Shake Shack executives ring the bell at the New York Stock Exchange. The stock, SHAK, is up 270% since going public in January.
Restaurants continue to reward initial investors handsomely as 2015 looks to be another massive year for returns on Wall Street. 8 restaurant companies have gone public since January 1, 2014, providing a combined 57.2% growth after day 1 and a total return of 107.6%.
Why are restaurant stocks so attractive to investors and why over the last few years have they outperformed most other sectors? First, they have a business model that is very easy to understand and simple to project top-line sales. A restaurant chain has an Annual Unit Volume (AUV) which is the average unit sales across all locations open for a designated time prior to the period measured. This is in contrast to a technology company that can release products with an unproven track record and at inconsistent time schedules. Second, same store sales have a large impact on the value of a chain. As companies grow, they need to continue to expand their same store sales growth meaning each individual store is experiencing an increase in growth, like Chipotle (CMG) did in fiscal 2014 by posting a 16.8% increase. Some restaurant stocks have stumbled in this category and have experienced a large hit in their stock price. They have propped up their top line growth by building stores but have seen AUVs shrink through their expansion. Taking these two factors into account, margins are what separate a successful restaurant group from an unsuccessful chain. The company that can best control their food costs and labor costs will ultimately drop the most revenue to the bottom line.
Restaurant IPOs since January 2014 (total return since IPO date in bold)*:
- Wingstop (WING): 61%
- Bojangles' (BOJA): 36%
- Shake Shack (SHAK): 268.76%
- The Habit Restaurants (HABT): 93.77%
- Dave and Busters Entertainment (PLAY): 124.06%
- El Polo Loco Holdings (LOCO): 37.66%
- Papa Murphy's (FRSH): 66.54%
- Zoes Kitchen (ZOES): 168.53%
Consumer discretionary stocks continue to do well in this market. Gas prices are down, the unemployment number continues to shrink while the job market heats up, and wages are showing signs of improvement. These external market conditions allow restaurants with great management teams and practices to experience rapid growth.
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*Courtesy of IPO ETF Manager, Renaissance Capital