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Here's Why Investors Should Retain Shake Shack (SHAK) Stock

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Shake Shack Inc. (SHAK - Free Report) is likely to benefit from unit-expansion efforts, robust Same-Shack sales and digital Initiatives. Also, the emphasis on licensed partnerships bodes well. However, supply-chain challenges and inflationary pressures are a concern.

Let’s discuss why investors should retain the stock for the time being.

Factors Driving Growth

Shake Shak focuses on store openings to effectively strategize its expansion plans. During fiscal 2022, the company opened 36 new domestic Company-operated Shacks and 33 new licensed Shacks. The licensed Shacks included locations in Asia (20), the Middle East region (3), Mexico (2), and the United States (8). During the fourth quarter of fiscal 2022, the company opened 22 restaurants. Since December, the company has opened 12 company-operated drive-thrus. The company emphasized on considering new countries, territories and formats to drive growth over the long term. For 2023, the company anticipates opening approximately 40 domestic company-operated Shacks. The company stated that 24 Shacks are under construction.

Meanwhile, the company focuses on licensed partnerships to navigate COVID-19 pressures and inflationary challenges across the globe. The company expects to open new stores in Thailand and the Bahamas (in 2023) and Malaysia (2024) through a new development agreement. Also, it stated plans to test its drive-thru (in licensed business) via the Alshaya partnership in Dubai. The company plans to open 25 to 30 licensed locations across formats and regions in 2023.

Shake Shack continues to impress investors with robust global Same-Shack sales growth. During the fourth quarter of fiscal 2022, Same-Shack sales rose 5.1% year over year. The upside was primarily driven by a 6% increase in the price mix. Urban same-shack sales during the quarter rose 11% on a year-over-year basis. The company’s average weekly sales are increasing consistently. In fourth-quarter fiscal 2022, its average weekly sales came in at $76,000, compared with $74,000 reported in the prior-year quarter. The upside was backed by menu price increases, the opening of 22 net new domestic Company-operated Shacks and the continued growth in urban and suburban Shacks.

Shake Shack has been investing in digital transformation, which is crucial to the company’s growth. During the fourth quarter of fiscal 2022, digital sales accounted for 36.2% of Shack sales. During the quarter, new purchasers in Company-owned app and web channels grew 6.7% (sequentially) to 4.8 million total new purchasers. The company has been investing more in digitization to sustain its digital guest enhancement strategies in the near term. During the quarter, the company was stated to have retained 74% of digital sales. The company intends to expand its digital base and improve frequency to drive growth. Also, it inclines toward acquiring new app users through marketing initiatives and promotions (focusing on digital-only dayparts).


Zacks Investment Research
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Shares of Shake Shack have declined 10.5% in the past year against the industry’s 12.9% growth. The downside was mainly driven by inflationary pressures and supply chain-related disruptions. Also, it faced headwinds from COVID lockdowns and intermittent market disruptions in Mainland China Shacks. The company anticipates monitoring the situation to gauge the impacts of COVID-19.

Shake Shack is continuously shouldering increased expenses, which are detrimental to margins. It has been facing significant supply-chain challenges and inflation across most commodities and categories. During fiscal 2022, Food and paper costs increased 19.8% year over year to $261.6 million. The increase was primarily due to the opening of 36 net new domestic Company-operated Shacks during fiscal 2022 and continued inflation in commodities such as dairy, paper and chicken. During the year, labor and related expenses increased 19.6% year over year to $257.4 million. For fiscal 2023, the company anticipates food and paper costs to be in the mid-to-high single-digit.

Zacks Rank & Key Picks

Shake Shack currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail – Restaurants industry are Chuy's Holdings, Inc. (CHUY - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Brinker International, Inc. (EAT - Free Report) .

Chuy’s Holdings currently sports a Zacks Rank #1. CHUY has a trailing four-quarter earnings surprise of 19.1%, on average. Shares of CHUY have increased 29.2% in the past year.

The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and EPS suggests growth of 10.8% and 19%, respectively, from the corresponding year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2 (Buy). ARCO has a long-term earnings growth of 11.6%. Shares of the company have increased 13.3% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests growth of 8.1% and 4.2%, respectively, from the year-ago period’s levels.

Brinker carries a Zacks Rank #2. EAT has a long-term earnings growth rate of 7.1%. The stock has gained 9.7% in the past year.  

The Zacks Consensus Estimate for Brinker’s 2024 sales and EPS suggests growth of 3.9% and 36.5%, respectively, from the year-ago period’s reported levels.

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