Shake Shack (NYSE:SHAK) shares soared after the company breezed past estimates in its first-quarter earnings report. The better-burger chain said revenue increased 29.1% to $99.1 million, ahead of expectations of $96.3 million, while adjusted earnings per share increased from $0.10 to $0.15, crushing the consensus of $0.08. The company also made some upward revisions to its full-year guidance.
Longtime followers of the stock shouldn’t be surprised by the earnings beat, however; Wall Street has chronically underestimated the fast-casual chain. As you can see from the chart below, Shake Shack has beaten earnings estimates every quarter except one, when it matched:
Data source: E*Trade.
Not only has the company consistently beat earnings estimates, but the extent of the beats has accelerated over the last two quarters, showing that its performance is improving and Wall Street has failed to anticipate it. Comparable sales in the first quarter accelerated to 1.7% (its fastest pace in several quarters), with the help of a recent price increase, and the company continued to show off strong operating leverage. Below are a few more reasons why the stock is surging.
Image source: Shake Shack.
Executing on growth goals
Shake Shack management has said it aims to open 200 domestic company-operated locations by 2020, and eventually have 450. The company has accelerated its new store openings every year, from a forecast of just 10 when it went public in 2015, to 26 last year and a projected 32 to 35 this year. With 95 domestic company-operated locations as of the end of the first quarter, Shake Shack looks like it’s well on track to meeting or even exceeding that goal.
Investors have sometimes balked at Shake Shack’s high valuation and weak comparable-sales growth, but the stock has always been an expansion play above all else. The company has huge brand value for a chain of its size, and rapidly opening new locations is the best way to unlock that.
Reflecting the strength of the company’s brand, its restaurant-level operating margins are expected to be 24.5% to 25.5% this year, well ahead of most of its competitors, which tend to generate restaurant-level operating margins in the teens. Meanwhile, Shake Shack’s average unit volume continues to be at the top in the industry. The company sees an AUV this year of $4.1 million to $4.2 million — better than the 50 biggest fast-food chains in the country except Chick-fil-A, at $4.4 million.
Benefiting from tax reform
No sector has more to gain from the lower corporate tax rate than retailers and restaurants. As businesses are generally focused on U.S. operations and don’t have access to the credits available for things like research and development or manufacturing, retail and restaurants have traditionally paid a higher tax rate than any other industries. Shake Shack was no exception to this rule: Last year the company paid an effective tax rate of 38.5%, but this year the company expects an effective tax rate of just 26% to 27%.
That reduction alone should lead to a 20% increase in Shake Shack’s profits. However, Wall Street analysts expect Shake Shack’s full-year earnings per share to drop from $0.57 to $0.46. As the first-quarter report makes clear, that forecast looks sorely misguided.
They’re huge in Asia
Finally, CEO Randy Garutti dropped another clue about the company’s potential, calling the recent opening of its first Hong Kong location “an incredible moment for our company,” which inspired hundreds of fans to line up in advance and attracted a “tremendous amount of media.”
Though Shake Shack does not break out international sales by region, the company appears to be hugely popular in Asia. Many of its openings have been greeted with long lines, and its first location in South Korea was still serving an average of 3,000 people a day more than a month after it opened. Many fast-food restaurants would be happy to serve that many people in a week. American fast-food brands like McDonald’s, Starbucks, and Yum! Brands’ KFC and Pizza Hut have all found warm welcomes in Asia, and Shake Shack appears to be following in their footsteps.
The company is planning to ramp up expansion in Asia. Garutti said the region would be a center of international development over the next three years as the company focuses on Hong Kong, Japan, South Korea, and Shanghai. Yum! Brands, which recently split off its China business, has more locations there than in the U.S., and Starbucks expects its China business to eventually outgrow its home market, so the opportunity for Shake Shack in Asia (and specifically China) could be enormous.
Given the company’s potential in Asia and the solid progress at home, the post-earnings surge shows that the power of Shake Shack’s brand can’t be ignored.