Shake Shack's Impressive Margin Progression: Analyst Says Staffing And Delivery Innovations Are Driving Growth

TD Cowen analyst Andrew Charles reiterated a Market Perform rating on the shares of Shake Shack Inc SHAK with a price target of $75.

The last two quarters of Shake Shack have seen impressive margin progression, driven by better staffing & fewer margin dilutive third-party delivery orders, while food & labor inflation has moderated, noted the analyst.

Improved staffing retention showed meaningful improvement beginning in 1Q, and the analyst anticipates the tailwind to persist following 2020-22's headwinds as stimulus has waned and inflation remains elevated, helping the restaurant industry regain staffing. 

The improved retention was due to the wage increases & the addition of tipping, which contributes ~$2-$3 per hour to employees on top of wages, noted the analyst.

Also Read: Truce!! Shake Shack Reaches Agreement With Activist Investor Engaged Capital The management thinks 20%+ margins would be achievable in 2023 without the risks around macro deterioration and beef inflation that is leading to 19%-20% restaurant margin guidance. 

The analyst expects shifting delivery guests into Shack owned channels will take time given the stickiness of subscription-based third-party delivery platforms.

The analyst is impressed with Shake Shack's current approach of app-based promotions in the 2 PM-5 PM shoulder period that incentivizes guests to try beverages/shakes & invites food attachment.

The company reported strong Q1 earnings with a $253.28 million revenue and an adjusted pro forma EPS loss of $(0.01), both above street view.

Price Action: SHAK shares are trading lower by 0.70% at $68.57 on the last check Friday.