The short ratio in Shake Shack, or the proportion of those betting the stock will fall compared with the company's overall shares in the market, is now a supersized 42.9%, reflecting the burger chain's massive trailing price-to-earnings ratio of over 1,000.
Judging by Shake Shack's first quarter earnings report, however, those shorting the stock may want to reconsider their position.
Shake Shack reported a same-store sales increase of 11.7% in the first quarter ended April 1, better than the fourth quarter gain of 7.2%, despite inclement weather that hurt results at other sit-down restaurants such as Buffalo Wild Wings (BWLD) and Brinker International(EAT) - Get Report.
"The Shack", as it's affectionately known as by its fans, even managed to post sales growth that beat that of red-hot burrito and salad bowl chain Chipotle(CMG) - Get Report, which gained 10.7%. Shake Shack's earnings were 4 cents a share on an adjusted basis, beating the mean loss estimate of 3 cents a share.
Shares of Shake Shack surged 6% in early trading on Thursday, as the results likely caused some shorts to vacate their positions. But shorts continuing to cling to hopes for slowing growth at Shake Shack and a nosedive in its stock may be in for a rude awakening. Here are three reasons why.
1. Customers don't care that Shake Shack has raised prices.
People are proving to be so in love with Shake Shack's burgers and fries, they're barely registering that the company is charging more than it did a year ago. The company has increased prices twice in the past nine months by a total of 6%, in part to offset cost pressures related to higher beef costs. This helped same-restaurant sales rise to 11.7%, compared with a 3.9% increase a year earlier. "We attribute our stronger than anticipated performance to menu price increases that were taken in September and January," said Shake Shack's CFO Jeff Uttz on the company's earnings call.
This acceptance by customers of higher prices leaves the possibility that Shake Shack could lift prices even further going forward. In business school, that's called pricing power and it's a powerful thing for a retailer to have.
2. Shake Shack keeps innovating, and it's profiting big-time as a result.
"We've seen a positive mix shift from our limited time offering of the Shackmeister Burger," said CEO Randy Garutti on the earnings call. The burger, which features fried shallots and special "Shack sauce," was released on January 1.
Shake Shack also benefited from the reintroduction of crinkle-cut fries in the first quarter.
Consumers gravitating towards Shake Shack's pricier, limited-time offerings bodes well for profits this summer as the company introduces even more new items.
"As we look towards the second half of the year, we like the program that we got, with a limited time offering burger happening," said Garutti. The company also recently introduced what it calls a "Custard Calendar," with a weekly special flavor. "Shake of the Week is increasing sales a little bit, because we charge a bit more for that," said Uttz.
3. Shake Shack is proving people outside of New York are hankering for the brand.
One of the pitches made by Shake Shack during its IPO roadshow was that the chain could successfully expand beyond its home market of Manhattan. That is starting to bear fruit, justifying the company's lofty valuation.
"This quarter, we saw a broad-based geographic strength across our Shacks, with particularly strong results at our new Shacks located in key markets outside of Manhattan, including Las Vegas and Chicago, as well as the early results of our new Shacks opened in Baltimore and Boston," said Garutti. The executive added that the outlets opened in Las Vegas and Chicago are performing ahead of the company's $2.8 million to $3.2 million long-term average forecasts for annual revenues.
Shake Shack's expansion plans are proceeding full steam ahead. The brand will open in Austin, Texas later this year, as well in markets in Long Island, NY and Chicago. Its flagship Madison Square Park location reopens after an extensive remodel at the end of the second quarter. In total, the company will open 10 new restaurants domestically this year.
Meanwhile, internationally, five new sites will open this year in the U.K. and the Middle East. Next year, the brand enters Japan with a spot in Tokyo.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.