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This Little-Known Restaurant Beat High-Flying Shake Shack in March

By Jamal Carnette, CFA - Apr 16, 2016 at 9:22AM

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After both IPO'd in 2015, Shake Shack has continued to climb while this company has struggled. In March, this reversed. What can investors expect from Bojangles going forward?

Shake Shack has been the valedictorian of the restaurant IPO class of 2015. Source: Shake Shack

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.

Image Source: Bojangles' Chicken 'n Biscuits

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.

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Stocks Mentioned

Bojangles', Inc. Stock Quote
Bojangles', Inc.
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,294.11 (1.70%) $21.62
Shake Shack Inc. Stock Quote
Shake Shack Inc.
$41.98 (-2.76%) $-1.19

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