Rising costs and weaker sales create some headaches for Shake Shack

The fast-casual burger chain on Tuesday updated its guidance for the current quarter, lowering its expectations for same-store sales, revenue and profitability all at once. The update came less than a month after Shake Shack issued its quarterly guidance, a quick reiteration of executives’ expectations.

“I know we gave an update to everyone a month ago,” Michelle Hook, recently named Shake Shack’s CFO, told investors at the TD Cowen Conference on Tuesday, according to a transcript on the financial services site AlphaSense. “But updates are good.”

Wall Street didn’t think so. Shake Shack’s stock fell more than 11% at one point on Tuesday, continuing a tough stretch for the company. Shake Shack’s stock is down by 30% so far this year, and all that decline happened since the company’s first-quarter earnings report last month.

Executives blamed forces beyond their control for the lowered guidance.

The dreaded “macroeconomic factors” kept sales low. But the company also dealt with some cost issues, including soaring beef costs that have hammered much of the restaurant business this year.

And more distributors are adding fuel surcharges, which is also hitting the cost line—and should worry a number of restaurant operators.

“Everyone is aware of the beef prices that we’re battling,” CEO Rob Lynch said at the conference, according to AlphaSense. “They’ve continued to escalate. We are also seeing fuel surcharge prices on some of our distribution and some of the other input costs in the middle of the” profit-and-loss statement.

“We felt like it was prudent today to reflect that in our margin guidance, both for the quarter … and then the year.”

But company executives expressed faith in their strategy. Lynch talked about the company’s marketing efforts. Shake Shack used paid media for the first time in its history last year, which helped drive sales and traffic late last year. That “really emboldened us,” Lynch said.

The company has also released a number of innovative new menu items, such as the Dubai Chocolate Shake last year and the Pimento Cheese Menu around the Master’s professional golf tournament in March.

The chain is planning a loyalty program launch later this year, which Lynch believes should help drive more loyalty.

And Lynch boasted that the company is improving operations, saying that the company optimized labor in the restaurants and took other steps that boosted store-level margins by 170 basis points over the past two years.

But Lynch vowed that profit margins will not come at the cost of quality. “We will not negatively impact the quality of any of our ingredients,” he said. “We will either maintain or improve it.”

Shake Shack brought in Hook from Portillo’s a month ago, and she reiterated her faith in the brand in explaining why she took the position. “The brand is amazing,” she said. “When I think about an iconic brand in this industry, Shake Shack is at the top of the list. When I look at the growth potential of this brand, it’s tremendous.”

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