Is Shake Shack on the Rise?
The two components of same-store sales growth
Previously, we saw some of Shake Shack’s (SHAK) same-store sales growth trends over the past few quarters. Same-store sales growth essentially means the average growth in revenue at existing locations compared to a year ago. It’s made up of traffic and ticket.
Out of the 17.1% growth in 3Q15, ~8.1% of growth came from traffic, meaning the number of customers visiting Shake Shack grew by 8.1%, and the remaining 9% of the 17.1% growth came from a combination of price and mix.
Management’s guidance
For full-year 2015, SHAK’s management expects its same-store sales growth to be in the double-digit range of 11%–12%. For 2016, management has reduced its guidance to a range of 2.5%–3% growth for the entire year.
Needless to say, the double-digit growth in 2015 makes it difficult to compare to, but there are other factors that may lead to the deceleration in same-store sales growth in 2016.
What Shake Shack is experiencing in 2015, Chipotle (CMG) experienced in 2014: a double digit same-store sales growth. You can also access Chipotle through the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY’s portfolio includes holdings of 4% in McDonald’s (MCD), 3% in Starbucks (SBUX), and 1.5% in Yum! Brands (YUM).
Catalyst for same-store sales growth
The management attributed growth to the following factors:
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The publicity it received from its initial public offering (or IPO), which, according to the company, increased “guest awareness”
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Reintroduction of some popular items such as crinkle-cut fries
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The reopening of its flagship Madison Square Park store
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Increases in menu prices
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Limited-time offers (LTOs) and the Shake of the Week program
The first three points above can be attributed to attracting more customer traffic and the last two points can be attributed to growing the average ticket.
As the IPO becomes a distant memory, and the crinkle-fries become boring, Shake Shack will need to use different strategies to keep people interested. There is also a risk of upsetting customers if the company increases its menu prices to cover some of its cost pressures, which we’ll discuss later.
More importantly, one of the biggest crowd-pullers, the Madison Square Park location, will be exiting the comparable base in the first two quarters of 2016. However, this is not negative in the long run, and LTOs are a great strategy to boost sales. Let’s look at this in a bit more detail next.
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