Shake Shack Stock: Margin Movement Is A Concern

Shake Shack Margin Movement Is A Concern

Shake Shack (NYSE:SHAK) performance was on par with expectations. However, the company’s outlook for a robust first quarter has given me a reason to believe that the company will be successful in the remaining portion of FY23. Although Shake Shack sales guidance for 1Q was increased, feedback from customers indicated that the business was actually moving towards the lower portion of its 16-18% goal margins that can be explained through the huge effect of the recent store openings.

We now face my biggest issue the margins. I think that a lot of investors are looking at FY23 as a turning point for the company’s performance because of cost inflation, the lessening of the impact of the opening of stores in 4Q22 and the possibility of price hikes However, management has not given any specific information on margins for the upcoming year. I’m worried that the consensus will alter their projections upwards in order to take into account a greater margin of inflection than SHAK can attain. This could cause unnecessary changes in the market. This is especially so when you consider that food and packaging inflation is both expected to increase during FY23.

However, I do have some minor concerns regarding that sales of the SSS’s (same-Shake Shack sales) slowing down performance. The trend has not shown obvious signs of changing at this point. My concern is that management has a tendency to prioritize store expansion over of assessing the profitability of individual stores. So, until there are indications of SSS improvement and clearer information about the movement of margins in the future, I recommend staying away from purchases.

Shake Shack Stock Recent earnings highlights

The SSS of Shake Shack 4Q22 was 5.1 percent and the growth came from a contribution of 6 percent from check , and an 0.9 percent reduction in traffic, the result was the 4Q AWS amounting to $76K. However, despite some fluctuations due to Omicron laps the January SSS was notable higher, at 17% and the $72K AWS that was available during the month gained due to the opening of large units during the 4th quarter. In the end, the 1Q23 sales forecast has been revised upwards to $240.25M to $245.75M with SSS being in the single percentiles. Digital momentum is also growing, with the launch of kiosks in company-owned stores set to be completed by the end of FY23. In the short-term but SSS will be driven by menu design and pricing.

Shake Shack Stock Margin

It’s great to know that management is working to make improvements in the bottom line of the business by, for example investing in the training of new employees, and enhancing existing teams to improve digital capabilities and efficiency in the workplace. With the introduction kiosks, employees are free to be able to focus on other things apart from accepting orders. This can boost efficiency. Another thing worth noting is the fact that new packaging is being evaluated and the potential to pass additional costs to delivery customers will likely to boost profits off-premise.

While lower COGS were partly offset by increased labor costs but the overall restaurant margin of 18.8 percent was generally in line with the previous comments of management. But, I do expect some margin headwinds during the quarter, most likely because of the actions taken during 4Q22. In particular the recent flurry of restaurant openings in 4Q22 could result in some inefficiencies in the first quarter and January is typically towards the middle to low levels of the restaurant margin guide. But, SHAK stands to gain from the slower rate of price hikes in packaging materials and certain raw materials. To increase my faith in the company I’d like to see increase in margins through the year due to factors listed below: the increase of footfall in the store which will have a positive impact on margins; steadying of demand from outside the premises and the resolution of the difficulties that arise from inefficiencies in the new units.

Shake Shack Stock Guidance

The latest guidelines for 1Q23 are as the following: $240.25-$245.75 million in revenue with a significant single-digit percentage increase of comparable sales 7 new store locations owned by the company and 16%-18% unit-level margin. The cost of opening is now estimated to be between $17 to $19 million. However, the rest of the FY23 guidance remains the same. Additionally, 40 new stores for the company are planned by management for FY23. they believe that the build costs will likely be about the same in comparison to FY22.

Shake Shack Stock Summary

The issue is with margins since management hasn’t provided clear guidelines for FY23. This could result in unneeded stock market volatility when consensus projections are revised upwards to reflect a greater marginal inflection rate than Shake Shack could attain. In addition, the poor results of SSS and the management’s preference for the expansion of stores over profitability is also among my major concerns. To increase confidence in the inventory, an increase in margins over the course of the year is necessary. This can be accomplished through the return of footfall in-Shack as well as stabilization of demand off-premise and the reduction of issues due to inefficiencies in new units. So, I suggest that you put off purchasing until you can see indications of SSS improvement and better visibility of the direction of margins moving forward.


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