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

Shake Shack Inc. tumbled as much as 10 percent in late trading after same-store sales missed analysts estimates, signaling that the rapidly expanding chain isnt immune to a slump thats 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 low as $36.80 in New York on Wednesday in after-hours trading. Through the close, they had increased 3.2 percent this year, compared with a 6.4 percent gain for the Standard & Poors 500 Index.


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.


Thats 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 its going to catch up to us.


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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