Shake Shack Inc Surprises Wall Street Once Again

By Markets Fool.com

Shake Shack has done it again.

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For the fifth time in a row, in each quarterly report it has released since going public, the burger chain blew past expectations. The chart below shows the company's outstanding track record:

Quarter Earnings Per Share Surprise
Estimated Actual
Q1 2015 ($0.04) $0.03 N/A
Q2 2015 $0.03 $0.09 200%
Q3 2015 $0.07 $0.12 71%
Q4 2015 $0.07 $0.08 14%
Q1 2016 $0.05 $0.08 60%

Data source: Yahoo! Finance

For the first quarter, numbers across the board were impressive. Same-store sales jumped 9.9%, lapping an 11.7% pop in the year-ago quarter, and restaurant-level operating profit rose from 25.7% to 28.2%. Overall revenue increased 43.3% to $54.2 million, driving a 114% jump in adjusted net income to $2.8 million, or $0.08 per share, up from $0.03 in the prior year.

Guidance got a jolt as well, raised from the conservative view management offered in the previous report, which sent shares plummeting. Now, Shake Shack sees comps rising between 4% and 5% for the year, up from a previous range of 2.5% to 3%. The company also raised the number of new domestic company-owned restaurants openings this year from 13 to 16. That increase is important as new restaurants are the key driver of growth. The faster it can open them, the better for investors, assuming the strong unit operating metrics persist.

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Wall Street just doesn't get the Shack

What's notable about the 2016 comp guidance is that the projection for the remaining three quarters didn't really change. I think this is management being overly conservative once again, as the 1.5% price increase in January alone would lead the company to meet that guidance without increased traffic. Considering the momentum from the first quarter boom, which management believes was assisted by the national rollout of Chick'n Shack, its new chicken sandwich, I would expect traffic to continue growing throughout the year.

Analysts, however, seem skeptical. Though they raised their full-year estimates, for the second half of the year, the consensus sees Shake Shack's earnings improving from $0.20 to just $0.23 per share, a surprisingly modest bump considering net income more than doubled in the past quarter. Management has warned about the effects of increased wages, but there are plenty of tailwinds including lower beef and dairy costs. Operating leverage should also improve in other areas as the company grows.

Shake Shack's future is looking brighter

Not only did Shake Shack up its guidance on new store openings for the year, but more importantly, it raised its expected average unit volume (AUV) from $3.3 million to $3.6 million for restaurants open this year, indicating that new shacks are outperforming expectations. Management stuck with its guidance of $3 million AUV for 2017 and beyond as it expects average sales to moderate as it expands into new markets and further penetrates existing ones.

Looking at average unit volumes, it's hard to understate Shake Shack's dominance over the fast food industry. Today, the company delivers an average unit volume of $5 million, well ahead of second place Chick-Fil-A at $3 million. Even if opening average unit volumes fall to $3 million over time, that's still better than any other restaurant chain. Shake Shack's combination of prime real estate and a beloved brand continues to make it a special case.

Shake Shack's West Hollywood location. Image source: Shake Shack

This was apparent in the opening of its first California location in Los Angeles' West Hollywood location. Management called the opening, in the birthplace of fast food, one of its most successful ever with lines at times having been well over an hour. In a market where regional favorite In-N-Out burger may be king, Shake Shack's big splash shows how well the brand travels.

When the stock first debuted, questions about the company's ability to deliver outside its home market lingered, but those seem to be answered. As Shake Shack finds success in new formats like outlet malls, the company target of 450 domestic, company-operated stores likely increases. With only 47 of those restaurants open today, it has a long way to go, but analysts consistently underestimate the company's potential, both in the next quarter and over the long-term.

Even after last week's pop, the stock remains on sale. Expect the surprise streak to continue.

The article Shake Shack Inc Surprises Wall Street Once Again originally appeared on Fool.com.

Jeremy Bowman owns shares of 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.