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Shake Shack Declines as Expensive Expansion Erodes Profitability

As the restaurant chain plans to open up to 40 U.S. locations in fiscal 2019, its foot traffic fell 0.3 percent in the most recent quarter.

(Bloomberg)—Shake Shack Inc.’s quarterly results illustrate the high cost restaurants are facing, with labor expenses and investments in technology and delivery eroding the chain’s profitability. The shares fell in late trading.

Comparable sales, a key metric for investors, rose 2.3 percent in the latest quarter. Analysts had estimated a 1.2 percent drop, according to Consensus Metrix. But foot traffic fell 0.3 percent and the company sees compressed margins continuing this year.

Key Insights

Shake Shack is still failing to bring in more diners as it expands outside its home market of New York in the fiercely competitive restaurant space. That may be a concern as more expansion is coming -- the chain plans to open 36 to 40 company-owned U.S. locations in fiscal 2019. They’re also growing internationally. The U.S. chain is facing pressure from higher labor costs, and Shake Shack locations are concentrated in areas where the minimum wages have been on the rise. That cost, coupled with delivery commissions, caused the restaurant-level operating margin to contract to 22.5 percent -- well below the 25.2 percent of a year earlier. The company sees the gauge at 23 percent to 24 percent in the current year. Higher prices have been fueling sales gains for restaurants. Chains are bumping up menu prices as higher rent and labor costs take hold across the industry in the U.S.

Market Reaction

Shake Shack shares fluctuated widely in late trading after the release of quarterly results -- at one point gaining as much as 9.1 percent before turning negative. The stock, which has gained 15 percent this year through Monday’s close, fell 2.2 percent to $51.12 as of 5:18 p.m. in New York.

To contact the reporters on this story: Leslie Patton in Chicago at [email protected]; Aviel Brown in New York at [email protected] To contact the editors responsible for this story: Anne Riley Moffat at [email protected] Jonathan Roeder, Lisa Wolfson

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