SHAK is on the Hedgeye Best Ideas list as a SHORT.
Last night SHAK posted impressive 1Q15 earnings $0.07 above-consensus 1Q15 EPS of $0.04 on same store sales of +11.7% vs consensus' +5.1%. In the release management raised full-year same-store sales guidance to "low-to-mid single digits" vs. prior "low-single-digits." Our bearish view is that the market is placing too much value on SHAK's differentiated burger concept.
The better than expected 1Q15 EPS was driven by:
- Stronger than expected operating margin
- Better 1Q15 comps of +11.7% vs. consensus’ +5.1%
- Price of +6.0%
- Sequential better traffic +2.1%
- Positive mix of +3.6%
- Strong store-level margins of 25.7%
- Better-than-expected food and paper costs and sales leverage on other operating line items
Management Increased 2015 guidance following 1Q15 results:
- 2015 Revenue of $161mm to $165mm vs. prior $159mm to $163mm
- Same-store sales growth of low-to-mid-single digits vs. prior low single digits.
- Unit development guidance of at least 10 new domestic company-operated Shacks and at least five international licensed Shacks in U.K. and Middle East.
Based on the guidance management provided, we believe they are either 1) being less than genuine or 2) don’t know the tone of the business going forward. The most visible place of uncertainty is in same-store sales guidance. In the model for the balance of 2015, we are assuming +6% price and +2% mix good for 8% same-store sales growth over the balance of the year. This would result in 2015 same-store sales in the high single digit range versus guidance of low-to-mid single digits. Baked into management’s assumptions is significant cannibalization from the reopening of the flagship store in NYC.
While the 1Q15 earnings release was very strong the valuation the market is awarding SHAK is mindboggling! If we model out $40 million in EBITDA in 2016 (which is nearly double the current street estimate of $22 million) and put 30x on it the stock is worth $32 or 52% down side. If we value the company closer to CMG the downside approaches 75% from current levels.