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If you haven’t and there’s an outlet near you, do yourself a favor and try it out. If you’re not lucky enough to have a Shake Shack in your town, don’t worry…it probably won’t be too long until you do.
Founded in 2001 by master-restaurateur Danny Meyer, Shake Shack has grown organically from a single cart in Madison Square Park in New York city to a global operator of more than 250 fast-casual restaurant outlets across the US - as well as in the UK, Russia, China, Singapore, Mexico, the Middle East an too many more to list.
The company plans to have over 320 locations open globally by 2020.
Meyer got his start as a New York City restaurant manager, then studied culinary arts in Europe before opening his own Manhattan restaurant in 1985 at the age of 27.
The author of several books about restaurants, Meyer is legendary for his intense focus on true hospitality and customer service. His restaurant empire is the envy of the industry and his methods and philosophy are emulated by would-be restaurateur the world over.
Shake Shack was originally intended to be a single-location summertime novelty rather than a chain, but long lines and soaring popularity convinced Meyer and his partners that there was significant opportunity for expansion. In 2004, even they couldn’t have imagined just how successful the venture would grow to be.
Shares of Shake Shack more than doubled on the first day of trading following its 2015 IPO, rallying from $21/share all the way to $47/share – and continued to run all the way to $93/share within the first 4 months. Unfortunately, that rocket ride seems to have been fueled more by enthusiasm for the company’s products than the fundamentals of its business and the shares fell back into the $30s where they stayed for most of the next two years.
By 2018, with over 100 locations open and the revenues to match the original promise, Shake Shack shares began to rally steadily again with the stock once again hitting new highs above $100/share in 2019.
The restaurant industry is fiercely competitive and consistently growing sales at 25%/year is almost unheard of. The average Shake Shack outlet brings in between $3M and $4M/year – considerably above the $2.7M average of a McDonalds restaurant.
The company has been spending heavily on expansion, so net earnings aren’t increasing quite as quickly as revenues, but the estimates are rising fast enough to earn Shake Shack a Zacks Rank #1 (Strong Buy).
Management and cost control are top-notch, so expect Shake Shack earnings to catch up quickly as outlets in all of the intended markets become built out.
A simple menu, loyal customers, great service and a rabid fan base make Shake Shack an enormously popular dining choice. Sensational revenue growth makes it a very solid investment in the sometimes dicey restaurant space.
Ulta Beauty, the $15 billion brick-&-mortar phenomenon in retail cosmetics and salon services, delivered Q2 results on August 29 that didn't give investors the glow they were looking for.
The company produced 12% revenue and 12.2% EPS growth (both lower than expected) and +6.2% comparable sales. But it was the outlook that surprised to the downside.
Besides slight misses on both the top and bottom lines, ULTA guidance was weaker than expected. Management cut their FY19 EPS view to $11.86-$12.06 from $12.83-$13.03.
And they see FY19 total sales growth of 9%-12%, vs consensus of +12.2% to $7.54B. ULTA also cut its FY19 SSS (same store sales) growth view to 4%-6% from 6%-7%.
This news caused analysts to take down current fiscal year EPS (ending January) from $12.95 to $11.96, for a 7.7% downward revision. And next year's profit consensus dropped 10.8% from $15.02 to $13.60.
That's why ULTA is a Zacks #5 Rank Strong Sell now.
Beyond the downward revisions in growth estimates, let's take a look at some of the commentary and price target moves from analysts following this Q2 report...
Downgrades to the Growth Outlook
Morgan Stanley: Ulta Beauty downgraded to Equal Weight from Overweight at Morgan Stanley. Analyst Simeon Gutman also lowered his price target for the shares to $275 from $395. The analyst sees the company's Q2 earnings miss and lowered guidance as "thesis-changing", with growth slowing "meaningfully." Gutman was especially caught off-guard by the SSS comps guidance because he had just upgraded ULTA prior to this report looking for mid-to-high single digit comps and a "longer runway" for store growth. These drivers are no longer in place.
Wells Fargo: Analyst Ike Boruchow downgraded Ulta Beauty to Market Perform from Outperform and lowered his price target for the shares to $235 from $350. Slowing cosmetic trends and shifting industry dynamics will "meaningfully pressure" Ulta's business, Boruchow told investors in a post-earnings research note. The analyst believes the "highly competitive" cosmetics industry is currently seeing decelerating trends.
Stifel: Analyst Mark Astrachan lowered his price target for Ulta Beauty to $250 from $315 saying the company reported disappointing Q2 results, with comp growth below consensus. Astrachan sees the quarter as a a "meaningful change" in outlook, suggesting slowing share gains, risk to long-term expectations for comp growth and operating margin leverage, and nearer-term challenges, including difficulty in achieving stronger sequential comp growth in Q4.
UBS: Analyst Michael Lasser lowered his price target on Ulta Beauty to $300, saying its Q2 results and outlook suggest that some "industry headwinds" cannot be overcome. The analyst notes that the 6.2% comp in Prestige brand marked a 240bps deceleration on a 2-year stack basis, adding that the trends have decelerated further in the past two months. But Lasser remains positive on ULTA shares noting that while the management lowered its SSS guidance to 4%-6% from 6%-7%, the reset may relieve the pressure out of end-of-quarter promos.
Telsey Advisory: Analyst Dana Telsey lowered her price target for Ulta Beauty to $330 from $375 while maintaining an Outperform rating on the shares. In her note, Telsey explains that current innovation headwinds to the cosmetics category have been steeper than expected, overtaking Ulta's ability to share-gain its way to prior comp expectations. The veteran retail analyst added that despite recent disappointing recent cosmetic trends, she still sees ULTA gaining share and maintaining the potential for mid-single digit comp growth and double-digit earnings growth this year.
Credit Suisse: Analyst Michael Binetti maintained an Outperform rating on Ulta Beauty, but lowered his price target on shares to $286 from $380 following the company's Q2 EPS miss and lowered FY19 EPS guidance. The analyst noted that he was unclear as to why Ulta Beauty cut its second half guidance "so significantly after what sounds like a very short-term change in the trend line."
Oppenheimer: Ulta Beauty removed from Top Pick status at Oppenheimer. Analyst Rupesh Parikh removed Ulta Beauty as one of its Top Picks, but maintained an Outperform rating and $310 price target on the shares, following the company's "softer-than-expected" Q2 earnings results. While the analyst expected a comp shortfall, he did not expect the FY19 guidance reduction. Parikh views the 20%-plus sell-off as directionally appropriate, but suggested "longer-term players should take advantage of the weakness."
Bottom line for ULTA: The company is clearly a category winner in the beauty business, but is going through another growth hiccup. With shares finding support at $240 this month there is a case to be made for a bottoming process here. We just need to see estimates turnaround going into the holiday quarter. The Zacks Rank will let you know.
Buy Airlines After Delta’s Solid Earnings Release?
The cyclical airline segment could be lining up as a buy. Historically, the fourth quarter produces the strongest returns for airline stocks with an average gain of 8% since 1990, according to a recent WSJ article. This is due to analysts being increasingly optimistic in winter months pushing stock prices up in the last months of the year.
Delta Airlines kicked off Q3 earnings this week, giving us clues for what to expect in the remaining releases this month.
Delta’s Results
The world’s largest airline released its earnings before market open Thursday, October 10th, with mixed results. Delta just demonstrated not only the best sales since the company’s inception but its most profitable quarter.
DAL initially fell in morning trading on Thursday due to a slight miss on revenues and management guiding costs higher. Investors are concerned about rising costs due to a hiring expansion. According to CEO Ed Bastian, Delta was short of pilots and attendants last summer and wants to avoid this strain moving forward by hiring 6,000 new employees (900 pilots).
Delta's slight miss on revenue was due to some enthusiastic analysts who overstated the positive impact of the airline not flying the MAX and the market share that they would be taking. None the less, Delta did take a sizable amount of market share and grew its topline over 5% year-over-year with the primary drivers being its loyalty and premium offerings.
Falling gas prices substantially improved Delta's bottom line, and this is expected to spill over into all the other airlines' upcoming earnings. The large airline stocks have rallied since yesterday morning on the hopes that Delta's promising earnings is a signal of robust Q3 financials from the rest of the market.
Market Implications
The Boeing 737 MAX was the big market news this year, impacting every airline in one way or another. American Airlines said that this crafts grounding caused them to cancel thousands of flights and cost the firm roughly $185 million in its second quarter.
Delta took over as the global airline market leader following the Boeing MAX debacle. Delta didn’t fly any of the Boeing MAX planes, and its capacity was not affected when the aircraft was grounded. Delta was able to take market share from the former leader American Airlines.
The Boeing MAX's grounding continues to be extended, with its current expected fly date being January 16th. Once this aircraft is finally cleared for use, the capacity of the industry will significantly increase, shaking up the market.
Analysts have historically understated the summer quarter earnings, and I believe that this may be the case in the remaining 3rd quarter airline reports. Analysts may have overstated the market loss that each of these airlines experienced this past quarter, and a sizable upside may be in store in the coming month.
Take Away
American and Southwest Airlines report later this month. I expect to see some positive upsides in at least some of these reports. Analysts have slashed expectations, and it won’t take much to beat them.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Shake Shack, Ulta Beauty, Delta, American and Southwest highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – October 14, 2019 – Zacks Equity Research Shake Shack (SHAK - Free Report) as the Bull of the Day, Ulta Beauty (ULTA - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Delta Airlines (DAL - Free Report) , American Airlines (AAL - Free Report) and Southwest Airlines (LUV - Free Report) .
Here is a synopsis of all four stocks:
Bull of the Day:
Have you had a burger from Shake Shack?
If you haven’t and there’s an outlet near you, do yourself a favor and try it out. If you’re not lucky enough to have a Shake Shack in your town, don’t worry…it probably won’t be too long until you do.
Founded in 2001 by master-restaurateur Danny Meyer, Shake Shack has grown organically from a single cart in Madison Square Park in New York city to a global operator of more than 250 fast-casual restaurant outlets across the US - as well as in the UK, Russia, China, Singapore, Mexico, the Middle East an too many more to list.
The company plans to have over 320 locations open globally by 2020.
Meyer got his start as a New York City restaurant manager, then studied culinary arts in Europe before opening his own Manhattan restaurant in 1985 at the age of 27.
The author of several books about restaurants, Meyer is legendary for his intense focus on true hospitality and customer service. His restaurant empire is the envy of the industry and his methods and philosophy are emulated by would-be restaurateur the world over.
Shake Shack was originally intended to be a single-location summertime novelty rather than a chain, but long lines and soaring popularity convinced Meyer and his partners that there was significant opportunity for expansion. In 2004, even they couldn’t have imagined just how successful the venture would grow to be.
Shares of Shake Shack more than doubled on the first day of trading following its 2015 IPO, rallying from $21/share all the way to $47/share – and continued to run all the way to $93/share within the first 4 months. Unfortunately, that rocket ride seems to have been fueled more by enthusiasm for the company’s products than the fundamentals of its business and the shares fell back into the $30s where they stayed for most of the next two years.
By 2018, with over 100 locations open and the revenues to match the original promise, Shake Shack shares began to rally steadily again with the stock once again hitting new highs above $100/share in 2019.
The restaurant industry is fiercely competitive and consistently growing sales at 25%/year is almost unheard of. The average Shake Shack outlet brings in between $3M and $4M/year – considerably above the $2.7M average of a McDonalds restaurant.
The company has been spending heavily on expansion, so net earnings aren’t increasing quite as quickly as revenues, but the estimates are rising fast enough to earn Shake Shack a Zacks Rank #1 (Strong Buy).
Management and cost control are top-notch, so expect Shake Shack earnings to catch up quickly as outlets in all of the intended markets become built out.
A simple menu, loyal customers, great service and a rabid fan base make Shake Shack an enormously popular dining choice. Sensational revenue growth makes it a very solid investment in the sometimes dicey restaurant space.
Bear of the Day:
Ulta Beauty, the $15 billion brick-&-mortar phenomenon in retail cosmetics and salon services, delivered Q2 results on August 29 that didn't give investors the glow they were looking for.
The company produced 12% revenue and 12.2% EPS growth (both lower than expected) and +6.2% comparable sales. But it was the outlook that surprised to the downside.
Besides slight misses on both the top and bottom lines, ULTA guidance was weaker than expected. Management cut their FY19 EPS view to $11.86-$12.06 from $12.83-$13.03.
And they see FY19 total sales growth of 9%-12%, vs consensus of +12.2% to $7.54B. ULTA also cut its FY19 SSS (same store sales) growth view to 4%-6% from 6%-7%.
This news caused analysts to take down current fiscal year EPS (ending January) from $12.95 to $11.96, for a 7.7% downward revision. And next year's profit consensus dropped 10.8% from $15.02 to $13.60.
That's why ULTA is a Zacks #5 Rank Strong Sell now.
Beyond the downward revisions in growth estimates, let's take a look at some of the commentary and price target moves from analysts following this Q2 report...
Downgrades to the Growth Outlook
Morgan Stanley: Ulta Beauty downgraded to Equal Weight from Overweight at Morgan Stanley. Analyst Simeon Gutman also lowered his price target for the shares to $275 from $395. The analyst sees the company's Q2 earnings miss and lowered guidance as "thesis-changing", with growth slowing "meaningfully." Gutman was especially caught off-guard by the SSS comps guidance because he had just upgraded ULTA prior to this report looking for mid-to-high single digit comps and a "longer runway" for store growth. These drivers are no longer in place.
Wells Fargo: Analyst Ike Boruchow downgraded Ulta Beauty to Market Perform from Outperform and lowered his price target for the shares to $235 from $350. Slowing cosmetic trends and shifting industry dynamics will "meaningfully pressure" Ulta's business, Boruchow told investors in a post-earnings research note. The analyst believes the "highly competitive" cosmetics industry is currently seeing decelerating trends.
Stifel: Analyst Mark Astrachan lowered his price target for Ulta Beauty to $250 from $315 saying the company reported disappointing Q2 results, with comp growth below consensus. Astrachan sees the quarter as a a "meaningful change" in outlook, suggesting slowing share gains, risk to long-term expectations for comp growth and operating margin leverage, and nearer-term challenges, including difficulty in achieving stronger sequential comp growth in Q4.
UBS: Analyst Michael Lasser lowered his price target on Ulta Beauty to $300, saying its Q2 results and outlook suggest that some "industry headwinds" cannot be overcome. The analyst notes that the 6.2% comp in Prestige brand marked a 240bps deceleration on a 2-year stack basis, adding that the trends have decelerated further in the past two months. But Lasser remains positive on ULTA shares noting that while the management lowered its SSS guidance to 4%-6% from 6%-7%, the reset may relieve the pressure out of end-of-quarter promos.
Telsey Advisory: Analyst Dana Telsey lowered her price target for Ulta Beauty to $330 from $375 while maintaining an Outperform rating on the shares. In her note, Telsey explains that current innovation headwinds to the cosmetics category have been steeper than expected, overtaking Ulta's ability to share-gain its way to prior comp expectations. The veteran retail analyst added that despite recent disappointing recent cosmetic trends, she still sees ULTA gaining share and maintaining the potential for mid-single digit comp growth and double-digit earnings growth this year.
Credit Suisse: Analyst Michael Binetti maintained an Outperform rating on Ulta Beauty, but lowered his price target on shares to $286 from $380 following the company's Q2 EPS miss and lowered FY19 EPS guidance. The analyst noted that he was unclear as to why Ulta Beauty cut its second half guidance "so significantly after what sounds like a very short-term change in the trend line."
Oppenheimer: Ulta Beauty removed from Top Pick status at Oppenheimer. Analyst Rupesh Parikh removed Ulta Beauty as one of its Top Picks, but maintained an Outperform rating and $310 price target on the shares, following the company's "softer-than-expected" Q2 earnings results. While the analyst expected a comp shortfall, he did not expect the FY19 guidance reduction. Parikh views the 20%-plus sell-off as directionally appropriate, but suggested "longer-term players should take advantage of the weakness."
Bottom line for ULTA: The company is clearly a category winner in the beauty business, but is going through another growth hiccup. With shares finding support at $240 this month there is a case to be made for a bottoming process here. We just need to see estimates turnaround going into the holiday quarter. The Zacks Rank will let you know.
Buy Airlines After Delta’s Solid Earnings Release?
The cyclical airline segment could be lining up as a buy. Historically, the fourth quarter produces the strongest returns for airline stocks with an average gain of 8% since 1990, according to a recent WSJ article. This is due to analysts being increasingly optimistic in winter months pushing stock prices up in the last months of the year.
Delta Airlines kicked off Q3 earnings this week, giving us clues for what to expect in the remaining releases this month.
Delta’s Results
The world’s largest airline released its earnings before market open Thursday, October 10th, with mixed results. Delta just demonstrated not only the best sales since the company’s inception but its most profitable quarter.
DAL initially fell in morning trading on Thursday due to a slight miss on revenues and management guiding costs higher. Investors are concerned about rising costs due to a hiring expansion. According to CEO Ed Bastian, Delta was short of pilots and attendants last summer and wants to avoid this strain moving forward by hiring 6,000 new employees (900 pilots).
Delta's slight miss on revenue was due to some enthusiastic analysts who overstated the positive impact of the airline not flying the MAX and the market share that they would be taking. None the less, Delta did take a sizable amount of market share and grew its topline over 5% year-over-year with the primary drivers being its loyalty and premium offerings.
Falling gas prices substantially improved Delta's bottom line, and this is expected to spill over into all the other airlines' upcoming earnings. The large airline stocks have rallied since yesterday morning on the hopes that Delta's promising earnings is a signal of robust Q3 financials from the rest of the market.
Market Implications
The Boeing 737 MAX was the big market news this year, impacting every airline in one way or another. American Airlines said that this crafts grounding caused them to cancel thousands of flights and cost the firm roughly $185 million in its second quarter.
Delta took over as the global airline market leader following the Boeing MAX debacle. Delta didn’t fly any of the Boeing MAX planes, and its capacity was not affected when the aircraft was grounded. Delta was able to take market share from the former leader American Airlines.
The Boeing MAX's grounding continues to be extended, with its current expected fly date being January 16th. Once this aircraft is finally cleared for use, the capacity of the industry will significantly increase, shaking up the market.
Analysts have historically understated the summer quarter earnings, and I believe that this may be the case in the remaining 3rd quarter airline reports. Analysts may have overstated the market loss that each of these airlines experienced this past quarter, and a sizable upside may be in store in the coming month.
Take Away
American and Southwest Airlines report later this month. I expect to see some positive upsides in at least some of these reports. Analysts have slashed expectations, and it won’t take much to beat them.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.