3 Biggest Takeaways From Shake Shack's Blowout Quarter

Shake Shack crushed third-quarter earnings estimates. Here's what you need to know.
By Brian Sozzi ,

Shake Shack (SHAK) - Get Report served up another juicy quarter for investors to chew on.

The better burger chain, known for its gourmet hamburgers and thick frozen custards, reported third-quarter earnings of 12 cents a share, beating analysts' expectations of 7 cents a share. Same-restaurant sales surged 17.1%, trouncing the already impressive 12.9% gain delivered in the second quarter.

According to Shake Shack, strong sales were due to robust traffic growth, increased menu prices, people gravitating toward new items such as a burger with bacon and caramelized onions, and strong performance from locations opened in the latter half of last year in Las Vegas and Chicago.

"The third quarter marked another strong quarter in terms of same-Shack (restaurant) sales growth, as we continued to execute on our strategic plan and drive engagement with our guests," said Shake Shack CEO Randy Garutti in a statement.

Shares of Shake Shack surged about 7% in after-hours trading on Thursday, and were up a similar amount in premarket trading on Friday.

TheStreet takes a look at the top three takeaways for investors from Shake Shack's blowout quarter.

Insiders Aren't Lacking Confidence in Shake Shack's Outlook

Wall Street has cooled on Shake Shack's stock lately despite its strong year of sales. Shares of Shake Shack have fallen roughly 21% in the past three months, partly on fears that a wave of shares that could potentially be sold by insiders is a sign of concern about the company's long-term prospects.

According to the Securities and Exchange Commission documents filed on Oct. 8, early Shake Shack investors have registered to sell up to 26.16 million shares of the company "from time to time" at about $48.48 per share. Some noteworthy early investors could sell shares as part of this secondary offering, including Leonard Green Partners, which owned about 12.8% of Shake Shack as of the date of the filing and could unload about 5 million shares. Shake Shack's founder, Danny Meyer, who owned about 3.5% of Shake Shack at the filing time, could sell as many as 1.2 million shares.

On the earnings call, Garutti downplayed the prospect of a mass number of shares hitting the market soon. "The registration does not overshadow the confidence Danny Meyer or myself have in the long-term outlook of Shake Shack," said Garutti, emphasizing the registration calls only for shares to be sold "from time to time."

That vote of confidence from Garutti, along with the impressive results from the third quarter, could renew interest among investors in owning Shake Shack shares.

Labor Costs Headed Higher

Shake Shack has long paid its employees above minimum wage, believing doing so helps to attract the type of talent that drives strong customer service. With higher minimum wages gradually kicking in across the country for retail and restaurant workers, Shake Shack will likely have to raise wages even higher to adhere to its strategy on compensation.

"We are experimenting with even higher minimum wages," Garutti said on a call with analysts, pointing to tests underway with hourly wages of $12 in Washington, DC and $11 in Texas. In Manhattan, Shake Shake starts off new employees at $10 an hour, according to the company's IPO prospectus filed at the end of last year, 25% higher than the current state minimum wage of $8. The minimum wage for fast food workers in New York will increase to $15 an hour over the next three years in New York City, and over the next six years for workers in the rest of the state, following the passage of recent legislation there.

Garutti noted that "we will continue to see pressure on the labor expense line in 2016." To partially offset higher labor costs, Shake Shack is in the final stages of approving a low-single digit percentage menu price increase that would go into effect in mid-January 2016.

The Popular ChickenShack Sandwich Gets a New Market

The ChickenShack fried chicken sandwich, which launched in July, is still only available at three Brooklyn, NY locations for about $6.29. It features a fried antibiotic-free chicken breast combined with lettuce, pickles and a buttermilk herb mayo.

Shake Shack has been hesitant to roll the sandwich out nation-wide because preparing the sandwich requires multiple steps, as Garutti shared with TheStreet in a recent interview. Hence, the company has continued to test the processes of making the chicken sandwich, which Garutti noted is a "top-selling item" at the three Brooklyn locations.

On Thursday, Shake Shack gave its strongest indication that it could debut the popular new item nationwide in 2016. The company recently launched the ChickenShack in four locations in Istanbul, and it's off to a "great start" in terms of sales, according to Garutti.

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