On the Margin
Noodles, Papa Murphy's highlight recent IPO struggles

Noodles, Papa Murphy's highlight recent IPO struggles

This post is part of the On the Margin blog.

Between 2013 and early 2015, restaurant chains’ money-raising strategy of choice was the initial-public offering. A dozen companies went public in that timeframe.

Some of them have done quite well. Shake Shack Inc., in spite of some concerns about valuation, has flourished. Wingstop Inc. just had a secondary offering. Zoe’s Kitchen Inc. has perhaps the highest valuation among publicly traded restaurant chains. Dave & Buster’s has been among the most surprising companies from that era, trading at nearly triple its IPO price.

But most of those companies have not done as well. Seven of the 12 companies that went public in that era are currently trading below their IPO price. In general, chains from that era have struggled to meet investors’ expectations for same-store sales. And Wall Street has punished them.

This is particularly true for two chains: Noodles & Company and Papa Murphy’s.

Noodles' fall has been particularly hard. Investors eagerly anticipated the arrival of the Denver-based noodle chain in 2013.

The company, which boasted an executive team loaded with veterans from Chipotle Mexican Grill, initially priced its IPO with a range starting with $13 per share. It raised that range twice and ultimately went public in June 2013 at $18.

Once trading, the stock skyrocketed, more than doubling to $36.75. By October, it hit nearly $47 a share.

And then it began falling. It lost nearly 80 percent of its value entering the year thanks to consistently disappointing sales. The chain looked as if it had been starting to recover this year, but then last month announced more troubling sales data and the resignation of its CEO, Kevin Reddy. The stock declined another 33 percent last week and is now down to below $7 a share — or about 40 percent of that IPO price.

Noodles' enterprise value is below 10 times cash flow. One wonders if it's now a takeover target given that it's fast casual and has a huge number of company-owned locations that could be sold to franchisees.

Papa Murphy’s was less heralded than Noodles. The company had a high debt load and a franchise model that relied on small-scale operators. Some franchisees sued the chain before the offering. When it went public in 2014 at $11 per share, its stock rose less than 6 percent on its first day.

Improving sales would ultimately take the stock past $21 a share a year later. Yet Papa Murphy’s, too, has struggled with weak sales in the quarters since then, including a 4 percent decrease in same-store sales in the second quarter.

This has taken a toll on the chain’s stock price. Papa Murphy’s has lost more than half of its value and entered today trading at $5.36 — less than half of its value at IPO. Papa Murphy’s enterprise value is below 9 times cash flow. By comparisons, pizza competitor Domino’s Pizza Inc. is valued at 20. Papa John’s is at 16. Murphy’s is a growth chain and Domino’s and Papa John’s are both legacy concepts. Those valuations, at least in theory, should be reversed.

The struggles of most of the IPOs from this generation have clearly turned off the spigot of public money into the restaurant industry. No restaurant chain has gone public through a traditional offering since Fogo de Chao in June of last year. Fogo, by the way, is trading below its offering price.

Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze​

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