Reporter's Notebook

Can Noodles, Potbelly stocks recover?

Investors have bid up the prices of restaurant chains that promise growth to sky-high levels in the past couple of years. But they've had an equal and opposite reaction to those growth chains that don't meet expectations.

Two cases in point are last year's two big restaurant IPOs: Noodles & Company and Potbelly Corporation. 

Noodles went public in July of last year at $18 a share. Its stock price doubled on its first day of trading, and by October 14 that year its price was $48.30 a share. But a series of sales disappointments have brought that price back down to earth, including a 0.6-percent same-store sales decrease in the second quarter of this year. Today the stock opened at $21.75 a share but at one point was trading below that $18 price.

Potbelly went public last October at $14 a share and surged 120 percent on its first day, besting the initial performances of both Noodles and Chipotle. A couple of days later it hit an all-time high of $31.95. But the stock has been falling ever since. Its stock is now at $13 a share. Like Noodles, its problem has been sales. Same-store sales at company-owned units fell 1.6 percent in the second quarter.

Another recent IPO, Chuy's, which went public in 2012, is down $14 since hitting a high of $43.14 in March.

"It's not just what you tell the Street, it's what the Street believes you can do," Damon Chandik, managing director and head of restaurant investment banking at Piper Jaffray, said last week. "They'll come up with their own projection. And if you miss those, it can be pretty painful."

All of these concepts remain growth chains, at least from a unit perspective. And consumer investors are still giving lofty valuations to those chains, in the range of a multiple of 18 to 30 times the companies' earnings. But those multiples compress sharply when those growth chains miss key operating metrics, Baird Analyst David Tarantino wrote in a note this weekend. 

History suggests that these stocks can recover. Tarantino analyzed growth companies that are comparable to the recent batch of restaurant IPOs, and he said the prices of Potbelly, Noodles and Chuy's can recover, so long as they demonstrate stronger same-store sales growth, and new unit productivity improves. They also need more consistent earnings growth to satisfy investors.

Their experience also serves as a warning to other companies considering the public route: Going public may be difficult, but the real work starts once you get there.

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