Shake Shack Inc. SHAK is set to report third-quarter results on Nov 5 after the markets close. Last quarter, the company posted a positive earnings surprise of 166.67%. In fact, the company has posted positive earnings surprises in all the three quarters it has reported so far. The company began trading on Jan 30, 2015.
Factors to Consider
Same-Shack sales grew 12.4% in the first half of 2015, far better than 4.1% growth in 2014. Shake Shack’s cult following and successful expansion into various cities around the world drove the upside. Menu innovation and limited time offerings are expected to keep comps strong in the soon-to-be-reported quarter. Also, the company is well positioned to cash in on the surging popularity of the U.S. fast-casual market and increase earnings on the back of lucrative store economics, strong brand and solid balance sheet.
The company is known for using 100% all-natural Angus beef that is never fed with hormones or antibiotics. Along with its signature dishes such as cheese crinkle fries, it serves shakes and frozen custard. Shake Shack is also focusing on highly valued millennial consumers who prefer brand experience and healthy food. Such efforts to meet consumer preferences are expected to aid comps in the third quarter.
However, the company expects comps in the second half of the year to be lower compared with the first half owing to the lapping of menu price increases taken in Sep 2014, the return of crinkle cut fries that will lap in the second half of 2015 and the end of the limited offering of the ShackMeister Burger in July. These factors would result in soft comps in the to-be-reported quarter.
Earnings Whispers
Our proven model does not conclusively show that Shake Shack will beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.
Zacks ESP: Shake Shack has an Earnings ESP 0.00%. That is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 7 cents per share.
Zacks Rank: Though Shake Shack’s Zacks Rank #1 (Strong Buy) increases the predictive power of ESP, a 0.00% ESP makes surprise prediction difficult.
We caution against Sell-rated stocks (Zacks Rank #4 and 5) going into the earnings announcement, especially when the company is seeing a negative estimate revisions.
Stocks to Consider
Here are some companies in the restaurant industry which, as per our model, have the right combination of elements to post an earnings beat this quarter:
Bob Evans Farms, Inc. BOBE, with an Earnings ESP of +2.5% and a Zacks Rank #3.
Wingstop Inc. WING, with an Earnings ESP of +11.11% and a Zacks Rank #2.
Popeyes Louisiana Kitchen, Inc. PLKI, with an Earnings ESP of +2.27% and a Zacks Rank #1.
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