Shake Shack Plunges as Street Sees Extended GrubHub Impact

(Bloomberg) -- Shake Shack Inc. tumbled by the most ever Tuesday after the burger chain's third-quarter comparable sales trailed estimates and management reduced its sales target.

“After seeing improved trends over the last two quarters, 3Q results -- as well as 4Q commentary -- were a sobering reminder of the volatility in results that often accompanies the stocks of young, fast growing companies,” Morgan Stanley analyst John Glass wrote in a note.

Shake Shack's decision to move to a single delivery provider (GrubHub) caused “some noise” in quarterly same-restaurant sales, management said on the conference call. Wall Street analysts said the full-year 2019 comparable sales forecast implies a decline in the fourth quarter and they expect the transition impact to last into 2020.

The stock fell as much as 18% to $68.90 to the lowest intraday since July 2. As a result of Tuesday's drop, Shake Shack loses its top performer status in the S&P 1500 Restaurant Index to Chipotle Mexican Grill Inc.

Here's what analysts are saying about Shake Shack results:

Morgan Stanley, John Glass

Not only did third-quarter comparable sales miss estimates, but the fourth quarter “could be far worse” because delivery integration is disconnected with other providers as Shake Shack moves to its single-provider relationship with GrubHub, Glass wrote in a note. Fourth-quarter same-restaurant sales could fall 3%, and sales will be hurt by the delivery transition for “a few quarters post this change.”

Sales pressure, combined with “a more challenged cost outlook,” resulted in the analyst cutting his fourth-quarter earnings estimate to a loss-per share of five cents from earnings per shares of six cents.

Rates equal-weight, price target to $76 from $84.

SunTrust Robinson Humphrey, Jake Bartlett

The temporary disruption from switching to a sole delivery provider “is much worse than we anticipated.”

Still, he expects joint marketing with GrubHub, GrubHub's “aggressive” expansion strategy and Shake Shack's greater focus on menu innovation in 2020 will drive positive same-store sales by the second half of next year.

Bartlett is “sharply lowering estimates” as negative comparable sales and G&A investment pressure margins, but he views the sharp pullback in the stock as a buying opportunity.

Rates buy, price target to $85 from $102.

What Bloomberg Intelligence Says:

“We think the delivery headwind will likely dissipate by 2Q. The chain's superior food quality and technology upgrades will likely fuel another low single-digit same-store sales gain in 2020. Margin pressure will remain a challenge, however, as labor and commodity inflation and higher packaging costs and fees associated with delivery persist.”
--Michael Halen, click here for note

Wedbush, Nick Setyan

“Given the limited visibility into the impact of dropping non-GrubHub delivery partners, somewhat offset by a ramp in deliveries with Grub, we believe it is prudent to expect negative SSS growth beyond just Q4.”

Setyan also believes that cannibalization and new comparable base units will remain ongoing headwinds to medium- to long-term same-restaurant growth.

Estimates fourth-quarter comparable store sales down 3.2%, first-quarter 2020 down 1.5% and flat comps for all of 2020.

Rates neutral, price target to $75 from $84.

MKM Partners, Brett Levy

“Following 2Q19 earnings, the market rewarded SHAK (an ~18% gain vs S&P 500 +1%), while 3Q19 results appear to be facing a stark reversal of fortune,” Levy wrote in a note.

So what changed from one quarter to the next? The analyst believes it is a “combination of some strategic decisions (including the removal of multiple delivery partners and technology investments) along with traditional external factors (including labor and commodity inflation and marketing, among other factors).”

While Shake Shack's unit growth rate is outpacing many in the restaurant industry, Levy believes “near-term choppiness, the company's ongoing investment phase, and SHAK's lofty valuation” support his neutral rating. Price target remains $75 per share.

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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