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Shake Shack's (SHAK) Q2 Earnings Beat Fails to Lift Stock

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Shake Shack Inc. (SHAK - Free Report) reported robust second-quarter 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. While the company’s bottom line outpaced the consensus mark for the sixth straight quarter, top line exceeded the same for third straight quarter.

Adjusted earnings of 29 cents per share trumped the consensus estimate of 17 cents. Also, the bottom line rose 45% year over year, backed by an increase in revenues.

Revenues jumped 27.3% year over year to $116.3 million and outpaced the consensus mark of $110 million. Rise in Shack sales and licensing revenues boosted the company’s top-line performance.

Even though Shake Shack delivered better-than-expected results, shares of the company declined nearly 5% in after-hours trading on Aug 2. Additionally, its decision not to raise the guidance for 2018 despite posting robust results took investors by surprise. Further, a 2.6% decline in guest traffic hurt investor sentient.

Revenues in Detail

Shack sales improved 28.3% year over year to $112.9 million, primarily owing to the opening of 25 new domestic company-operated Shacks and rise in same-Shack sales. Shake Shack’s cult following and successful expansion into various cities across the globe boosted Shack sales and traffic.

Licensing revenues in the quarter under review totaled $3.4 million, up 2.1% year over year. The upside can be attributed to the opening of 20 new licensed Shacks stores and robust performance of Shacks in Asia. Meanwhile, Shake Shack continues to cash in on the diversification of its licensing business and the opportunity to reach places that it could not, domestically.

Same-Shack sales (or comps) rose 1.1% year over year. The figure compared favorably with the year-ago quarter’s 1.8% decline. The metric inched up 1.7% from the last reported quarter. In the reported period, comparable SHAK base, which includes restaurants open for 24 full months or longer, was 50 compared with 37 in the year-ago quarter.

Shake Shack, Inc. Price, Consensus and EPS Surprise

Operating Performance

Shack-level operating profit (non-GAAP operating income) of $31.8 million was up 25.5% year over year. The metric margins, as a percentage of Shack sales, shrunk 60 bps to 28.2% primarily due to increased labor and related expenses, certain fixed expenses and cost.

Adjusted EBITDA increased 12.9% to $21.9 million. However, as a percentage of total revenues, adjusted EBITDA margins contracted roughly 240 bps to 18.8% on a year-over-year basis.

General and administrative expenses summed $12.6 million, up from $9.7 million a year ago. As a percentage of total revenues, general and administrative expenses were 10.8%, up 20 bps from the prior-year quarter. This upside was primarily driven by increase in employee to support growth initiatives and investment across the business.

2018 View

Shake Shack continues anticipating total revenues between $446 million and $450 million. It projects Same-Shack sales to be flat to up 1% and licensing revenues in the band of $12-$13 million.

Shack-level operating profit margin is guided between 24.5% and 25.5%, while general and administrative expenses are projected between $49 million and $51 million, excluding roughly $6-$8 million of costs associated with Project Concrete.

For 2018, it continues to expect the launch of 32-35 domestic company-operated and 16-18 net-licensed Shacks.

Zacks Rank & Key Picks

Shake Shack has a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include BJ's Restaurants, Inc. (BJRI - Free Report) , Wingstop Inc. (WING - Free Report) and Carrols Restaurant Group, Inc. (TAST - Free Report) . BJ's Restaurants and Carrols Restaurant sport a Zacks Rank #1 (Strong Buy), whereas Wingstop carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BJ's Restaurants has an impressive long-term earnings growth rate of 15.3%.

Carrols Restaurant Group has long-term earnings growth rate of 20%.

Wingstop reported better-than-expected earnings in the trailing four quarters, with an average beat of 16.2%.

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