NRN editor and restaurant finance expert Jennings breaks down what you should be watching in the industry this week. Connect with her on the latest finance trends and news at @livetodineout and firstname.lastname@example.org.
Restaurant stocks are exciting again following Friday's public debut Friday of El Pollo Loco on the Nasdaq.
After climbing more than 60 percent over the opening price of $15 per share in the first day of trading, El Pollo Loco’s share price continued to soar on Monday, more than doubling its IPO price by midday.
Given that the IPO was only a few days after Chipotle Mexican Grill reported rather spectacular second-quarter results, with same-store sales rising 17.3 percent despite widely publicized price increases, many speculated that El Pollo Loco was riding that wave of investor hysteria, er, I mean excitement.
The two brands are not really very similar at all, except that they both fall in the rather general category of fresh Mexican and they’re both limited service. Both are highly ranked by consumers, and many observers point to the recent Consumer Reports restaurant chain survey, which ranked Chipotle No. 1 for burritos, while El Pollo Loco came in at No. 2 for chicken — behind the perennial favorite Chick-fil-A.
It should be noted that El Pollo Loco scored the same rating in that survey as Popeyes Louisiana Kitchen and Boston Market, but that doesn’t take away from the love the heaving masses (at least, those in the West) have for El Pollo Loco.
El Pollo Loco’s chief executive Steve Sather would love for consumers to make comparisons with Chipotle on price. With an average check of about $5.85 — about 15 percent less than Chipotle — El Pollo Loco is carving out a niche between fast food and fast casual. Sather calls it “QSR plus,” and the crazy chicken chain offers a value proposition that will likely have ongoing appeal, especially given the economy’s uneven recovery for battered middle America.
You can get a decent burrito, taco or quesadilla at either chain. What you can’t do at Chipotle is feed a family of six with 12 pieces of chicken, three sides, a bacon-avocado salad, and warm tortillas for $25.
Still, some observers, like Carol Tice at Forbes, wonder if investors are ignoring certain warning signs, not the least of which is El Pollo Loco’s seven years of losses, despite climbing average unit volumes and 11 consecutive months of same-store sales growth.
The 401-unit El Pollo Loco has yet to prove whether it can achieve the growth envisioned.
Company officials say there’s room for 2,300 El Pollo Loco locations nationwide, though growth for now will focus on existing states: California, Arizona, Nevada, Texas and Utah. The Houston market is the next target, with 80 potential trade areas identified there, and it will likely be one where the Mexican-born flavors of citrus-marinated grilled chicken will be embraced.
On the East Coast, in markets where many consumers have to learn to pronounce pollo, the Spanish word for chicken, as “poi-yo,” not “polo,” it may be a tougher sell. El Pollo Loco attempted to move Eastward in the past, and failed.
Meanwhile, IPO observers say more restaurant companies will look to the public markets, given what is apparently investor hunger for growth opportunities despite the still-economically-handicapped consumer. Restaurant analyst John Gordon of Pacific Management Consulting Group predicted “every restaurant cat and dog will come out of the barn now.”
For a minute on Monday, El Pollo Loco was the top-performing IPO of 2014 after hitting an intra-day high of $32.82, according to StreetInsider.com.
Who will be next?