Here’s why Shake Shack stock is up 14% in August

Key points

• Shake Shack stock jumped 7% Tuesday and is up 14% in August.

• The restaurant chain had record revenue in the second quarter and saw net income rise 44%

• Several analysts gave Shake Shack price target upgrades after earnings were released.

The burger and shake restaurant chain has been lifted by unexpectedly strong Q2 earnings.

Shake Shack (NYSE: SHAK) stock has been on a tear over the past week, rising some 14% since the burger and shake chain posted blowout second quarter earnings on Aug. 1.

Shake Shack stock skyrocketed some 18% after it released earnings on Aug. 1 to nearly $105 per share. While it did fall with the rest of the market in Monday’s massive stock selloff, it was one of the top gainers on Tuesday, rising some 7% on the day to $101 per share.

Shake Shack stock is up about 34% year-to-date, but it had been in a slump since May, falling some 25% to below $80 per share on slowing trends in the restaurant industry. But the gains over the past week have wiped out most of those losses.

Profits increase 44% in Q2

Sales trends in the restaurant industry showed signs of slowing in the second quarter, which brought down many of the stocks in the industry.

But investors were buying last week after Shake Shack posted blowout results that defied those trends. Revenue climbed 16% year-over-year to $316 million, which set a company record and topped estimates of $314 million.

System wide sales, which includes sales from all 540 Shake Shacks, was $484 million, up 13% year-over-year. System-wide sales includes restaurants that the company both owns and has license agreements with. Revenue does not account for licensed Shake Shacks.

Restaurant-level profit, which is earnings from restaurants after all costs are subtracted, was $67 million, or 22% of sales, up from 21% in the same quarter a year ago.  

Operating profit more than doubled from $4.7 million to $10.8 million, while net income rose 44% to $10.4 million, or 23 cents per share. Further, adjusted net income rose 54% to $12.1 million, or 27 cents per share. Earnings were in line with estimates.

Growth was buoyed by the opening of 12 new Shake Shacks in the quarter, including three drive-throughs. It also licensed another 11 new Shake Shacks. Same store sales increased 4% in the quarter.

On track to reach guidance

The surprisingly strong quarter put Shake Shack on track to meet its fiscal 2024 goals, CFO Katie Fogertey said in the Q2 shareholder letter. That means growing revenue by 14% to 15% and increasing adjusted EBITDA by more than 25%.

The company is also on track to expand its restaurant-level profit margins by 70 to 110 basis points. These efficiencies will lower the cost of opening new Shake Shacks by 10% year-over-year and lead to positive free cash flow in 2024 — the first time the company has achieved that result since 2017.

For the third quarter, management anticipates $311 million to $317 million in revenue, with licensing revenue of $11.6 million to $12 million. Also, they expect to open 6 to 7 new company owned restaurants and 7 licensed Shake Shacks in the quarter.

Is Shake Shack stock a buy?

Shake Shack got several price target upgrades after posting earnings last week. It also got a lift on Tuesday as rival Yum Brands (NYSE: YUM) posted decent Q2 results, topping revenue estimates as its stock price rose nearly 4%.

Analysts have a median price target of $112 per share for Shake Shake, which would be a 12% increase over its current price level. Most consider it either a buy or a hold.

Shake Shack is growing fast but its valuation is high, and the economy has shown signs of slowing down.

The stock has had a nice run this year, but it is hard to see much more growth in the near-term with its high valuation. This is probably a stock to watch but put on the back burner for now.