Is Shake Shack on the Rise?
Margins
Shake Shack’s (SHAK) operating margins are expected to face pressures mainly arising from labor cost increases as well as commodity inflation. The company is anticipating its operating profits to come in at 22% in 2016, and over the long-term, it estimates an operating margin in the range of 18%–22%.
Cost pressures
One of the biggest concerns worrying the restaurant industry is the anticipation of a minimum wage increase, which would put pressure on companies’ costs. In the chart above, the red dot represents what Shake Shack is paying its employees. For most states, the company is already paying above the minimum wage, but over the next two to three years, the minimum wage is expected to surpass what the company is currently paying.
This not only impacts Shake Shack, but the entire restaurant industry in the United States. To offset these labor cost pressures, Shake Shack plans to increase its menu prices by a minimum of 1%–2% in 2016. Naturally, other companies will also make such price increases.
You can access Chipotle through the Consumer Discretionary Select Sector SPDR (XLY). XLY’s portfolio consists of holdings of 4% in McDonald’s (MCD), 3% in Starbucks (SBUX), and 1.5% in Yum! Brands (YUM).
In the next part of this series, we’ll look at analysts’ recommendations and price target for Shake Shack.
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