Sell-Side Digests Shake Shack's Earnings, Guidance

Shake Shack Inc SHAK on Monday reported third-quarter results, leading to a 20% stock drop but some analysts continue to like the stock.

The Analysts

Wedbush analyst Nick Setyan maintains a Neutral rating on Shake Shack's stock with a price target lowered from $84 to $75.

Morgan Stanley analyst John Glass maintains at Equal-Weight, price target lowered from $84 to $76.

Credit Suisse analyst Lauren Silberman maintains at Outperform, unchanged $83 price target.

Wedbush: 'Amplifying Concerns'

Shake Shack's third-quarter report and fourth-quarter guidance were both disappointing while "amplifying concerns" around the long-term picture, Setyan said. Specifically, 2% same-store sales growth was short of the consensus estimate of 2.7%, while unit-level margin of 23.1% was short of the consensus estimate of 24.3%.

Management lowered its full year same-store sales growth guidance from 2% to around 1.5%, which Setyan said implies a notable deceleration in the fourth quarter by as much as negative 3%. It's reasonable to expect negative same-store sales growth to continue through the first quarter of 2020 and come in flat for the full-year 2020.

Related Link: The Street Agrees: Shake Shack Delivered Tasty Q2, But Valuation Is Full

Morgan Stanley: 'Sobering Reminder' Of Volatility

Shake Shack's report marks a reversal from the past two quarters of improving trends and acts as a "Sobering reminder" results can be volatile, Glass said. The results were impacted by a transition to GrubHub Inc GRUB as an exclusive delivery partner and this could result in "significantly worse" top-line performance in the fourth quarter.

However, Glass said Shake Shack's exclusive relationship with GrubHub will yield longer-term benefits through a single integrated partner. Unit growth, unit potential and international opportunities remain "highly attractive."

"In the short run, we don't think the shares were priced for this magnitude of a swing in sales trajectory or short term profit pressures," the analyst wrote in a note.

Credit Suisse: 'Confidence' In Outlook

Shake Shack's now exclusive partnership with GrubHub will impact near-term sales, but Silberman said the restaurant likely received an "extremely favorable deal." A national co-market campaign went live on Monday and should partially offset some of the lost sales from other delivery channels.

The analyst said Shake Shack faces an opportunity to both expand its delivery options to other partners over time as well as offering delivery directly from its app.

Overall, the long-term story for Shake Shack remains unchanged despite a disappointing quarter.

Price Action

Shares of Shake Shack were trading lower by 19.8% to $67.55 at time of publication.

Photo credit: m01229 (Shake Shack dinner in New Haven) via Wikimedia Commons