The sizzle of a Shake Shack burger may not be enough to stem the tide of slowing earnings and sales growth.
Shake Shack will report its third-quarter earnings today, and all signs point to slowing revenue growth and traffic amidst a sector-wide slowdown. Cheaper grocery prices, higher labor costs and expansion plans have yet to translate into a significant revenue boost for the company.
Economists polled by Bloomberg estimated adjusted earnings per share of $0.14, identical to second-quarter figures. Revenue estimates averaged $69.3 million, a year-over-year increase of 30%, indicative of slowing growth compared to last year’s revenue figures which posted a 37 percent year-over-year increase. Market Realist analysts predict just a 1.3%, a drop from the company’s second-quarter same-store sales growth rate of 4.5%. Stocks traded $33.43 before market close on Wednesday, 18% less than its stock price when the last earnings figures were released in August.
Analysts attribute the muted earnings growth to a countrywide restaurant slowdown driven by falling grocery store food prices and high labor costs straining their ability to compete.
“Labor inflation and food cost deflation to remain a driver of grocery gains at the expense of restaurants,” wrote Wedbush analyst Nick Setyan in a note to clients last month. Wedbush recommended investors exercise caution on Shake Shack stock as the company continues to add restaurant locations amidsts slowing sales numbers.
Wedbush analysts note that the gap between the food at home (grocery) and food away from home (restaurant food price) inflation continues to widen to a level not seen in seven years.
Meanwhile, labor costs driven by minimum wage increases are squeezing fast-casual chains across the industry, leaving Shake Shack in a difficult spot. Last night, Arizona, Colorado and Maine voters opted to raise the minimum wage to $12 per hour following a series of incremental increases.
“Costs are subject to fluctuations in commodity prices as well as labor from minimum wage increases and other benefits, namely health care,” wrote Andrew Charles of Cowen and Company, in a research note.
Despite the headwinds from a sector slowdown, some analysts recommend investors continue to invest in Shake Shack due to its longer-term growth potential.
“SHAK is one of our favorite early stage growth companies. It combines a very long runway
for growth with some of the best unit level economics in the industry ,” wrote Buckingham Research’s John Zolidis in an analyst note which maintained a “buy” rating for the stock.
Shake Shack’s potential for growth could be driven by its recently-launched mobile ordering app, a tool that has driven sales for industry counterparts including Panera, Domino’s Pizza and Papa John’s.
“We are also excited about the company’s announced test of a mobile order and pay app at one location in New York, which we believe has the ability to unlock improved customer frequency and through-put,” wrote William Blair analyst Amy Noblin, quoted in The Street.