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 Half a dozen food chains have held piping-hot stock market debuts in
the past year to meet a growing appetite for "fast-casual"
restaurants catering to younger and more affluent diners willing to
pay more for fresher, higher quality fare than they expect to find
at traditional fast food places like McDonald's.
Wall Street hopes the new crop of publicly traded eateries will
replicate the success of Chipotle Mexican Grill Inc <CMG.N>, which
has grown to about 1,800 restaurants since its 2006 debut. With
consumer spending showing signs of improvement and more diners keen
on antibiotic-free meats and other healthy foods, now is a great
time for restaurants in that niche, especially ones adept at
building grass-roots buzz and loyalty, experts said.
But investors have pushed the shares of some of those restaurants -
Shake Shack Inc, Zoe's Kitchen Inc and Habit Restaurants Inc - to
sky-high levels that imply growth expectations that may prove hard
for the management to deliver.
Shake Shack - the big outperformer - is up 260 percent since it went
public at the end of January. As a group, shares of established
restaurant companies have outperformed the broader stock market
exponentially, with the Dow Jones U.S. Restaurants & Bars Index
(which doesn't include these newcomers) rising 11 percent this year,
compared with the Standard & Poor's 2 percent increase.
Based on the number of locations open at the end of 2014, Shake
Shack's current stock price values its restaurants at $40 million
each, four times the stock market value of a Chipotle restaurant and
15 times the value investors assign to a McDonald's Corp restaurant.
Brad Lamensdorf, who co-manages the AdvisorShares Ranger Equity Bear
ETF, said he would short Shake Shack's shares, except that his
broker has none left after lending his last at a staggering 65
percent annual interest rate. At that rate, short sellers would have
to pay out more than 5 percent of their investment every month while
waiting for Shake Shack's stock to fall, which may not happen.
"Just because a stock looks expensive doesn't make it a great short.
It's way too expensive to borrow," Lamensdorf said, adding it might
become more feasible in July after insiders restricted following
Shake Shack's January IPO are allowed to sell their shares. Almost
40 percent of Shake Shack's shares are currently short-sold.
Lamensdorf is also shorting Chipotle, betting that the company's
expansion is about to lose steam. Chipotle is down 7 percent so far
in 2015. Another fast-casual chain, Buffalo Wild Wings, is down 13
percent, with investors concerned about slowing growth momentum at
both chains.
And some may already have lost their luster: Shares of Chicago-based
sandwich chain Potbelly Corp more than doubled in their first
trading session after its IPO in 2013. But since then, the company's
growth has failed to impress investors and its stock sells now for
about a dollar more than the $14 a share it fetched when it first
went public.
More fast-casual restaurant IPOs are in the works. Nashville,
Tennessee-based J. Alexander's Holdings Inc and Fogo de Chao, a
steakhouse chain offering 20 cuts of meat in Brazilian-style
tableside barbecue service, have both filed with U.S. regulators for
IPOs.
Habit, which opened in 1969 and is known in California for its
charburgers, is up 120 percent since its November IPO. Zoe's
Kitchen, which serves Mediterranean cuisine with Southern
hospitality, has doubled since its IPO in April 2014.
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High prices for the newly listed stocks reflect a scarcity of
high-growth restaurants to invest in as well as Wall Street's
confidence in companies' management teams, said Piper Jaffray
analyst Nicole Miller Regan, who has "overweight" ratings on Zoe's
and Habit and does not cover Shake Shack.
"Look at Chipotle. It's not a burrito company, it's an ATM," Miller
Regan said. "I don't care what cuisine you put through there - it's
a phenomenal return."
Shake Shack's PEG ratio (price/earnings over its expected next
year's growth - a measure of a stock's value that accounts for
expected profit growth), is 156 compared to 1.6 for Chipotle. Lower
PEGs suggest cheaper stocks. Zoe's PEG is 2.5 and Habit stands at
4.6. By comparison, Internet giant Twitter Inc has a PEG of just
0.8, suggesting it is well priced for its expected growth.
Habit, Zoe's and Shake Shack declined to comment on their stock
valuations.
ENLIGHTENED HOSPITALITY
To justify its recent stock price, Shake Shack would need to
establish more than 400 company-run or franchised restaurants within
about five years, estimated Georgetown University business professor
James Angel.
With a new location in Austin, Texas, Shake Shack now has 68
restaurants in the United States and other countries; it has said it
plans to open at least 10 domestic locations annually and expand
abroad.
Shake Shack, which says its key to success is a culture of
"enlightened hospitality," is a master of word-of-mouth marketing.
It has more than 1,800 Instagram followers for every $1 million
spent across its locations, compared with 11 for McDonald's Corp and
60 for Taco Bell, a fact that Goldman Sachs has cited as helping
build loyalty among millennials.
Habit on Thursday posted March-quarter revenue above expectations
but its full-year revenue outlook was shy of consensus, according to
Thomson Reuters I/B/E/S.
Shake Shack posts its quarterly results on May 13.
"Do they have a unique value proposition with their customers? Yes.
Is it hard to replicate? Yes," said Bob Goldin, Executive Vice
President of food services consultancy Technomic. "But is it
impossible? Absolutely not.”
(Reporting by Noel Randewich; editing by Linda Stern and John
Pickering)
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