Shake Shack (NYSE: SHAK) this week posted fourth-quarter earnings results highlighted by a 31% revenue spike. The "better burger" chain kept up the modestly improving operating trend that investors have seen in each of the past two quarters, too. That good news was tempered a bit by the company's expectations for flat sales at existing locations in the year ahead.
More on that 2018 outlook in a moment. But first, here's how the headline fourth-quarter results stacked up against the prior-year period:
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Earnings per share
What happened this quarter?
Sales growth turned positive at existing locations even as Shake Shack continued aggressively adding to its base of restaurants.
Highlights of the period included:
- Sales rose sharply thanks to the addition of 16 new locations and a slight uptick in comparable-store sales as comps improved by 0.8% to beat management's expectations. Comps had declined by nearly 2% in the prior quarter as customer traffic fell 4%. This quarter's comps gain implies that these traffic trends at least stabilized over the holiday period.
- Comps dipped by 1.2% for the full year to edge past Shake Shack's November forecast of a 1.5%-2% decline. That result trails established rivals including McDonald's, which grew comps by 5% in 2017. Yet Shake Shack's comps were significantly better than the 3% drop that management had forecast earlier in the year.
- Average weekly sales at company-owned stores fell to $85,000 from $90,000.
- Operating margin fell, dipping to 6.1% of sales from 6.8% thanks to increased labor costs.
- Shake Shack's reported loss was powered by a large income tax expense related to recent tax law changes.
What management had to say
Executives focused their comments on the company's store expansion pace. "We delivered another year of robust global growth," CEO Randy Garutti said in a press release, "opening 26 new company-operated domestic Shacks and 19 net licensed Shacks, representing a nearly 40% increase on our base."
Management explained how this growth is helping lessen the company's reliance on a New York market that today accounts for 41% of the base, down from 56% in 2015. "This percentage will continue to decline as we geographically diversify our Shack base," executives said.
Garutti and his team issued a detailed 2018 outlook that targets launching 34 new stores, which would set another record for the young restaurant chain. Comps are projected to be flat despite a 2% menu price uptick, implying reduced customer traffic at existing locations. Meanwhile, Shake Shack is warning that operating margin will drop for the third consecutive year, falling to about 25% from 27% in 2017, and 28% in 2016.
Despite those weakening operating trends, management believes there's a large opportunity for unit growth over the next few years. Shake Shack is aiming to reach at least 200 locations in the U.S. by 2020 to more than double its current footprint and take a big step toward the 450 stores that management believes the market will ultimately support.
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