Shake Shack Falls Despite Narrower-than-Expected Q4 Loss - Analyst Blog

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Share price of Shake Shack Inc.SHAK declined in the after-market trading session, as the reported fourth-quarter and full-year 2014 results, its first earnings results, after it began trading in Feb 2015. Investors' confidence was possibly dented by the company's conservative comps outlook. However, the shares of this fast casual restaurant recovered thereafter.

The company's adjusted loss of 1 cent per share was narrower than the Zacks Consensus Estimate of a loss of 3 cents, mainly due to a rise in revenues, offset by higher expenses. However, adjusted loss compared unfavorably with the prior-year earnings of 3 cents.

Revenues grew 51.5% year over year to $34.8 million, primarily driven by higher comps and unit growth. Meanwhile, revenues beat the Zacks Consensus Estimate of $33 million by 5.62% backed by healthy comps.

Behind the Headline Numbers

Comps grew 7.2% year over year, primarily driven by 3.9% rise in transactions and 2.7% improvement in product mix, combined with 1.2% price increase. Comps growth was much better than the prior-year quarter growth of 6.8%.

Total operating expenses were $35.8 million, up 63.7% year over year due to higher food and paper costs, increase in occupancy and related expenses, increase in labor costs as well as store operating expenses.

General and administrative expenses, as a percentage of revenues, increased 290 basis points (bps) to 17.2%. Labor cost declined 90 bps year over year to 27.3%.

As a percentage of sales, operating profit margins decreased 40 bps to 22.3% as higher commodity prices, primarily for beef, more than offset the decrease in labor, occupancy, and other operating expenses.

2014 Results

For 2014, Shake Shack posted adjusted earnings of 16 cents, versus adjusted earnings of 18 cents reported in 2013.

Total revenue increased 43.7% year over year to $118.5 million.

Store Update

Shake Shack opened 10 restaurants during the quarter. Among these, five were domestic company-operated units while the rest were international licensed restaurants.

Guidance for 2015

In 2015, the company expects total revenue between $159 million and $163 million and comps growth in the low single-digit range.

The company expects to open at least 10 domestic company-operated units in 2015, along with at least five international licensed restaurants.

Our Take

Shake Shack reported the first financial results, as a publicly traded company, which was better than expected. Comps have grown steadily and the company has been able to differentiate itself in a heavily competitive fast-casual restaurant sector. However, we remain concerned about the food cost inflation in the U.S., which might put the margins under pressure.

Shake Shack currently carries a Zacks Rank #3 (Hold). Some better-ranked restaurateurs include BJ's Restaurants, Inc. BJRI , Dave & Buster's Entertainment, Inc. PLAY and Cracker Barrel Old Country Store, Inc. CBRL . All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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