Growth | March 2014 | By Kevin Hardy

Public Domain

Last year was a banner year for limited-service brands releasing initial public offerings. Analysts say that’s a sign of good things to come for the industry.

Fast food brands launching public offerings signal health restaurant industry.
Noodles & Company executives, including CEO Kevin Reddy (third from left), visited the NASDAQ MarketSite in Times Square to celebrate the brand’s June 28 initial public offering on the NASDAQ Stock Market. NASDAQ / Zef Nikolla
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In the last few years, Wall Street has shown an increased appetite for restaurant companies as a whole, and it’s fast-casual brands in particular that increasingly grab investors’ attention.

That was perhaps no more evident than in 2013, when enthusiasm for fast-casual restaurant concepts reached new heights with gangbuster initial public offerings (IPO) from Potbelly and Noodles & Company. The IPOs raised about $100 million each, and stock prices of both companies more than doubled on their opening days of trading.

Analysts say their success shows that the market is welcoming to limited-service brands and that even smaller chains can make a go on Wall Street—especially those with plenty of potential for future growth. Experts also say the success of brands like Chipotle, Noodles & Company, and Potbelly lays out a model for future fast-casual IPOs. Brands with a focus on healthier or at least higher-quality ingredients are even more likely to succeed, they say.

“The stock market in general has been very strong. Restaurant companies have been along for the ride in terms of performance,” says Bob Bielinski, managing director of the restaurant industry practice at CIT Corporate Finance, which provides financing, leasing capital, and advising services.

Aside from high-profile wins from Potbelly and Noodles & Company, market observers say, the overall performance of restaurant companies on the market is trending up over the last two years, with even better prospects for 2014. “The market has indicated an acceptance of restaurant companies,” Bielinski says. “And I think it’s particularly interested in growth companies.”

In its first quarter as a publicly traded company, Chicago-based Potbelly in November reported third-quarter revenues of $78 million, up 11.7 percent from the previous quarter’s $69.9 million. The sandwich chain used the $108.8 million from its IPO to pay a dividend to investors, pay down debt, and use as working capital.

“We view the IPO as a significant milestone, but not a destination,” CEO Aylwin Lewis said in the company’s third-quarter financial statement.

In an October 15 video interview with NASDAQ’s “Signature CEO” series, Lewis said the IPO would help the brand build a “bulletproof balance sheet” and push more growth. The company opened about 40 stores in 2013 and expects aggressive growth to continue.

“We’re promising double-digit growth for the foreseeable future,” he said in the video. “We are 300 units. And there is so much white space in the U.S. for us to grow. So we’re going to bring Potbelly to as many neighborhoods in the U.S. as possible. Because I believe every neighborhood deserves a Potbelly.”

Some of the strength of restaurant companies on the market may just fall in line with an improving economy and overall better stock performance.

“Consumers are expecting a recovering economy, and investors are expecting a recovery. And restaurants are among the first companies that will benefit in a recovering economy,” says Jonathan Maze, editor of Restaurant Finance Monitor. “If you were unemployed last month and this month you get a job, one of the first things you’re going to do is what? Go out and eat. Restaurants get a very quick benefit in a recovering economy. But they’re also the first to get pounded in a recession.”

While it may be easy to assume that only the biggest name brands go public, Maze says, the 2013 success of Potbelly and Noodles & Company should be encouraging to other smaller brands.

“It does show that smaller IPOs can work,” he says. “ If you have some growth and financial performance, investors are going to invest in your concept. So frankly, there’s no question that you’re going to see more IPOs in 2014.”

Experts expect the most successful IPOs will come from emerging concepts, not more mature companies. One brand that might get a return similar to Noodles & Company, which saw shares more than double after just a few days on the stock market, is Jimmy John’s, if it decided to go public, Maze says. He adds that privately held Chick-fil-A and In-N-Out Burger would likely be incredibly successful if they ever went public, though that seems farfetched for the family-owned companies.

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