Shake Shack Sinks on Headwind Tied to Single-Delivery Switch

(Bloomberg) -- Shake Shack Inc. shares plunged on Tuesday after the company posted worse-than-expected comparable sales and disappointing 2020 targets as growth in delivery slowed amid a shift to a sole partnership with Grubhub Inc.

“Results and guidance reinforced our concerns around Shake Shack’s transition to a single delivery partner and increased cannibalization, which drove our recent downgrade,” SunTrust analyst Jake Bartlett wrote. The headwind from the delivery transition is likely “to get worse, before it gets better.” Other analysts remain cautious on the transition, as well.

The company also blamed cannibalization for the sales shortfall. Bartlett noted that the issue has been a concern for investors for a few years now, and he anticipates that it will remain a focus.

Shares tumbled as much as 17% to $61.15, the biggest intraday decline since Nov. 5. Shares had been up 24% so far this year, following the 31% advance for all of 2019.

Here’s more of Wall Street analysts had to say following the report.

SunTrust, Jake Bartlett

With roughly 50% of the system recently solely integrated with Grubhub vs. 25% at the end of 2019, the analyst expects delivery sales to actually decline as Shack loses customers loyal to its prior partners.

“For instance, we found that at the end of January, DoorDash (private) stopped offering access to Shack Shack in Boston, Chicago and DC, all markets that have been recently integrated solely with Grubhub. Of course, we see the greatest risk to sales when SHAK solely integrates with Grubhub in NYC and loses DoorDash sales.”

Along with a shorter holiday season, adverse weather, less menu innovation and less of a lift from delivery, management said sales were also hurt by cannibalization from rapid development. This has “long been a topic” among Shake Shack investors -- it contributed to negative comps. in 2017.

“Cannibalization will likely remain a focus as delivery sales slow or decline, and SHAK increasingly focuses on infilling markets.”

Rates hold, price target to $71 from $79.

Wedbush, Nick Setyan

The 2020 comp guidance is predicated on a second-half inflection after the Grub-transition, but the exact timing of the completion of the switch remains an unknown.

Setyan believes negative same-store sales guidance (down low single-digits) is “prudent” due to limited visibility around the ongoing transition to an exclusive Grubhub delivery partnership.

Restaurant-level margins were a positive surprise in the fourth-quarter, but could prove “optimistic” given the “absence of a stabilization” in second-half comparable sales growth and relatively tame food costs.

Rates neutral, price target $75.

Morgan Stanley, John Glass

“With materially weaker traffic, fourth quarter missed our below-Street comp. expectations and guidance for 2020 suggests to us the start of the year could be similar or modestly worse.”

A more gradual transition to Grubhub as a sole delivery partner is the primary reason for the shortfall in the quarter, though weather compares, a shorter holiday season, and potentially cannibalization in in-fill markets were also contributors.

“In 2020, add to this the potential impact on licensing revenue from coronavirus.”

Bulls waiting for faster earnings growth will have to “remain patient” in 2020.

Rates equal-weight, price target to $62 from $63.

Raymond James, Brian Vaccaro

“We expect weak comp trends seen in 4Q to continue over the next few quarters as the company transitions to Grubhub as its sole delivery partner.”’

Management guidance for “stable” store margins in 2020 looks “aggressive in light of negative first-half comps. and continued labor pressures, though lower delivery fees and extra week benefit will help.”

Rates underperform.

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Will Daley

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