Photographer: Michael Nagle/Bloomberg

Shake Shack Falls as Fast-Food Slump Weighs on Sales Growth

  • Comparable-store sales rose 4.5 percent, trailing estimates
  • U.S. restaurant industry is plagued with lower spending

Shake Shack Inc. tumbled the most in five months after same-store sales missed analysts’ estimates, signaling that the rapidly expanding burger chain isn’t immune to a slump that’s spreading through the fast-food industry.

Sales at locations open at least 24 months rose 4.5 percent in the second quarter, the New York-based company said in a statement on Wednesday. That marks a slowdown from the 9.9 percent gain the chain posted in the prior quarter and trails the 5.4 percent increase analysts had expected, according to Consensus Metrix.

While Shake Shack has relied on its well-known brand and new stores to help boost revenue, the U.S. restaurant industry is facing a tough environment. Other chains have been struggling as well, and analysts have said the sector may be headed into a recession.

“Expectations were much higher” for Shake Shack, said Nick Setyan, an analyst at Wedbush Securities in Los Angeles. Sales growth also may have slowed after the company opened more restaurants in New York, which could have taken customers away from its established locations, he said.

The shares dropped as much as 8.2 percent to $37.50 in New York, the biggest intraday decline since March 8. Through Wednesday’s close, they had increased 3.2 percent this year, compared with a 6.4 percent gain for the Standard & Poor’s 500 Index.

Investors who turned bearish on the stock before the announcement likely will profit. The portion of shares borrowed to sell short -- a bet that the stock will decline -- spiked to 21 percent on Wednesday, the highest level since November and almost five times the average for stocks in the Russell 2000 Index of small companies, according to data compiled by IHS Markit Ltd. and Bloomberg.

Labor Costs

Employee costs are weighing on profit at the chain, with labor expenses jumping 37 percent in the quarter. Second-quarter profit was 14 cents a share, just beating analysts’ average estimate of 13 cents. Earlier this year, Shake Shack said it had increased its starting wage to $12 an hour in most major cities.

“That’s going to be our biggest challenge,” Chief Financial Officer Jeff Uttz said during an investor conference in June. “Minimum wage going up nationwide, state-by-state, eventually it’s going to catch up to us.”

On a conference call on Wednesday, executives said they expect more wage pressure in the second half of the year as the chain seeks to attract the best restaurant employees.

Revenue rose 37 percent to $66.5 million in the quarter ended June 29. On average, analysts projected $63.2 million.

Shake Shack also is expanding abroad in countries including the U.K. and Japan. It has almost 100 locations globally.

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