Shake Shack Disappoints, Drawing the Ire of Fickle Investors
Updated from March 11, 5:11 p.m. EDT with more information on food inflation and Shake Shack's outlook.
NEW YORK (TheStreet) -- Shake Shack (SHAK) - Get Report has been put on notice by the often-temperamental stock market: Sometimes, it isn't easy being a public company.
And that's even if eager customers are OK with paying more for a product -- in this case, a hormone-free Shack burger.
On Wednesday, the "better burger" and fry joint reported its first earnings report since a frenzied IPO in late January that saw its stock more than double. While the newly public Shack Shack beat consensus earnings estimates for the quarter, its forecasts about future earnings, which included a worrying outlook for margin-crimping beef inflation through 2017, failed to impress investors. The stock fell more than 6% in after-market trading Wednesday and was down more than 8% in pre-market trading Thursday.
Shake Shack announced an adjusted loss per share of $0.01 in the quarter, a better result than the consensus forecast of a $0.03-per-share loss. The chain's "same-Shack" sales, which measure sales from restaurants open more than 24 months, rose 7.2% as the company saw no resistance to price increases in mid-September and again in early January.
The figure eclipsed the low-single-digit percentage guidance that Shake Shack set in its prospectus but likely wasn't as high as investors were hoping for. For comparison, Chipotle's (CMG) - Get Report same-store sales growth clocked in at 16.8% in 2014.
Operating margins at Shake Shack also fell 40 basis points year-over-year to 22.3% as beef-price inflation cut into the success the company had in controlling labor and other expenses.
Shake Shack's mention of nagging beef inflation well into the future is similar to the challenges faced by fellow "better for you" fast-food chain Chipotle. The burrito king has run into roadblocks in the past year securing sources for its responsibly raised beef, in large part due to drought conditions gripping the country. Another factor has been a limited number of ranchers raising their cattle herds according to Chipotle's strict standards.
Underlying food inflation for Chipotle was about 7.5% last year, causing Chipotle to increase prices by roughly 7% midyear.
Executives at Shake Shack downplayed the possibility of another price increase this year, even as they acknowledged that "this generation today is willing to pay a little more" to buy healthier fast food. That reluctance to lift prices again, along with the margin decline in the quarter, stoked concerns that Shake Shack's bottom line could disappoint lofty investor expectations this year as it moves aggressively to open new restaurants in urban locations in the U.S.
Other costs will chip away at profits, as well.
The company must eat costs to build out its infrastructure and support staff for its international expansion. And, similar to an expensive ongoing initiative at Chipotle, Shake Shack announced that it was removing genetically modified organisms (GMOs) from the items it sells such as burgers and hotdog buns.
In the end, Shake Shack's bottom line may have also been viewed as disappointing in light of the ongoing healthy-eating movement gripping the country, one that's fueling the company's sales and those at the likes of Chipotle and Sonic (SONC) .
"There is a seismic shift in the way people eat right now," Shake Shack CEO Randy Garutti told TheStreet in a Jan. 30 interview. "My kids' generation, they are not going to grow up eating fast food the way our parents did -- that shift is people are willing to trade up, willing to pay a little bit more to know their beef has no hormones or antibiotics."
The company outlined a full-year sales projection of $159 million to $163 million. Wall Street was anticipating $160 million.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
