Is Shake Shack Making a Move Into Breakfast?

By Markets Fool.com

Shake Shack started as a single location in New York. Image source: Shake Shack.

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It's easy to see why nearly every fast-food chain either offers or has considered offering breakfast.

Adding the meal brings in additional revenue at a time when stores would otherwise be sitting empty. That means that serving the morning meal can lower operating costs across the rest of the day by splitting fixed expenses over more hours.

McDonald's (NYSE: MCD) has understood this for decades, riding the Egg McMuffin, Big Breakfast, McGriddle, and other staples to add sales. Other chains have jumped on that bandwagon in recent years, with perhaps the most aggressive being Yum! Brands' (NYSE: YUM) Taco Bell, which set its sights squarely on McDonald's with its 2014 breakfast rollout.

The morning has become a crowded space with not only traditional fast-food players but also Starbucks, Dunkin' Donuts, and Panera Bread competing for business. That glut of consumer choices might make it harder for a new player to add breakfast, but it has not stopped one well-liked brand from considering it.

Shake Shack (NYSE: SHAK) may be entering the morning wars. But it won't (presumably) be offering eggs-and-bacon milkshakes.

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What is Shake Shack doing?

It's worth noting that Shake Shack has been on a tear. The company grew total revenue in Q2 by 37.2% largely by adding 14 new company-owned locations in the U.S. Same-store sales grew by 4.5% and CEO Randy Garutti noted during its recent earnings call (as transcribed by Seeking Alpha) that "to put that in perspective, the comp growth is an especially strong number, on top of last year's nearly 13% comp performance, a two year stack comp of 17.4%."

The chain plans to open its 100th location later this year and it has begun a test of a breakfast menu at its location in the New York City Fulton Transit Center downtown.

"Importantly, this Shack bridges the gap between sort of a normal Shack and a transit hub. So we chose to actually test breakfast upon opening this location," Garutti said. "Breakfast as we know, is an exciting day part for us."

That's an encouraging comment for fans of the chain and investors who would like to see it open during the morning daypart, but the CEO dialed back expectations as he continued.

"We have no intentions for now to expand it beyond our current transit hubs," he said. "But we're launching it here, will provide some good learnings for us beyond our traditional airport and train station Shacks."

That's not Garutti saying no or never. It's the CEO explaining that transit locations -- which have heavy morning traffic -- make sense as a way to test breakfast. So the company might not be launching a line of breakfast sandwich Shacks right away, but it's at least testing what works in the morning.

The breakfast menu offered at the Fulton transit hub uses the company's familiar naming conventions. It's a simple list featuring the Sausage Egg N' Cheese, the Bacon Egg N' Cheese, the Egg N' Cheese, and coffee, tea, and juice. It touts "cage-free eggs, griddled fresh. Served on a toasted non-GMO potato bun" as well as locally roasted organic coffee sourced from farms in Central and South America and Indonesia.

This has to happen eventually

It's important for Shake Shack to enter the breakfast space, but it's something the company should do slowly. That's partly because entering the morning market with the wrong menu can lead to consumer apathy and because it's important to shore up existing strengths before expanding operational priorities.

Garutti addressed the excitement over breakfast during the earnings call, making sure to leave the door open but making it clear that the company remained committed to building on its existing success.

"There may come a day, but it's not something we're focused on today," he said. "We want to focus on the heart of our business today, and that's lunch and dinner."

For now, that means people wanting to see the Shake Shack breakfast menu need to head to a transit center where it's being tested. In the long run, however, that limited launch of a morning menu opens the door for expansion. This is a case where a slow-and-steady approach makes sense, and while it might frustrate diehard fans, it makes sense to get the morning right before launching it across the chain.

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Daniel Kline has no position in any stocks mentioned. He really likes the custard at Shake Shack and is happy the chain's closest location is 45 minutes from his new condo. The Motley Fool owns shares of and recommends Panera Bread and Starbucks. 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.