Near where I used to live in the Northern Virginia suburbs of Washington DC, there is a chain of Peruvian grilled chicken restaurants called Super Pollo that I used to frequent. The food was delicious with generous portions and reasonable prices. The fresh and cheap and somewhat exotic fare fits the “fast-casual” restaurant mega-trend that has fueled the success of Chipotle (CMG) and Panera Bread (PNRA), two stocks in our small cap fund.
(Source: El Pollo Loco)
When I used to eat there I often wondered why Super Pollo was not more widespread and successful. Yesterday, however, I was reminded of Super Pollo when a restaurant with a similar model called El Pollo Loco (LOCO) went public. The stock opened up 50%. Then today it rose nearly another 50%. Will the Crazy Chicken, as the company’s name is translated, be the next Chipotle? The more I read about the company, the more I am reminded not of Chipotle but of two other hot restaurant IPO’s that quickly collapsed: Potbelly’s (PBPB) and Noodles and Co (NDLS).
Below is the chart of Potbelly, the sandwich shop chain that went public amid major hype in late 2013, more than doubling on the first day of trading. While the market has mostly gone up since then, the stock has fizzled, falling from over $30 to around $11.
Noodles and Co. was a similar story, now down more than 33% since its IPO. The cases of Noodles and Co. and Potbelly demonstrate that even for stocks that enjoy a favorable trend and a good story the price that you pay really matters. Even after their massive sell-offs, Noodles and Potbelly remain pricey.
Though I have not examined the El Pollo Loco IPO documents closely, it seems that the company has a heavy debt load, a checkered management history and growth that’s good but not nearly on the level of Chipotle. Though the company recently reported its first quarterly profit, it lost about $57 million in the last three fiscal years and has $288 million in debt, according to the L.A. Times. With only around 400 locations, the company’s market cap is now nearing one billion dollars.
While I would welcome the restaurant in my own neighborhood (its current locations are now only in the southwestern U.S.), I will be holding off on buying this expensive stock. The overpriced restaurant IPOs fit with our view that the market, while fairly reasonably valued on the whole, has some definite pockets of exuberance.