Shake Shack Investors Look to Long-Term GrubHub Delivery Benefit

(Bloomberg) -- Shake Shack Inc. shares neared a multi-year high early Tuesday after the fast-food burger chain posted second-quarter sales results that beat expectations and raised its full-year revenue outlook.

Analysts applauded the sales results, as well as Shake Shack's new-store development plan, with multiple brokerages raising price targets. They also chose to overlook Shake Shack's comments that its new GrubHub Inc. delivery partnership may result in some volatility in delivery sales for the rest of the year, with Cowen's Andrew Charles voicing the prevailing view that any headwind is “short-term pain for long-term gain.”

Shares of Shake Shack have risen more than 61% year-to-date through Monday. In early trading Tuesday, the stock is up 3.6% to almost $76, a fraction below a 4-year high reached late last month.

Here's what Wall Street is saying:

SunTrust, Jake Bartlett

Strong comparable sales and increased new-store development guidance should drive further gains in the stock.

The transition of delivery to one partner (GrubHub) may cause some near-term sales disruption, but SHAK's increased 2019 comparable sales forecast “appears achievable and potentially beatable.”

Over time, delivery will become a “meaningful SSS driver as SHAK benefits from joint marketing efforts and leverages consumer data.”

Rates buy; price target to $86 from $70.

Jefferies, Andy Barish

Continued growth in digital and delivery drove “impressive” sales results.

Shake Shack may see some near-term volatility as its new delivery partnership with GrubHub rolls out nationally over the next two to three quarters but, long term, SHAK should benefit from GRUB's “breadth of coverage, POS/kitchen integration and data sharing/marketing capabilities.”

Restaurant-level margin flow-through is still limited, Barish said, but believes “brand strength will help market look past.”

Rates hold, with view that shares are fairly valued at a premium valuation of ~28x 2020 estimated Ebitda; price target to $68 from $55.

Wedbush, Nick Setyan

Momentum in comparable sales growth continues, “but so do margin headwinds.”

New unit outperformance, delivery rollout with GrubHub and new product innovation can contribute to potential revenue upside in the second half.

But unit-level margins fell for a second consecutive quarter due to delivery costs, higher costs associated with chicken bites, labor inflation and the lapping of one-time benefits in 2Q18, Setyan said. “We continue to see risk to the lowered unit level margin guidance.”

Rates neutral; price target to $75 from $70.

Cowen, Andrew Charles

“We are surprised by the deceleration in 2H19 implied comp guidance as SHAK transitions to one national delivery provider over the next 2-3 quarters.”

However, the company “tends to guide conservatively,” so the impact to comps likely won't be as “severe as forecasted, though admittedly this is difficult to prove.”

Rates market perform; price target $71 from $66 owing to improved sales performance.

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

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