Shake Shack has big plans, but weather created some problems for the chain last quarter. | Photo courtesy of Shake Shack.
Since he took over as CEO of Shake Shack two years ago, Rob Lynch has reset expectations for the chain’s long-term potential.
Rather than have just a few hundred, specialty locations, the brand Lynch envisioned would be much bigger, with 1,500 locations—or perhaps more—and a more everyday customer.
The New York-based chain took some real steps in that direction. Same-store sales rose 4.6% in the first quarter, including 1.4% traffic growth. The company expanded restaurant margins by 50 basis points, to 21.2%, despite high beef costs. It opened more locations in the first three months of the year than it ever had in the first quarter.
Maybe more interestingly, the company is doing value. It offers some items on its app at $1, $3 or $5. Customers on the app can, potentially, get a combo meal for $12, which at a brand like Shake Shack and its $17 average check is something. That’s about the price of a Subway footlong.
Those prices are enough to lead some analysts to question fast-food chains like Wendy’s whether they feel pressure by fast-casual burger chains lowering their prices.
Yet the brand can’t quite shake Wall Street skepticism, which revealed itself in a huge way on Thursday when the company missed its expectations for both sales and profits.
Most notably, Shake Shack reported a 1 cent loss per share when Wall Street had been expecting 11 cents. It also missed more modestly on revenue and same-store sales, along with store-level profit margins.
Lynch, the CEO, blamed the weather for most of it. The company said that poor weather hurt same-store sales by 240 basis points. It also hurt earnings, as did the company’s investments in new locations and “macroeconomic factors.”
“We had anticipated even higher sales heading into Q1,” Lynch told analysts on Thursday. “We made a lot of investments heading into Q1, with a sales plan that we would have achieved had we not seen those weather impacts.”
The results sent Shake Shack’s stock down nearly 30%. It wiped out the gains in shares the company had made this year. Over the past 12 months, the company’s shares are now down more than 32%. Profits in particular are important to Wall Street, and reporting a loss when investors expect a profit generally elicits this type of reaction.
Still, Shake Shack is making the argument that it is establishing a restaurant chain that could potentially steal some occasions from fast-food chains. Consumers have echoed frustration over prices in recent years, and Shake Shack’s reputation as a quality destination could make them spend an extra few dollars for something that tastes better.
The company has not ignored innovation. In April it started selling a BBQ Boneless Babyback Rib Sandwich and new Mac and Cheese as an additional part of the company’s Smoky BBQ platform. Same-store sales last week rose 8%, Lynch said, with 5% traffic growth.
That sandwich, by the way, was not a value offer, priced at $12.99. The company has been playing both ends of the price spectrum.
“We are seeing huge demand for the culinary forward innovation that we’re bringing, while underpinning that by being able to go out and also deliver a great value proposition for a different consumer,” Lynch said.
It is also making huge gains in digital sales, which grew 35% last quarter, perhaps because customers can get good deals on the app. Nearly 40% of its sales in the first quarter came through various digital channels.
That will help Shake Shack do something else that its larger, more established rivals do: Start a loyalty program. The burger chain is promising one by the end of this year. As it is, Lynch said, “these guests visit us more often and spend more on an annual basis.
“With these strategic platforms, we’re offering an improved value equation across all household incomes, which we believe will result in a broader guest base, sustained loyalty and greater lifetime value.”
Of course, Shake Shack will eventually need to turn all these new locations and new customers and new occasions into profitability. Or it may have more days like Thursday.
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