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Shake Shack: Ups and Downs Continue

The fast-casual chain reported earnings and updated its revenue guidance

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Mrinalini Chaudhuri
Mar 31, 2017
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Shake Shack Inc. (

SHAK, Financial), an American fast-casual restaurant chain, recently reported fourth quarter and full-year 2016 results. The company witnessed impressive 43.5% revenue growth during the quarter. It also increased its revenue guidance for fiscal 2017. Full-year revenue grew 40.9% and same-store sales increased 4.2%.The company missed estimates on same-store sales however. Higher menu prices and favorable shifts in sales mix contributed to a 1.1% increase in average weekly sales.

Fourth-quarter performance

Total revenue during the quarter increased 43.5% to $73.3 million, which was $51.1 million in the prior-year quarter.

Sales during the quarter were $70.9 million, an increase of 43.8% from $49.3 million in the comparable quarter in 2015.

Licensing revenue during the fourth quarter was $2.4 million, an increase of 34.6% from $1.7 million in the same quarter the year before.

Same-store sales increased 1.6% during the fourth quarter of 2016.

Average weekly sales for domestic company-operated stores was $90,000 for the fourth quarter, a 1.1% increase from $89,000 in the prior-year quarter.

Store-level operating profit increased 29.9% to $18 million in the fourth quarter, which was $13.9 million in the prior-year quarter.

General and administrative expenses increased to $8.3 million in the fourth quarter from $7.7 million the comparable quarter of 2015. As a percentage of total revenue, general and administrative expenses decreased to 11.3% during the quarter from 15%.

Net income for the quarter was $3.9 million, or 15 cents per diluted share, compared to $1.2 million, or seven cents per diluted share, for the same period last year.

Adjusted EBITDA increased 31.6% to $11.4 million.

Adjusted pro forma net income during the quarter was $3.3 million, or nine cents per fully exchanged and diluted share, which was $2.9 million, or eight cents per diluted share, in the prior-year quarter.

During the quarter, the company opened six domestic company-operated restaurants.

Full-year performance

Total revenue increased 40.9% to $268.5 million, which was $190.6 million in 2015.

Sales for fiscal 2016 were $259.4 million, an increase of 41.6% from the prior year.

Store-level operating profit increased 38.6% to $73.3 million for fiscal 2016, which was $52.9 million the year before.

General and administrative expenses for the year decreased to $30.6 million from $37.8 million in 2015. As a percentage of total revenue, general and administrative expenses decreased to 11.4% from 19.8%.

Net income for the year was $12.4 million, or 53 cents per diluted share, an improvement from a net loss of $8.8 million, or 65 cents per diluted share, in 2015.

Adjusted EBITDA increased 35.7% to $50.2 million, which was $37 million the year before.

Adjusted pro forma net income in 2016 was $16.8 million, or 46 cents per fully exchanged and diluted share, which was $12 million, or 32 cents per share, in 2015.

Expectations for 2017

 

Range

Store-level operating profit margin

To be between 26.5% and 27.5%

Total revenue

To be between $349 million and $353 million

Interest expense

To be between $1.6 million and $2.0 million.

Effective tax rate

To be between 40.0% and 41.0%

Depreciation expense

To be around $22 million

Focus

  • Expanding global footprint
  • Innovation of menu
  • Multiformat growth strategy
  • Growth in premier locations

Conclusion

The restaurant industry is highly competitive and fragmented. The company has already carved a niche in the market by offering hot dogs, crinkle cut fries, burgers, frozen custard and other American classics at affordable prices. In January, it launched its first mobile ordering app for iOS nationwide. It continues to leverage the strength of the significant brand awareness and is developing new restaurants in the markets that are primed for growth.

While the company missed on same-store sales, its fourth-quarter performance was good overall. Although it had a recent dip, the company plans to reach out to the new customers by opening new stores.

With its current momentum, the New York-based company will continue to grow in the future. Management expects 2017 to be an exciting year. With a strong pipeline of products and new domestic openings, it is poised to grow. It plans to expand in both existing and new U.S. markets. It is committed to delivering guest experiences that contribute to the long-term strength of the Shake Shack brand. The company may be able to handsomely reward shareholders over the long term.

Disclosure: I do not hold a position in the company.

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