Shake Shack's business model slammed by virus as sales plunge

[NEW YORK] Shake Shack faces "outsized near-term risk" related to the impact of Covid-19, given its exposure to high-traffic, tourist areas and a lack of drive-thrus, analysts across Wall Street warned.

The company's sales plunged 70 per cent over the last two weeks with "significant declines expected to continue as stores operate as to-go and delivery only", Credit Suisse analyst Lauren Silberman wrote. The bank downgraded its rating of shares to "neutral" from "outperform", and nearly halved its price target to US$40.

While the fast-casual chain is boosting its delivery business through a number of third-party services, "a lack of drive thrus will hurt results", Bloomberg Intelligence analyst Michael Halen wrote.

Shake Shack shares fell as much as 7 per cent on Friday after the company said sales at US company-owned stores that remain open are down between 50 per cent and 90 per cent when compared to the same period last year.

The stock has fallen 30 per cent over the past six sessions and is trading near its lowest level since September 2017.

Here's what analysts are saying:

Credit Suisse's Lauren Silberman:

"We expect the company to face meaningful declines for the foreseeable future."

The company "has also reduced staffing and operating expenses across all Shacks, noting cost of goods sold are largely variable, labour is partially variable, rent is mostly fixed and operating expenses are about half variable".

"Given uncertainty regarding the timing of a recovery (particularly in urban markets), a return to normalised sales levels and resumption of new unit growth, we are moving to the sidelines."

Downgraded to "neutral", price target slashed to US$40 from US$76.

Raymond James Financial's Brian Vaccaro:

"The magnitude of recent comp declines (down 70 per cent, range of down 50-90 per cent) was a bit worse than feared, with potential additional closures as the situation unfolds."

"Sharp comp declines and uncertainty as to when unit growth could resume (key factor supporting historically high valuation) creates further potential downside risk."

Maintained "underperform" rating and cut estimates based on the dropping comparable sales.

Bloomberg Intelligence's Michael Halen:

"Shake Shack's H1 sales and margins are poised to drop sharply due to shuttered US dining rooms and other social-distancing tactics to reduce the spread of coronavirus, in our view. The chain temporarily shifted to off-premise only in mid-March and will likely close stores and reduce hours of operation in April."

MKM Partners' Brett Levy:

"With a higher per cent of units in urban markets, and many without drive-thru capabilities, this could represent an ongoing pressure point."

Maintained "neutral" rating and US$70 price target.

BLOOMBERG

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