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Shake Shack’s Slow Recovery Keeps This Analyst on the Sidelines… For Now

These are difficult times for restaurant operators. The industry is among those hit the hardest by the global pandemic.

So, expectations were set to low burn before Shake Shack (SHAK) delivered Q2 results. Yet the fast-casual burger chain still managed to disappoint in its latest quarterly statement.

With SSS (same store sales) dropping year-over-year by 49%, the top line took a beating. Revenue for Q2 came in at $91.79 million – a 40% yearly decline – and $0.79 million below the estimates. Non-GAAP EPS of -$0.45 missed by $0.07, translating to a loss of $18.3 million. The contrast to last year’s same quarter is telling. Shake Shack reported a $10.2 million profit in 2Q19.

In a sense even the worse-than-expected performance during one of the most difficult quarters on record can be written off as a freak case. The problem for the chain is that trends aren’t improving. SSS for July are down 39% year-over-year, hardly better than June’s 42% downturn.

And New York, Shake Shack’s biggest market, has been especially slow to recover. New York SSS declined by 64% in the second quarter, and in the current quarter-to-date, sales are still down by 56%.

On the plus side, digital sales are booming, representing 75% of total sales in the quarter, with the addition of almost 1 million new customers signing up via digital channels.

However, investors didn’t like what the menu had to offer and sent shares down by 12% in the following session. But despite the dismal results, Deutsche Bank Brian Mullan analyst hasn’t ruled out a turnaround just yet.

The analyst said, “Exiting the quarter, we could see consensus shifting considerably in any given quarter, but we’re not sure that 2021E or 2022E adjusted EBITDA estimates really move meaningfully lower. While we would characterize ourselves as cautious here given SHAK’s challenged locations (for the current environment) and have real questions around what the true restaurant level margins and AUVs (average unit volume) will be at maturity, we also have a healthy respect for the seemingly very long-term runway for continued system sales growth, which seems to provide valuation support time and time again.”

As a result, Mullan keeps his Hold rating as is. The price target gets a little trim and is reduced to $55 from $57. Nonetheless, there’s possible upside of 15%, should the target be net in the year ahead. (To watch Mullan’s track record, click here)

Most of the Street remains on the sidelines, too. With 11 Holds and 1 Buy and Sell each, SHAK has a Hold consensus rating. There’s a modest upside of 0.55%, as implied by the $50.83 average price target. (See Shake Shack stock-price forecast on TipRanks)

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Marty Shtrubel
Marty Shtrubel was born in the UK, raised in Israel, and then headed back to London, where he made music and pursued a career in sound recording. After a move back to Tel Aviv, he set off on a new path and now works as a financial blogger at TipRanks.

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