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SHAKE SHACK REPORTS – EXPANSION POTENTIAL, ALSO SIGNIFICANT RISK – UNIT LEVEL ECONOMICS SLIPPING

May 11th, 2018 · No Comments

Investors, of course are primarily concerned about the future. Growth is continuing at what we think is accurately described as a “breakneck” pace, with 32-35 new company locations to be opened in calendar ’18 on a base of 90 at 12/31/18.

SHAKE SHACK REPORTS Q1’18 – EXPANSION POTENTIAL, ALSO SIGNIFICANT RISK – UNIT LEVEL ECONOMICS SLIPPING
May 10, 2018articles,
SHAKE SHACK REPORTS Q1’18 – STOCK UP 25% – WHAT’S GOING ON?
By Roger Lipton

IN A NUTSHELL:
36% of the stock float was sold short, so the numbers came through “adequately”, and the stock didn’t go down, so the short term traders panicked, covered their positions and drove the stock higher.

Before we look at the facts, we must restate that there is no publicly held restaurant company that we hold in higher regard than at SHAK. However, the Company is one thing, and the stock is another.

HIGHLIGHTS OF Q1’18:
Comps were up 1.7%, price and mix were important so store level traffic was down 4.2% (on top of a negative 3.4% Q1’17. Factoring out a promotion in Q1’17 traffic was still down 2.2%. Weather was a negative factor in Q1’18 but delivery pilots and an early Easter helped a bit. The table that follows shows line by line performance over the last three years, as well as Q1’18.

As predicted since SHAK came public, average weekly sales for domestic company operated shacks continued lower, at $81,000, down 6% YTY. Trailing twelve month AUVs were $4.5M, down $100,000 from the prior quarter. This latter number is predicted to be $4.1 to $4.2M for all of ’18. Store level “operating profit”, store level EBITDA in essence, was 25.0% of store revenues, up 28.5% on a 29.6% increase in shack sales so store level EBITDA contracted 30 bp. CGS was down 50 bp, Labor was up 20 bp, Other Operating Expenses were up 90 bp to 11.2%, Occupancy and Related expenses were down 30 bp to 8.0%. Below the store level EBITDA line: G&A was up 90 bp to 11.9%, Depreciation was up 40 bp to 6.6%, Pre-opening was down 110 bp to 2.0% (with unit expansion back loaded in ’18). Operating Income was up 15.7% (on an increase in Total Revenues of 29.1%). Income Before Taxes was up 15.7%, down 70 bp to 6.6%. After taxes at 19.4% (vs. 30.0% in ’17), Income After Taxes was up 28.9%. The summary is that the stores controlled costs rather well in a difficult sales (and traffic) environment, the corporate burden was higher, and lower taxes salvaged the quarter’s bottom line.\

Investors, of course are primarily concerned about the future. Growth is continuing at what we think is accurately described as a “breakneck” pace, with 32-35 new company locations to be opened in calendar ’18 on a base of 90 at 12/31/18. Company guidance was essentially “maintained” for ’18. Aside from the new openings, total Revenue expectations was raised by a nominal $2M to a range of $446-450M. Licensing revenue is expected to be $12-13M vs. $12.4M in ’17. In terms of line by line expectations, as shown in the table above, under “Guidance”, Same Shack Sales are now guided to 0-1% positive vs. “flat” previously. AUVs, as indicated earlier will be $4.1-$4.2M for ’18, vs. $4.6M in ’17. Store level EBITDA will be 24.5%-25.5% (affected by the new lower volume units), vs. 26.6% in ’17. G&A will be $49-$51M (plus $4-6M for “Project Concrete”) or 11.1% (plus 1.1%) of Total Revenues. Depreciation will be about $32M (7.1% ). Pre-Opening will be $12-13M (2.8%). Adjusted Pro Forma effective tax rate will be 26-27% (vs. 30.0% in ’17 and 19.4% in Q1’18.

THE FUTURE
Putting this all together for ’18, the Street estimates range from $0.54-$0.57 per share. Growth will be there, but operating leverage will likely not take place either at the store level or after the corporate support. The more interesting part of the exercise takes place in calendar ’19 and beyond. The Street estimate for ’19, according to Bloomberg, is $0.735 per share, up from $0.543 in ’18, up 35%. While the Company has not provided formal guidance for ’19, analysts must be expecting margins to be maintained from ’18 to ’19, both at the store level and the corporate level. We consider this to be possible, but far from a sure thing.

Read the entire article here: http://www.liptonfinancialservices.com/2018/05/shake-shack-reports-q118-expansion-potential-but-also-significant-risk-store-level-economics-slipping/
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