Does Shake Shack Have More Growth Ahead?

In a research note published Wednesday, Jefferies analysts Andy Barish, Alexander Slagle and Reena Krishnan shared their impressions on Shake Shack Inc (NYSE: SHAK) following the Jefferies 2015 Global Consumer Conference, where CEO Randy Garutti had the chance to speak.

The CEO highlighted the company’s long-term global growth prospects and robust unit economics.

The management’s presentation solidified the firm’s view that the restaurant operator “should be able to drive SSS at the high end of guidance with solid operating leverage as momentum and unit growth opportunities remain strong.”

However, valuation makes the analysts maintain a Hold rating and $60 price target, based on 110x ’16 EBITDA.

Related Link: Why This Trader Says Shake Shack is 'Dead'

A Closer Look

Shake Shack is still in its early stages of growth. This means the runway ahead is long and filled with expansion opportunities. The analysts continue to expect domestic unit growth around 30 percent, on average, over the next couple of years and around 20 percent long-term as the company recently “reiterated its expectations to triple its domestic footprint over the next few years, beyond its core NYC market.”

Plans include expansion to Los Angeles, Arizona, Dallas and Tokyo, among other markets.

On the flip side, management and analysts expect margins to come under pressure as growth goes on.

“With more units coming online at a lower revenue base, AUVs and restaurant level margins are expected to decline,” the analysts said. “With lower AUVs and lower restaurant operating profit from the newer units as well as labor inflationary pressures, we expect margins to come under pressure and compress from about a mid-20% range to a low 20% range.”