Shake Shack drops as slowing growth threatens brand cachet

[CHICAGO] Shake Shack Inc fell as much as 9.7 per cent in late trading after slowing growth raised concerns about the burger chain's lofty valuation.

The company expects same-store sales to rise 2.5 per cent to 3 per cent in 2016, according to a statement on Monday. That compares with an increase of 13.3 per cent in 2015.

Though the forecast reiterated a view the company gave in November, investors may have been looking for a rosier outlook from the company, which has one of the richest valuations in the restaurant industry. As of Friday, the company's price-to- earnings ratio was about 323, compared with 27 for the Standard & Poor's 500 Restaurants Index.

"It's growing into earnings, but maybe just not growing into earnings fast enough for some people," said Bloomberg Intelligence analyst Michael Halen.

The stock dropped as low as US$38.12 in after-market trading. Before the tumble, it was up 6.6 per cent this year.

IPO Frenzy

Shake Shack held its initial public offering in Jan 2015 and saw its shares surge, fueled by optimism that the company could grow from a cult favorite into an international chain. Given the expectations, it's hard for even good earnings to be "good enough," Mr Halen said.

The company also reiterated its revenue forecast for 2016, predicting US$237 million to US$242 million. Analysts estimate US$240.3 million on average, according to data compiled by Bloomberg.

Fourth-quarter earnings were 8 US cents a share, excluding some items. Analysts had projected 7 US cents on average. Same-store sales grew 11 per cent in the period, topping the 7.3 per cent average estimate compiled by Consensus Metrix.

Shake Shack also said it expects labor expenses to hurt results this year. The addition of a chicken sandwich to the menu has added to its costs as well.

BLOOMBERG