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Michael McLellan

Why Restaurant IPOs Keep Coming Freaky Fast

by Michael McLellan | Dun & Bradstreet Editor

June 12, 2015 | No Comments »

Wingstop_1100pxThe latest trend in the fast-casual restaurant business is going public. A heaping helping of restaurant companies have served up fresh IPOs in recent months, including the high-profile Shake Shack sweepstakes, which raised $150 million back in January.

This week Wingstop’s IPO raised more than $110 million. Wingstop follows the $147 million May IPO of Southern-style chicken-and-biscuit chain Bojangles.

Jimmy John’s is hoping its forthcoming IPO will give investors a well-established sandwich brand to support. (Potbelly is the only other major sandwich chain that is public, and it is smaller than Jimmy John’s.) Chicago-based Potbelly surged 120% in its October 2013 IPO.

Why Go Public?

Restaurant companies have been getting high valuations by underwriters and investors because the industry has shown moderate growth in recent years, along with a slowly improving economy. Besides an influx of cash that helps pay down debt or expand a chain’s footprint, a big part of the motivation to go public is companies generally get a lot of media attention for their IPOs (before things settle back in to business as usual).

Since Shake Shack went public in January, its nationwide same-store sales have been steadily increasing. The company believes the publicity surrounding its IPO helped drive improved sales at all of its locations.

IPO Not Always a Gold Mine

Papa Murphy’s went public last year to little fanfare. The IPO did not generate much publicity, apart from a lawsuit filed by disgruntled franchisees. Same-store sales slowed around the offering but have since picked back up.

Although Noodles & Company saw its stock price and same-store sales increase dramatically after its IPO in 2013, the chain’s sales are down more than 40% this year. Noodles & Company now trades below its offering price.

Public Challenges

As time goes on, being public is not always an advantage for restaurant companies. Being a publicly traded company puts pressure on executives to deliver short-term results to shareholders. The need to deliver strong quarterly sales and dividends to investors can sometimes overshadow the need to properly serve customer needs.

Michael McLellan covers the business of restaurants, hospitality, marketing, media, and more for D&B and Hoover’s. Follow him on Twitter.

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Photo courtesy of Wingstop.

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