Shake Shack hasn’t had a great time with earnings guidance this year.
The fast-casual burger chain in May missed Wall Street expectations for sales and profits, due to weather, and it adjusted its earnings guidance. One month later, the company cut its guidance for the year. The combination proved fateful: Its stock tanked some 30% combined.
On Wednesday, the company decided to get rid of quarterly earnings guidance altogether.
“After reviewing our approach relative to the broader restaurant industry, we have made the decision to move away from providing quarterly guidance, while continuing to provide annual guidance,” CFO Michelle Hook told analysts on Wednesday. “We believe an annual outlook better reflects how we manage the business for the long term, aligns us with best-in-class practices across our industry, and keeps the focus on the multi-year value we are building rather than in quarter-to-quarter volatility.”
And yet on Wednesday, according to multiple reports, the activist investor Starboard Value has taken a stake in the New York-based chain. It’s not certain what, exactly, Starboard is planning. But it has generally not been shy about suggesting changes.
The report sent the company’s shares soaring more than 12% after they initially languished after the earnings report. That wiped out much of the company’s share losses this year, though they are still down more than 8%.
Regardless, the guidance issues and the apparent emergence of an activist highlight the complexities of operating a public company and the challenges of trying to meet investor expectations.
Earnings guidance is simply a set of expectations that publicly traded companies give to investors and analysts, so they know what to expect. They are not required, certainly, and there is a wide variation in how much companies set expectations. But in general we think it makes less sense for brands to provide quarterly guidance, given the volatility from one period to the next.
It’s certainly possible that Shake Shack would still have faced an activist had it not made the dual guidance flubs. The company’s stock is down more than 35% over the past year. It has long struggled to live up to the sky-high expectations set for the brand when it went public a decade ago. That may well have made it a target regardless.
Yet Shake Shack’s guidance issues earlier this year have shed a light on the stock’s challenges during that period. Activists are always looking for brands where the shares are potentially undervalued based on corporate decisions, fairly or not.
Shake Shack has also made a lot of changes to its business strategy under CEO Rob Lynch, notably ramping up development while making it more of an everyday brand. The company has also opened an office in Atlanta. All this has fundamentally changed what it means to be Shake Shack.
Amid all this, however, is this simple fact: Shake Shack has done quite well, by almost every measure.
Its restaurant-level profit margins are 23%. And while that’s down compared with prior quarters, it’s worth remembering that beef costs have taken off of late, and profitability in general isn’t where it once was. That is still a solid number for a company-run business, making new units worth building.
More to the point, Shake Shack’s same-store sales have beaten the market. Shake Shack outperformed average fast-casual chain same-store sales in each of the four quarters before this last one. It has also outperformed average burger chain same-store sales during that same period.
Indeed, it has had just one negative quarter since 2019, outside of the four periods in 2020 when the chain and its heavy urban and mall presence were hammered by the pandemic. Very few chains can say that. Its same-store sales rose 3.5% last quarter.
Its system sales, meanwhile, easily beat its major fast-casual burger rivals. Shake Shack’s system sales grew 15.2%, compared with 5.3% at Freddy’s and 1.9% at Five Guys. Indeed, no burger chain, not even Culver’s, in the Technomic Top 500 outperformed Shake Shack last year.
Of course, what matters to Wall Street and what is reality are often two separate things. Investors are all about expectations, and for whatever reason Shake Shack has routinely lived up to Wall Street’s vision of what it should be.