3 Restaurant Stocks to Avoid As Americans Begin to Cut Spending

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In this article, we discuss 3 restaurant stocks to avoid as Americans begin to cut spending. If you want to see more stocks in this list, check out 8 Restaurant Stocks to Avoid As Americans Begin to Cut Spending

3. Shake Shack Inc. (NYSE:SHAK)

Number of Hedge Fund Holders: 21

Shake Shack Inc. (NYSE:SHAK) is a New York-based company that owns and licenses Shake Shack (Shacks) restaurants in the United States and internationally. Shacks is known for its hamburgers, hot dogs, and crinkle cut fries. On July 18, Morgan Stanley analyst John Glass lowered the price target on Shake Shack Inc. (NYSE:SHAK) to $48 from $63 and reiterated an Equal Weight rating on the shares. The analyst lowered second half and 2023 estimates across most of his restaurant coverage ahead of Q2 earnings to factor in potentially weak sales as consumers face increasing pressures. On average, he slashed his full service estimates by 5% for 2022 and 11% for 2023 and trimmed fast casual estimates by roughly 2% for both years, the analyst noted.

Among the hedge funds tracked by Insider Monkey, 21 funds reported owning stakes in Shake Shack Inc. (NYSE:SHAK) at the end of Q1 2022, compared to 22 funds in the prior quarter. Joel Ramin’s 12 West Capital Management is the biggest stakeholder of the company, with 1.7 million shares worth $120.7 million. 

Here is what Alger has to say about Shake Shack Inc. (NYSE:SHAK) in its Q3 2021 investor letter:

“Shake Shack, Inc. was among the top detractors from performance. Shake Shack is a modern day “roadside” burger stand serving a classic American menu of premium burgers, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. Founded by Danny Meyer’s Union Square Hospitality Group (“USHG”), Shake Shack was created by leveraging USHG’s expertise in sourcing premium ingredients, community building, hospitality, fine dining and restaurant operations. There are currently 339 locations, including restaurants in 32 U.S. states and the District of Columbia and 116 international locations in cities like London, Hong Kong, Shanghai, Singapore, the Philippines, Mexico, Istanbul, Dubai, Tokyo, Seoul and more.

Shares of Shake Shack underperformed in the third quarter due to a slower-than-expected recovery in urban locations and a lower-than-expected margin outlook. Sales at Urban locations were still down 18% year over year in July compared to a 23% decline in May, a modest improvement but less than expectations. We believe a delay in return to work has caused a temporary stalling in the company’s margin recovery, but this should improve as urban mobility increases and tourism from foreigners normalizes. On margins, the company guided to 15%-17% restaurant-level margins, which was below expectations of 18.9%. This margin outlook factored in higher wage inflation, which the company will begin to offset with a 3.5% price increase in the coming months. We believe margin recovery can potentially follow a sales recovery so near-term revenue choppiness may result in margin weakness but we believe the company is well positioned for when the environment normalizes as the pandemic winds down. Ultimately, we believe the pandemic accelerated Shake Shack’s digital efforts, so the company is currently positioned to benefit from a strong online presence. Digital was only 12% of sales in the early months of 2020, but that increased to 47% as of the second quarter of this year.”

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