There have been a lot of hot restaurant IPOs hitting the market over the past couple of years, and it's a safe bet that they wouldn't have had much of a chance to woo retail investors if it weren't for Chipotle Mexican Grill (NYSE:CMG): Underwriters wouldn't be trolling small chains with expansion-ready concepts looking for easy access to Wall Street capital if it weren't for Chipotle's success.
Restaurants are, after all, risky businesses. Many fail, and popularity is hard to sustain for the ones that do achieve success. It's against this backdrop that several young and fast-growing eateries have been able to pull off scintillating IPOs. They're the equivalent of fajita skillets arriving at your table -- they sizzle at first, but the heat doesn't always last.
Potbelly (NASDAQ:PBPB) and Chuy's (NASDAQ:CHUY) are two growing operators that recently hit the market, with some hailing them as the next Chipotle. Chuy's hit the market at $13 two summers ago. It serves burritos and other Mexican fare, just like Chipotle, but it does so in a festive casual-dining setting. There's no assembly line, unless you're talking about the Happy Hour nacho bar, where patrons can top their own nachos out of what appears to be a car's trunk. Potbelly completed its IPO at $14 last year, and the nature of its oven-baked sandwiches has it categorized in the same fast-casual niche as Chipotle.
"Chuy's is the new Chipotle!" "Potbelly is the new Chipotle!" Potbelly shares more than doubled to close above $30 on its first day of trading. Chuy's didn't get off to such a hot start, but by the following summer the stock had nearly tripled in value.
It's been mostly downhill for both companies ever since, and now the market realizes that neither operator was the new Chipotle. Potbelly and Chuy's reported quarterly results after the market close on Tuesday, and neither was very encouraging. Potbelly saw its revenue climb just 7% despite opening several new locations over the past year. Comps actually declined 1.6%, and adjusted earnings fell by nearly a third to $2 million or $0.07 a share.
Chuy's held up relatively better, but its performance wasn't enough to save the stock from hitting another 52-week low in after-hours trading. Revenue at Chuy's climbed 18%, fueled primarily by brisk expansion and a 2.4% uptick in comps. Net income, unfortunately, only grew at a third of that clip, with margins contracting as a result of higher labor, food, and rent costs.
Chipotle is the better Chipotle
Seeing Potbelly and Chuy's post modest growth, shrinking net margins, and, in Chuy's case, a hosed-down profit outlook for all of 2014 isn't pretty. Weren't these supposed to be the next Chipotles? It turns out that Chipotle was the next Chipotle.
After all, during these same three months we saw Chipotle deliver monster results. Revenue and earnings soared 29% and 26%, respectively. Chipotle experienced a jaw-dropping 17.3% surge in comparable-restaurant sales.
There's a moral to this story, and it's fairly obvious: The next time you're looking for the "new" Chipotle, or any other former or current market darling, the search may very well begin and end with the company itself.
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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.