Shake Shack Pulls Back Despite Signs Of Business Rebound

Shake Shack Is Shaking Of COVID-19 One Quarter At A Time 

We’ve liked Shake Shack (NYSE: SHAK) for the last year because of two things. The first is the company’s growth strategy, it is growing by leaps and bounds building not only its revenue base but improving its profitability. The second is the pandemic. The pandemic put a real hurting on operations dependant on in-store traffic while at the same time spurring digital, eCommerce, and fast-food sales. So, while business has been hurting a bit over the last year it’s also been rebounding strongly from the lows and the company has been adding new stores putting it in a great position for the reopening and 2nd half of 2021.

Mixed Results Drive Shake Shack To New Lows 

Shares of Shake Shack are down about 8.5% in premarket trading because of two things. The first is that Q1 results missed the consensus by about 425 basis points on the top line. That’s not good but, in our view, is due to lingering effects of the pandemic and only postpones the reopening-related surge that we think is on the way. The second is the short interest. Short-interest in this stock was running in the double-digits and at a five-month high going into the reporting season. That by itself is enough to put some downward pressure on a stock, add in the mixed report and we see happening here is an opportunistic move lower that is not grounded in fundamentals and chance to buy more of this stock. 

So, the $155.28 million in net consolidated revenue missed the consensus by 425 basis points but is still up 8.5% from last year with very favorable metrics pointing to accelerating business in the 2Q period. At the Shack-level, same-Shack sales grew 5.7% to drive a 9.0% gain in sales that was offset by weakness in the licensed market. Licensed revenue fell nearly 10% under the influence of pandemic-related closures and slower foot traffic. 

In all cases, sales were underpinned by eCommerce which management says accounted for 60% of sales. The total of eCommerce sales as a percentage of revenue is falling but not due to loss of business. eCommerce sales are running at 9% of the January total as of this report with company-owned digital up 230% for the quarter. 

What the market fails to appreciate is the company’s obvious leverage. The bottom line results not only outpaced the consensus on weak revenue but also produced a surprise profit at both the GAAP and adjusted levels. 

The Q1 Was Mixed, We Prefer To Focus On The Guidance 

Shake Shack gave mixed guidance in that it failed to beat the consensus but reveals rapidly improving fundamentals. In this light, we view the guidance as very cautious and likely to be upgraded following the Q2 results if not before. The company is expecting $174 million to $183 million versus a $182.7 consensus and weekly sales trends suggest this is low. Weekly sales in the Q1 period improved to $64K in Q1, up from $62K in Q$ 2020, and accelerated to $68K in March and $69K in April. Add in the fact new stores are producing an average of $79K per week and the company is planning to open another 20 to 25 stores on top of the 15 already opened in 2021 and the outlook for revenue growth is very bright indeed. It’s just a matter of time. 

The Technical Outlook: Shake Shack Pulls Back To Support 

Shares of Shake Shack are down hard in premarket trading and may fall further but there is a major support target close at hand. The support target is near the $91 level and consistent with support prior to the Q4 earnings-driven rally. If this level can hold we see this stock consolidating for another move higher later in the year. A move below that level could spell real trouble for this market but we don’t see that happening. Shake Shack is a great brand with a good product and exceptional growth outlook.