Last year was another banner year for high-profile restaurant IPOs. In 2015, a high-flying debut from Shake Shack (SHAK -2.76%), where shares are up 75% above its IPO price, overshadowed solid performance from Wingstop. Not all restaurants have taken the public markets by storm, however. Brazilian-style churrascaria Fogo de Chao currently sits 20% below its IPO price while Bojangles' Famous Chicken 'n Biscuits (BOJA) is about 10% off its IPO price.
Last month, however, represented a reversal of fortunes of sorts for Shake Shack and Bojangles. Shares of Shake Shack fell 10% as concerns about excessive valuations continue to dog the stock. On the other hand, Bojangles stock surged 18% in March as investors reacted favorably to the company's fourth-quarter earnings. Can this regional restaurant's stock continue to provide better returns than high-flying Shake Shack?
Was Bojangles' report a sign of things to come?
Sometimes a stock's return doesn't reflect the company's performance. On balance, 2015 was a solid year for Bojangles operationally. Total revenue grew 13.4% on a year-on-year basis, with comparable-restaurant sales increasing 4.1% in 2015. However, it's prudent to point out comparable-restaurant sales fell to an anemic 0.6% in the fourth quarter. Management blamed flooding in the Carolinas (Bojangles is a primarily Southeastern restaurant chain), McDonald's all-day breakfast launch, and increased discounting from other competitors as reasons for the poor fourth-quarter performance.
Unfortunately, only one of management's reasons is temporary. Investors should keep a close eye on comparable-store sales going forward. Breakfast is becoming more contested and it's an important daypart, especially so for a restaurant with "biscuit" in its name. Looking forward, Bojangles' expects comparable-restaurant sales growth in the low-single digits.
Last year the company added 40 net restaurants and now boasts 662 stores. The company plans to increase that overall figure approximately 8% this year by adding roughly 55 net new stores. Overall, the company expects the combination of new stores and increased comparable store growth to increase Bojangles' top line 10.2% this year to $538 million at midpoint of guidance. The stock is not too richly valued by trading at 24 times earnings, but I'll be sitting on the sidelines until I receive more insight into the company's comparable-restaurant sales.
Shake Shack will grow, but is priced in?
Growth has not been a problem for Shake Shack. Quite frankly, Shake Shack's revenue and comparable-restaurant sales, or "same-Shack sales," to use the company's parlance, look like the next coming of Chipotle. Last year the company grew revenue 61% on a year-on-year basis with same-Shack sales increasing 13.3%. Those figures cooled in the fourth quarter, but only slightly to 47% and 11%, respectively.
However, company guidance gave some investors reason to pause. Against the backdrop of 2015's success, management expects revenue growth of 27% in 2016. Even worse, same-Shack sales guidance is expected to cool to 2.5%-3%. Management admitted to being extremely cautious with same-Shack sales guidance during the earnings conference call, and I think the company can beat this figure by a decent amount.
Shake Shack is richly valued considering the company's market cap of $1.3 billion is double Bojangles' figure but the company reported a net loss last fiscal year. However, I feel the company will continue to grow, even if its valuation has temporarily gotten ahead of its fundamentals.