This stock is ready to explode higher on fundamentals alone and is in an oversold condition . This stock made a solid base at $60 in June before moving to over $100 in Sept and then dropping back, finding strong support again at $60.
We have recently heard ( rumor ) that a merger is in the works. The buyout coming from Chipotle CMG – NYSE. We would watch the volume carefully and begin to take positions at current levels and step up as you see activity increase.
Shake Shack is a compelling growth story in the fast food hamburger market.
The company has 150 locations with the goal of reaching 450.
Continued strong revenue growth is coming from new restaurant openings.
Same-store sales growth has not been impressive compared to major competitors in the market.
The stock looks intriguing at 40% off market highs, but lackluster same-store growth needs to improve.
Shake Shack (SHAK) reported another quarter of blistering revenue growth. Sales grew 32% vs. last year largely due to the opening of 17 new restaurants. Sales growth in existing restaurants was up 2%.
This isn’t terrible comps growth. This time last year, same-store sales growth was up less than 1%. And same-store sales growth has peaked as high as 3.6% in recent quarters. The company says it has expected lower same-store growth as it invests in expansion this year.
Competing burger chains – mature burger chains – are posting much better same-store sales growth. While Shake Shack has years of growth ahead of it as it marches towards 450 locations from today’s 150, it remains a question if the company can meaningfully move the needle on same-store sales growth comparable to the likes of McDonald’s (NYSE:MCD), Wendy’s (NASDAQ:WEN), or other major chains.
Shares look interesting at $60, >40% off their 52-week highs. While the company’s net income is slim as it invests in growth, it doesn’t look unreasonably valued on a price/sales basis relative to its peers. But the big difference between Shake Shack and its competitors appears to be same-store sales. If the company can continue opening restaurants and boost same-store sales growth, shares could go much higher from $60.
Q3: Same-Store Sales OK, Not Great
When the year began, Shake Shack guided for nominal same-store sales growth of 0-1%. This is comparable to what the company saw in 2018. The company has placed less emphasis on menu innovation and special offers as it has focused its investments on expansion.
In addition to this, the company is also transitioning to full integration with Grubhub (NYSE:GRUB) exclusively. While the company will not stop other third-party delivery apps from offering Shake Shack, the burger chain’s order systems will be directly integrated with Grubhub to improve customer service of Grubhub orders. The company believes this transition also hurt same-store sales in Q3 and will likely do so again in Q4.
Grubhub hasn’t really witnessed stellar same-store sales growth since 2016. It remains to be seen if the company can deliver on improving same-store sales growth as the company rolls out new locations and settles the transition issues resulting from the Grubhub partnership.
While Shake Shack undergoes growing pains, major competitors are reporting great same-store sales growth rates.
|Chain||Q3-19 Same-Store Sales Growth Rate|
It remains unclear if Shake Shack’s lagging same-store sales growth is truly a byproduct of investments in other expansion efforts or if the Shake Shack buzz dies down once a new restaurant has been in place for a year. The company says it intends to develop a deeper brand awareness for existing Shacks in hopes of boosting sales growth. The company believes it is still an early-stage growth company with a massive addressable market and still plans to triple its restaurant count from the current 150. The company will have opened 38-40 restaurants by the end of Q4 and intends to open 40-42 restaurants next year.
Shake Shack has lower margins than major competitors due to its continued investment in restaurant expansion. The company doesn’t look like a value on a P/E ratio basis, but it does look interesting on price/sales when you compare it to competitors. If the company can improve same-store sales to levels of larger competitors, the company could command a comparable P/E valuation to the likes of McDonald’s and Restaurant Brands International (NYSE:QSR) when the growth levels off.
That said, we’re still in the early stages of growth for Shake Shack. The company believes it is at just 33% of its potential restaurant count and has years of restaurant expansion ahead. But low same-store sales growth rates may continue to be an issue for the foreseeable future. An investment in Shake Shack today gives you a better entry point at >40% off its highs for a growth stock that may hopefully improve same-store sales growth at some point in the future and improve profitability once restaurant expansion slows down. But it’s hard to say when the same-store sales growth will improve or by how much. That remains to be seen.
Shake Shack looks interesting after the steep selloff from 52-week highs. I am uncertain what a sustainable same-store sales growth rate could become for the company. If Shake Shack can improve same-store sales growth rates to those of larger competitors like McDonald’s or Wendy’s, the stock will likely head much higher than its current $60. From Seeking Alpha
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