Can California Save Shake Shack After Last Week's 18% Drop?

By Markets Fool.com

Image source: Shake Shack.

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Last week was a forgettable one forShake Shack investors. Shares of the gourmet burger chain plunged 18% on the week after posting poorly received quarterly results. However, with an important new outlet set to open tomorrow the stock could start to head north as the chain travels west.

Shake Shack goes Hollywood on Tuesday. It will open a new burger joint on the corner of Santa Monica Boulevard and West Knoll Drive in West Hollywood. It will be the chain's first foray into Southern California and the West Coast. It will also naturally pit Shake Shack against that coast's cult fave In-N-Out, as well as other rival chains that got their start in Southern California including The Habit Restaurants, Fatburger, and Umami Burger.

In short, it won't be easy. Southern California loves its homegrown darlings. Shake Shack fans that rave about its Angus burgers, crinkle-cut fries, and frozen custard treats may argue that quality will overcome a bias for the home team, but let's not dismiss the quality that's already in California. Consumer Reports surveyed burger fans in 2014 to see how the top 21 chains score in terms of quality of their signature sandwiches, and the top two spots went to The Habit Restaurants and In-N-Out. Shake Shack wasn't included in the survey, but the point remains that succeeding in California will take more than what it did to become an East Coast darling where In-N-Out has yet to expand and The Habit Restaurants is just starting to set up shop.

Shake Shack isn't going to wait to see if tomorrow's opening is a hit before throwing more patties on the grill in Southern California. It plans to open a Glendale store later this year with downtown Los Angeles on tap for next year.

The push comes at a time when the stock is feeling mortal after offering up ho-hum guidance after a strong quarterly report. Revenue may clocked in with a year-over-year surge of 47% during the holiday quarter -- powered by an 11% pop in comps and new locations -- but the chain spooked the market by forecasting revenue growth to slow to a 26% clip at the midpoint of its outlook for 2016. It also sees comparable-restaurant sales climbing 2.5% to 3% in 2016, a far cry from its bigger store-level steps in recent quarters.

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Shake Shack is still in a good place. It continues to trade well above its 2014 IPO price of $21, even if it has fallen sharply since peaking last year. It has beaten Wall Street's profit targets in every quarter as a public company, and there's some well-earned buzz for theChick'n Shack fried chicken sandwichit introduced earlier this year as a way to expand beyond burgers and hot dogs.

If California embraces Shake Shack tomorrow and beyond it will open up the expansion possibilities for a chain that it still early in exploring the ceiling. It's there for the taking, and Shake Shack seems to have a better chance than others who have headed out to Hollywood to become a star to make it.

The article Can California Save Shake Shack After Last Week's 18% Drop? originally appeared on Fool.com.

Rick Munarriz owns shares of Habit Restaurants and Shake Shack. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.