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Shake Shack Inc.’s Chief Executive Randy Garutti said the burger chain will be raising prices again in March, which will bring the inflation-based price hikes to 6% to 7% as the company enters the second quarter.
The March price increase will be 3% to 3.5%. In October 2021, prices were also raised 3% to 3.5%.
Shake Shack
SHAK,
will also raise prices for items purchased on third-party delivery services from 10% to 15% higher than items purchased in a Shake Shack location.
The company is leaving the door open for further price increases.
“Shake Shack has historically taken roughly 2% price per year, and that’s given us a strong value proposition for our premium products,” Garutti said, according to a FactSet transcript of the late Thursday earnings call.
“We believe these current price raises are necessary to protect margins. We’ll be keeping a close eye towards the cost of our business, and we’ll consider whether additional price may be necessary later this year.”
See: Inflation, tension in Ukraine and other factors put margin relief hopes at risk
Shake Shack reported an adjusted fourth-quarter loss per share that was narrower than Street expectations, and revenue that was in line with consensus.
An increase in COVID cases, along with stalled returns to office, travel, tourism and events have hurt the business.
“[A] combination of lower-than-average sales per hour, reduced operating hours and outright closures due to COVID resulted in materially lower sales versus our seasonal expectations,” Garutti said.
“We expect these trends may continue to impact sales in our company-owned Shacks and our licensed business through the first quarter.”
Shake Shack stock was down 5.3% on Friday after the announcement. The stock has plunged 42.2% over the last year while the S&P 500 index
SPX,
has gained 11.5%.
With the U.S. inflation rate reaching 40-year highs, some analysts don’t think the price hikes will be a huge problem.
Also: U.S. inflation rate climbs to 7.5% after another sharp increase in consumer prices
“Time will tell, but with inflation running in the [mid-single digit percentage +] levels and many of Shake Shack’s peers pricing well ahead of historical norms, management’s actions may not prove to be outliers,” wrote Stifel in a note.
“Our verdict: The company has always been a premium price point, but should its urban markets return in force, many of these markets may be more receptive to their premium pricing.”
Stifel rates Shake Shack shares neutral with a $75 fair value estimate, down from $81.
Quo Vadis Capital thinks the issue is with the company’s expansion. During the fourth quarter, Shake Shack opened 19 new locations around the world, both company-operated and licensed. For 2022, the company is planning for as many as 75 new restaurants.
“The environment is challenging and volatile. However, we believe the core problem is that the company is overly focused on unit growth. It is growing too fast,” wrote John Zolidis, president of Quo Vadis, in a note.
“The non-contiguous scattershot real estate strategy creates diseconomies of
scale. The brand is not resonating as strongly in all new markets.”
Quo Vadis rates Shake Shack stock sell.
Shake Shack, which has been focused on urban areas, has talked about expanding in suburban locations.
The company has opened its first three drive-through locations in Minnesota, Missouri and Michigan, the last one, outside Detroit, over the past week. Orlando and Castle Rock, Colo. are next.
“We view Shake Shack’s plans to take incremental price in March as a strong positive, giving us greater confidence in a margin recovery,” wrote Truist in a note.
“We see no reason that Shake Shack’s sales will not quickly re-accelerate now that cases have returned to pre-omicron levels, especially as mask mandates have been lifted (NY and CA among other states).”
Truist rates Shake Shack stock buy with a $102 price target.
