Companies get a lot of free publicity when they go public. All of those news reports on restaurant chain IPOs should almost certainly lead to a sales boost for the chains in question, right?
Among eight recent restaurant company IPOs, five of them reported better sales in the quarter of their offering than in the previous period. Two of them, Papa Murphy’s and Potbelly, saw sales slow down. The eighth company, The Habit Restaurants Inc., is inconclusive.
To be sure, same-store sales is a terrible measure of restaurant performance. There are many factors that can come into play in a single quarter: Weather, competition, other news reports on the chain or the companies’ previous quarter’s performance. Also, some companies get a lot more media attention for their IPOs.
For example, Shake Shack went public in January. Its same-store sales during the first quarter of this year increased 11.7 percent — that’s 450 basis points better than its performance in the fourth quarter of last year. The company outright said that publicity surrounding its IPO helped improve sales.
And indeed, perhaps no restaurant company IPO, maybe ever, was as thoroughly covered as that one.
On the other hand, Papa Murphy’s went public last year. Media largely ignored the event, except for publicity surrounding a lawsuit by franchisees. Same-store sales slowed from 3.3 percent in the first quarter of last year, to 1.5 percent in the second quarter, the period of the offering. So much for the IPO boost.
It can also be difficult to tell whether the IPO impacted sales or not. The best example of this is Habit. It went public in November, and its same-store sales were an incredible 13.2 percent in the period. But that was down from the 16.2 percent in the quarter before.
Slowdown? Sure, but consider this: In August last year, the quarter before it went public, Consumer Reports touted Habit for being the top burger chain in the country. Apparently, consumer magazines praising your burgers lure more customers than suits touting your financial performance. Go figure.
Still, most chains had a nice boost, of 2-3 percentage points, proving that free publicity does help.
There isn’t much benefit to being public over the long-term, however, despite the alleged credibility that being public provides a chain. Plus, being public puts added pressure on executives to yield performance over time, because there’s a real penalty in the form of that stock price.
To wit: Stock in Noodles & Company, which more than doubled in its 2013 IPO and saw its same-store sales increase by 250 basis points during that quarter, is down 43 percent this year, because sales have been sliding.
Oh, and Papa Murphy’s? Its sales have been improving since that tough quarter, and its stock has responded. It’s up more than 49 percent this year so far.