Shake Shack Stock: 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.