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The Ratings Game: Shake Shack soars as the burger chain heads to $1 billion in sales for the fourth quarter

Shake Shack Inc. stock soared 22.4% in Friday trading after the company said it was on the path to a billion-dollar fourth quarter.

“With all the noise, it’s easy to overlook that revenue is up 49% this quarter versus the same time last year,” said Chief Executive Randall Garutti on the late Thursday earnings call, according to the FactSet transcript.

“And in the fourth quarter, we expect to surpass $1 billion in system-wide sales for the year, a first for us. That is quite a comeback our team is making.”

Shake Shack
SHAK,
+22.54%

reported an adjusted loss of 5 cents per share, ahead of the FactSet consensus for a loss of 6 cents per share. Revenue of $193.9 million fell short of the FactSet consensus for $197.5 million but was a record, according to Garutti.

Read: Feeling fleeced by pricy filets? Meat, fruit and oats lead the drought-driven surge in food costs

Shake Shack credited the return to offices, events and commuting for the revival, particularly in New York, which the company calls home.

In May, Goldman Sachs forecast that the burger chain would recover, though it could take some time due to its focus on urban areas.

“For Shake Shack long-term, we believe the balance of urban renewal and the strength and focus of our suburban models will build a solid foundation for the future,” Garutti said.

But the company acknowledged that the dual cost pressures of supply chain and labor will be challenges for the foreseeable future.

“Most of the premium ingredients we buy, such as the no hormone, no antibiotic proteins that separate us from traditional fast food, have seen significant increases in a very short period of time,” he said.

“As just one example, beef, the largest part of our basket, was up approximately 30% in the third quarter compared to the same period last year and up high single digits from just the second quarter.”

See: U.S. adds 531,000 new jobs in October as economy recovers

In mid-October, Shake Shack raised prices by 3% to 3.5%, higher than the usual 1%-to-2% annual rise.

“With digital engagement increasing and digital sales sustaining, even as in-store ordering recovers, we remain confident that Shake Shack’s sales opportunity has improved during COVID,” wrote Truist analysts in a note.

“Also, despite headwinds, Shake Shack’s accelerated development plan appears on track.”

Truist rates Shake Shack stock buy with a $100 price target, up from $90.

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But other analysts are more cautious. Raymond James analysts maintained their underperform stock rating, saying the long-term picture is fuzzy due to margin headwinds and high valuation is a risk.

MKM Partners maintained their hold stock rating and $83 fair value estimate.

“With many near-term issues beyond management’s control, investors are left to determine their priorities between the near-term hurdles and the company’s long-term growth potential,” analysts said.

And Stifel also maintained its hold stock rating and cut its price target to $75 from $85.

“We remain torn over Shack Shack’s growth potential and its current weak margin structure,” analysts led by Chris O’Cull said.

“On the one hand, we see the company as a brand with proven global appeal trading at a $3 billion enterprise value; in that sense, it is hard to envision the current $3 billion enterprise value as anything short of a bargain for a global brand. On the other hand, the company struggles to sustain a healthy margin profile at the store or corporate level.”

Analysts say they believe in the long-term prospects but are wary of profit volatility.

Shake Shack shares have gained 14.6% for the year to date while the S&P 500 index
SPX,
+0.55%

is up 25.4% for the period.

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