Why Did Shake Shack Inc. Shares Gain 25% in May?

Shake Shack (NYSE: SHAK) had a really strong first quarter. The company saw total revenue rise by 29.1% to $99.1 million while same-store sales increased by 1.7%. That led shares in the company to big gains in the month of May.

What happened

After some struggles in the first three quarters of 2017, the company had a strong fourth quarter and followed that with a good start to 2018. CEO Randy Garutti explained and celebrated the results in the company’s Q1 earnings release.

“2018 is off to a strong start as we built upon our fourth quarter momentum, reporting another quarter of robust top and bottom-line growth,” he said. “…These results were supported by the continued evolution of our digital initiatives and the strength of new and existing Shacks as we executed on our development plans.”

Shake Shack had a very solid first quarter. Image source: Shake Shack.

So what

Shake Shack appears to have shaken off some of the concerns that it would not be able to grow and maintain same-store sales. That was well-received by the market which sent shares markedly higher after the earnings report. After closing April at $47.61 Shake Shack shares rose to $59.62 to close May, a 25% gain, according to data provided by S&P Global Market Intelligence.

Essentially, the Q1 numbers showed that the chain’s fourth-quarter results were for real. That validates the company’s somewhat aggressive (by its standards) growth plans.

“Our team is executing the plan to open 32 to 35 new domestic company-operated Shacks in 2018, our biggest year of openings to date,” Garutti said. “Our domestic pipeline is stronger than ever as we build toward our goal of 200 domestic company-operated Shacks by the end of 2020 and our long-term target of 450.”

Now what

Shake Shack has to continue to execute and show that it won’t hit a point where it reaches over-saturation any time soon. The company is still relatively small making it a novelty that consumers visit when they see one. As the chain becomes less scarce, that reason for visits will largely disappear.

To succeed in the long-term, the company needs to show it can deliver sales growth as it grows. The last two quarters suggest it can, at least at its current pace of growth.

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Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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