The Ratings Game: Shake Shack, a New York City native, is focusing its expansion on the suburbs


Shake Shack Inc. is expanding its footprint, and says the suburbs are a prime target.

“Assuming no unforeseen COVID-related delays, we’re on target to open between 35 and 40 new company-operated Shacks this year across both urban and suburban markets, although more weighted to suburban as we continue our market penetration strategy,” said Randall Garutti, chief executive of Shake Shack, on the recent first-quarter earnings call, according to a FactSet transcript.

The company is aiming for a total of 45 to 50 new Shacks in 2022.

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As of May 6, Shake Shack

had 16 locations still closed due to the pandemic, Garutti said.

Shake Shack, which originated in New York City, already has a presence in the suburbs. And those locations are rebounding from COVID-19 more quickly than urban locations, with sales down 1% in April compared with 2019, the year before the pandemic.

“We continue to experience recovery across both our urban and suburban markets,” Garutti said. “However, many major urban markets such as Manhattan remain materially below pre-COVID levels, while office events and tourism traffic return.”

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Besides suburban areas, executives highlighted the other areas where Shake Shack locations are reopening, including airports and baseball stadiums, like at Dodgers Stadium in Los Angeles.

“With limited fans allowed at games, we don’t expect to have a normal sales season, but we’re delighted to be bringing Shackers back to the ballpark,” Garutti said.

Shake Shack, which is known for its burgers, is also getting in on the chicken craze.

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Garutti said it sold out of the Korean-style chicken sandwich it launched earlier this year, ending the promotion “strong” in March and “having learned a lot.” The company is preparing for additional limited-time chicken offers for later this year.

Right now the company is offering its Chicken Shack sandwich topped with avocado and bacon, as well as an avocado bacon burger.

 Even if the company is upbeat about the suburban recovery, some analysts have questions.

“The performance of Shake Shack’s suburban stores is concerning (there are clear reasons why urban stores are trailing), but less than it first appears,” wrote Truist Securities analysts.

Analysts say there are a number of variables about Shake Shack’s business compared with 2019. For instance, they don’t know what Shake Shack’s average weekly sales were in April 2019, and the company’s idea of a “suburban” location might be considered “urban” for other companies.

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The company’s average weekly sales in the first quarter were $64,000.

But Truist analysts are optimistic about Shake Shack’s post-COVID prospects in part because of the company’s digital business, which reached 60% of total sales for the first quarter.

Truist rates Shake Shack stock hold with a $103 price target, down from $105.

Shake Shack reported first-quarter net income of $1.309 million, or a penny per share, after a loss of $960,000, or 3 cents per share, last year. Adjusted EPS was 4 cents, ahead of the FactSet consensus for a 9 cents-per-share loss.

Revenue totaled $155.3 million, up from $143.2 million last year and below the FactSet consensus for $162.0 million. Same-restaurant sales were up 5.7%, ahead of the FactSet consensus for a 0.4% decline.

For the second quarter, Shake Shack is guiding for revenue of $174 million to $183 million, and a same-restaurant sales increase between mid-40% and 50%. The FactSet consensus is for revenue of $179.3 million and a same-restaurant sales increase of 53.9%.

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Quo Vadis Capital is pessimistic about how things are going for the chain.

“Shake Shack is a house on fire,” wrote John Zolidis, president of Quo Vadis, in a note. “The business was under severe pressure in 2019 with negative transactions at existing locations and weaker sales at newly-opened units combining with labor and other cost deleverage.”

The most recent quarter is “simply continuing the pre-COVID trend,” Zolidis wrote, with Quo Vadis rating Shake Shack sell.

MKM Partners says the first-quarter results are actually “telling numerous stories.”

MKM rates Shake Shack stock neutral with a $105 fair value estimate, down from $110.

“We view the intermediate recovery story and the components of Shake Shack’s longer-term growth opportunities as stable, but the shorter-term volatility appears to weigh on the shares as members of its competitive set offer up greater proof of accelerating results,” Brett Levy, MKM’s executive director, wrote.

Shake Shack stock slumped 8.9% in Wednesday trading, and has fallen 3% for the year so far.

The benchmark S&P 500 index

has gained 8.3% for 2021 to date.

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