New York City-based Shake Shack Inc. (SHAK) owns, operates, and licenses Shake Shack restaurants in the United States and worldwide. Since the original Shack’s opening in 2004, the brand has expanded to more than 300 outlets in 32 U.S. states and more than 100 overseas locations. The company is continuing its efforts to redefine the industry landscape and deploy new technologies to fulfill the demands of consumers through strategic partnerships.

However, the stock has declined 31.5% in price over the past nine months and 6.4% over the past three months. Furthermore, closing yesterday’s trading session at $83.77, the stock is currently trading 39.5% below its 52-week high of $138.38, which it hit on January 27, 2021, indicating bearishness.

Also, following the company's failure to meet the consensus sales estimate in its recently released third-quarter results, and lower-than-expected projections, Northcoast Research downgraded the stock to Neutral from Buy yesterday, which contributed to a 7.8%  price decline.

Here is what could influence SHAK’s performance in the upcoming months:

Inadequate Financials

SHAK’s operating expense surged 43.5% year-over-year to $196.54 million for the third quarter, ended September 29, 2021. Its operating loss came in at $2.65 million. The company reported a $2.18 million net loss, while its loss per share was  $0.06 for this period.

SHAK’s revenue increased 48.7% year-over-year to $193.9 million but missed the $199 million consensus estimate by 2.6%. The company expects its total revenue for the current quarter to be $193.5 million - $200 million, which is below analysts’ expectations.

Weak Profitability

SHAK’s 33.2% trailing-12-months gross profit margin is 7.3% lower than the 35.8% industry average. Also, its ROC, net income margin, and ROA are negative 0.9%, 2.6%, and 1.3%, respectively. And its  $56.36 million trailing-12-months cash from operations is 71.1% lower than the  $195 million industry average.

Stretched Valuation

In terms of forward Price/Book, the stock is currently trading at 9.42x, which is 148.9% higher than the 3.78x industry average. Also, its forward 5.25x EV/Sales multiple is 254.3% higher than the 1.48x industry average. SHAK’s 4.85x forward Price/Sales  is 271.7% higher than the 1.3x industry average.

POWR Ratings Reflect Uncertainty

SHAK has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SHAK has a D grade for Value, Stability, and Quality. The company’s higher-than-industry valuation justifies the Value grade. The stock’s 1.52 beta is consistent with the Stability grade. In addition, the company’s poor profitability is in sync with the Quality grade.

Of the 43 stocks in the A-rated Restaurants industry, SHAK is ranked #42.

Beyond what I have stated above, one  can view SHAK ratings for Growth, Momentum, and Sentiment here.

Bottom Line

Despite a significant increase in revenue in its last reported quarter, SHAK failed to beat the consensus estimate. In addition, the company’s poor profitability and stretched valuation pose a threat to the stock’s future price performance. Therefore, we think the stock is best avoided now.

How Does Shake Shack Inc. (SHAK) Stack Up Against its Peers?

While SHAK has an overall D rating, one might want to consider its industry peers, Good Times Restaurant (GTIM) and RCI Hospitality Holdings Inc. (RICK), having an overall A (Strong Buy) rating.

SHAK shares were trading at $85.21 per share on Tuesday morning, up $1.44 (+1.72%). Year-to-date, SHAK has gained 0.51%, versus a 26.08% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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