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Inside A Shake Shack Inc. Restaurant Ahead Of Earnings Figures
A ShackBurger, french fries, and soft drink at Shake Shack. Photo by Ron Antonelli—Bloomberg via Getty Images

Here’s Why Shake Shack Shares Are Climbing

Nov 09, 2016

Burger purveyor Shake Shack has managed to sizzle at a time when the restaurant industry is tasting a bit undercooked.

That's the takeaway from the fast-casual chain's latest quarterly results on Wednesday, which easily beat Wall Street's expectations. Revenue soared 40% to $ 74.6 million , while same-Shack sales increased 2.9%, building on last year's 17% jump. Shake Shack also increased the revenue forecast for this year and set 2017 expectations beyond analyst expectations.

Revenue for this year is now projected at $2 64 million to $265 million (prior range was $253 million-$256 million) for 2016, according to the company. Next year, sales are expected to be $348 million to $352 million—Wall Street had predicted $334 million before the results came in.

Buoyed by the optimism, investors sent Shake Shares up around 9% to over $36 in after-hours trading. The stock still trades far off the peak of around $93 in May 2015.

Executives said that the strength for the latest quarter was based on the company's new menu items and limited-time offers, which are items that restaurants add to their menus for a short period of time to juice sales. Those "wins" include the Chick’n Shack sandwich, a top-three selling menu item during the summer. More recently the company sees strong interest in a new Salt & Pepper Honey Chick’n sandwich it has been testing in Brooklyn. Next year, it plans to focus on shakes by introducing new flavors for each season.

What's most notable about Shake Shack's third-quarter results is that it comes at a time when restaurant chains have struggled to lure in diners. Economic uncertainty and falling grocery prices have put pressure on the industry, resulting in a slowdown in traffic for much of 2016. More than a few chains have lamented that the 2016 election, which wrapped up on Tuesday, also depressed demand. And even some of the industry's stronger players, most notably Starbucks (sbux) and Buffalo Wild Wings (bwld), fell victim to the slowdown.

Shake Shack management did concede that labor costs would be a headwind. Those expenses climbed in the third quarter as a result of a hike in the starting hourly wage that was implemented at the beginning of the fiscal year, as well as an increase in medical claims by employees. Labor costs will continue to rise, though management said that's an industry trend as restaurant chains have faced pressure to raise salaries for their employees.

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