near-term and sees potential for up to 450 company-operated restaurants in the long-term. The company also plans to open at least 5 international licensed restaurants towards the end of fiscal 2015, under its current license agreements in the Middle East and U.K. In its guidance for the new fiscal, Shake Shack projected a low single-digit growth in same-restaurant sales. However, the company expects to generate high revenues to the tune of $163 million during the year.
Final Thoughts
Shake Shack’s lacklustre first earnings report after going public has not gone down well with investors. Although the company is not alone in its market space to face the downward trend, with other burger-chains such as Wendy’s (WEN, Financial) and McDonald’s (MCD, Financial) seeing a drop in overall same-restaurant sales in 2014, rivals such as Habit Burger and Burger King (BKW, Financial) have witnessed significant growth. Despite an over 50% jump in revenues and opening of new restaurants, the company will have to keep innovating on its menu while rationalizing costs. Experts expect the Shake Shack stock to log an average annual sales growth rate of 27%-30% over the next five years, although the short-term estimates are less encouraging. Consequently, the Shake Shack stock carries a ‘hold’ guidance.
