Shake Shack's Shaky Margins Cast A Shadow On Q4 Revenue Beat

Morgan Stanley reiterated its Underweight rating on Shake Shack Inc (NYSE: SHAK), which beat fourth quarter revenue expectations on accelerated unit development, while reporting EPS only in-line as comps moderated and margins compressed.

• Q4 Adj. EPS $0.09 vs. $0.09 Est., Sales $73.3M vs. $70.68M Est.
• Raises FY17 Sales From $348-$352M To $349-$353M, Sees Same-Store Sales Growth Of 2-3%

The comps declined through the quarter as December was impacted due to the holiday shift as well as cold weather in the Northeast, resulting in lower traffic.

The restaurant margins were weaker than expected on previously announced labor pressures as well as new unit inefficiencies.

Related Link: 12 Stocks You Should Be Watching Today

“4Q16 marks the second consecutive quarter that SHAK's RLM has de-levered, the first times this has happened since the IPO. Though it has been well forecasted by mgmt, FY17 guidance implies continued headwinds to margins next year,” analyst John Glass wrote in a note.

That said, unit growth remains excellent, with FY2017 new unit guidance raised to 22-23 company units (+41 percent year-over-year) and 11 licensed units.

At last check, shares of Shake Shack fell 3.18 percent to $35. The analyst has a price target of $34.