Founder Danny Meyer Just Bought $2 Million of Shake Shack Stock After Its 28% Drop

Volatility is nothing new for shareholders of Shake Shack (NYSE: SHAK). After crossing $100 per share again last month, the stock dropped 28% in a single day following the release of its first-quarter earnings report.

The pain came despite Shake Shack opening a record number of stores and posting same-store sales growth of 4.6%, doubling the rate of growth from fiscal 2025.

Unfortunately, top-line growth failed to translate to the bottom line, as Shake Shack swung to an operating loss of $2.6 million from a profit of $2.8 million a year ago. Earnings per share came in at zero, missing analyst expectations by a wide margin.

Nevertheless, the company's founder remains bullish on the company's stock.

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Costs overwhelm growth

The core issue for Shake Shack is that costs are rising faster than sales. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 9% to $37 million in the first quarter, and margins compressed from 12.7% to 10.1%. While beef inflation remains a headwind, long-term investments in technology upgrades took the biggest bite out of profits.

General and administrative costs rose by $13 million year over year, growing from roughly 12.7% of total revenue to 14.6%. Looking ahead, management has guided for elevated general and administrative spending for the remainder of the year due to the tech overhaul.

These long-term investments include a new point-of-sale and kitchen display system designed to improve throughput and order accuracy. The company is also building its first-ever loyalty platform, scheduled to launch in late 2026, and investing in proprietary AI tools to provide real-time insights at the store level.

Finally, the company is integrating a data and analytics platform to support the new systems. While these initiatives are designed to create long-term benefits, they are front-loading costs and pressuring margins today.

A challenging year ahead

On the demand side, same-store sales growth has been primarily driven by price increases. This year, pricing may be tough to pass through as consumers rein in spending, testing Shake Shack's value proposition. The company is also facing challenges in the Middle East, where temporary closures and reduced traffic are impacting its licensed business.

That said, the long-term unit growth story remains attractive. The company has a long-term target of 1,500 company-operated locations, up from 390 today. Founder Danny Meyer also recently showed confidence by purchasing around $2 million worth of stock on the open market.

That said, even after the recent slide, the stock is not cheap. At roughly 50 times forward earnings, the valuation remains stretched for a company facing near-term margin pressure. For long-term investors, the recent insider buying is a positive sign, but patience will be required as the company works through a period of elevated costs.

Bryan White 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.