Did the Shake Shack(NYSE:SHAK)IPO in January fuel growing investor appetite for fast casual restaurant stocks?
The stock priced at $21 a share, and much like the lines that trail around the corner from its restaurants, market mania drove shares up nearly 120% on the first day of trading. With so much money still on the table following similarly successful debuts from fellow better-burger chain The Habit, Mediterranean leader Zoe's Kitchen, and sandwich shop Potbelly, it is reasonable to ask: have we reached a fast casual saturation point?
Maybe for better-burger chains but not the broader fast casual category. Sure, Smashburger might toy with the idea yet again of following Shake Shack and The Habit into the public markets, but I think the real investment dollars will go in a completely different direction: pizza.
Grab a slice
Not only are independent "better pizza" shops expanding, but existing restaurants are investing heavily in them as well. Perhaps even more important, they are also attracting private equity dollars.
For example, Lee Equity Partners made a significant investment in Project Pie, a build-your-own pizza shop founded in 2012 by James Markham, who is responsible for two other fast casual pizza concepts: MOD Pizza and Pieology.
Primarily a West Coast phenomenon, Project Pie is spreading eastward and just recently opened its first pizza shop in Ireland. Its owners seem to be taking a page from Shake Shack and are going global with their fast casual concept -- they intend to open as many as 60 pizzerias across the U.K.
Apollo Global Management acquired Peter Piper Pizza last year when it purchased CEC Entertainment, the parent of Chuck E. Cheese's. It ended 2014 with 142 Peter Pipers in the U.S. and Mexico. Given its concentration south of the border and in the Southwest, the chain should be able to use the growing Hispanic population as a catalyst for further growth.
In addition to private equity, corporate dollars are rolling the dough toward pizza. Three-store chain PizzaRev quickly quadrupled in size shortly after Buffalo Wild Wings (NASDAQ:BWLD) staked a claim. The wings-and-beer joint invested a second tranche of capital into the chain last year and during its fourth quarter earnings conference call last month, said PizzaRev would open more locations this year and continue its expansion through franchising.
The opportunity to become "the Chipotle of pizza" was such a rallying cry that Chipotle (NYSE:CMG) itself decided to join the fray. It took a position in the small but rising Pizzeria Locale chain, which is now starting to expand and has opened its first location outside of Denver.
Other fast casual pizzerias dot the landscape as well. Rave Restaurant Group owns and franchises more than 275 Pie Five and Pizza Inn shops, and privately held BRIX Holdings, a multi-concept franchised restaurant operator, acquired RedBrick Pizza last year.
With Papa Murphy's -- a pizza shop in which Lee Equity Partners has a majority stake -- going public last May, the pizza space is bubbling with activity. The company released its fourth quarter earnings report the other day boasting over 8% same-store sales growth -- other players are likely convinced this is the time to grab a slice of the public markets.
Follow the money
My guess is that the first move will come from the stronger pizza chains with private equity backing. Investors should watch Project Pie in particular, as Lee Equity Partners has been through the process once already with some success. It also has international ambitions that would resonate with growth-minded investors.
But do not count out these other possibilities: Blaze Pizza, which was expected to have 100 pizzerias across the country by the end of 2014, and Uncle Maddio's Pizza, a chain with several dozen units that says it is on track to have 300 restaurants open in five years with 1,000 units in development. With such stars in their eyes, can an IPO not be on the horizon?
No easy path to riches
Obviously, there is no shortage of candidates to consider, but investors still need to think through the broad challenges facing all restaurants, regardless of whether they are publicly traded. Both labor and healthcare costs are rising, while ingredients like beef, pork, and poultry have also seen higher prices. Those elevated costs have affected the performance of numerous quick-serve restaurants.
More importantly, new stocks hitting the market always generate investor excitement, and investors should be careful not to buy into the hype. Other fast casual stocks saw impressive gains only to come crashing down once their actual prospects aligned with market expectations. A strong business, however, will continue to deliver results over time.