Have These Red Hot Fast-Casual Restaurants Topped Out?

Jacob Harper |

When the economy tanks, people quit eating out. And when it improves, they go right back out. From 2011 to 2012, as the economy began its slow recovery, sales at “full-service” restaurants – that is, restaurants where the customers is sat down and looked after by a server – went up 8.7 percent. In 2011 Americans spent a robust $220 billion at full-service restaurants, and an additional $211 billion at the limited-service places.

In those “limited services” numbers is a sort of hybrid style restaurant, one that is benefiting from American consumers eating out more, while appealing to their sense of propriety left over from leaner economic times. They’re popularly known as “fast-casual” – restaurants that don’t utilize servers, and offer higher-quality fare than traditional take-out and fast food. And fast-casual's revenue as a sector is growing every year.  Panera (PNRA) , Chipotle (CMG) , and Noodles and Co. (NDLS) are all experiencing rapid growth, and the future looks very bright indeed.

Analysts “Optimistic” on Fast-Casual

As reported in the Nation’s Restaurant News, current macroeconomic conditions are a perfect incubator for fostering fast casual restaurant growth. The American economy is improving – encouraging people to eat out more likely favor fast-casual restaurants and other brands with higher-income customers as those companies report second-quarter results. But we’ve yet to experience anything close to the economic boom of the 90s, which was the last time full-service restaurants experienced such a rapid period of growth. This combination of slightly better economic times, but not quite so robust as to encourage people to go all out, has been a boon to medium-priced fast-casual chains.

Exactly how fast is fast-casual growing? Chicago-based research firm Technomic Inc. reported that in 2012, fast casual restaurant sales grew 13.2 percent, compared to 4.6 percent for fast food and 3.6 percent for casual-dining chains like Olive Garden and Chili’s.

Fast-Casual as Healthy, Cheaper Alternative

Consumers, especially health-conscious ones, are seeking out fast-food alternatives in droves. Panera, after all, was the first major chain to post the caloric content of their food for their customers. This appeal to the health-conscious would appear to also be beneficial for full-service restaurants, which are seen as being better for you than greasy fast-food.

But full service-restaurants, as implied in their name, employ servers. And servers cost customers extra money. One of the more attractive qualities of fast-casual is even the appearance that their food is better for you then fast-food, while remaining cheaper. And the fact that customers aren’t expected to tack on an extra 20 percent for gratuity. As Technomic president Ron Paul put it, fast-casual is appealing because of “the perception of better quality food, in a different style – with no tipping.”

Which is pretty much exactly how fast-casual describes themselves, and points out in their reports to the SEC. Noodles explicitly explained summedup the fast-casual approach in their IPO filing: "Grab a drink, have a seat, and we'll bring the food to you, without the need to tip."

"Grab a drink, have a seat and we will deliver your food to your table-all without the need to tip." - See more at: http://www.equities.com/editors-desk/investing-strategies/ipo/ipo-report-noodles-ndls#sthash.w6du5GgM.dpuf
"Grab a drink, have a seat and we will deliver your food to your table-all without the need to tip." - See more at: http://www.equities.com/editors-desk/investing-strategies/ipo/ipo-report-noodles-ndls#sthash.w6du5GgM.dpuf
"Grab a drink, have a seat and we will deliver your food to your table-all without the need to tip." - See more at: http://www.equities.com/editors-desk/investing-strategies/ipo/ipo-report-noodles-ndls#sthash.w6du5GgM.dpuf

Fast-Casual Goes Public

Three fast-casual companies of note have experienced untoward success. And while they favor slightly different methods for grabbing their slice of the pie, they all have experienced astronomical growth.

Panera

Back when it was known as Au Bon Pain, Panera went public in in 1991 at $9 a share. They now sport 1,652 bakery-cafes in the United States and Canada, and are in many ways the progenitor of the fast-casual model, and especially (in contrast to fast-food) the sector's healthiness. As noted, Panera was the first company to explicitly not the calorie content of their food. And in 2008 Panera was cited by Health magazine as being the healtiest fast-casual restaurant.

Since that modest IPO in 1991, Panera has grown exponentially. Panera is currently at $185.51 a share. That's down 1.57 for the day, but up a whopping 287.81 percent since July 2008. 

Chipotle

Chipotle had their IPO in 2006 for $22 a share, and broke records with a 100 percent increase day of to close out at $44 a share. Since then, the assembly line burrito restaraunt has been one of the fastest growing chains on the planet. Chipotle currently operates 1,450 restaurants around the country with 12 stores in Canada and Europe.

Putting aside a slight contraction of their stock price in 2012, they're experienced more or less uniterrupted growth that has continued into 2013. In June 2013 analyst Lynne Collier of brokerage firm Sterne Agee wrote“Chipotle is one of our top picks, as the company boasts one of the best operating models in the industry, leading unit economics, quality management, and near-term top-line catalysts like catering and increased marketing.” She put a buy rating on Chipotle, and price point of $428 a share.

Chipotle dropped .89 percent, and currently sits at $377.77 a share.

Noodles, Inc.

While Chipotle might seem impressive with their 100 percent first day jump, Denver, Co. based-Noodles did even better. The 343 locations, $297 million in yearly revenue company (who, fittingly, specialize in noodles) had their iPO at $18 a share. They hit $35 before trading started, and closed the day at $36.75 a share, for a whopping 104 percent increase on the day. Noodles is  the antithesis of Panera: their entire menu is carb-laden, and their flagship dishes are Macaroni and Cheese and Pad Thai. But despite the relative unhealthiness, Noodles still abide by the markers of fast-casual that seem to engender success. They're cheap, they're quick, they don't employ servers, and typically open locations in areas bereft of fine dining options. 

As the Daily Beast speculated, this misjudgment in IPO price cost Noodles around $103 million, and is indicative of a general misunderstanding on Wall Street of the potential of fast-casual. And if Chipotle and Noodle's IPOs hold true for the next fast-casual restaurant to go public, they may be right.

Noodles stock currently sits at $43.56 a share.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CMG Chipotle Mexican Grill Inc. 423.55 2.82 0.67 350,291
NDLS Noodles & Company 4.73 -0.03 -0.63 83,505
PNRA Panera Bread Company 194.96 2.66 1.38 328,175
QRCWW Quest Resource Holding Corp Wt Exp 09/24/2019 n/a n/a n/a n/a

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