Zoe's Kitchen (ZOES) was off to a swift start on its first day of trading Friday, surging above its initial price and reaching the mid-$20s as investors bought up shares of the Mediterranean-styled fast-casual restaurant operator.
In recent trading, Plano, Texas-based Zoe's was at $25.34, some 68% higher than its offering level. The company had been planning to sell 5.8 million shares in a range of $11 to $13, but earlier this week, it increased the estimate to $13 to $15. Pricing was set at $15 late Thursday. It's achieved the first-day gains despite a somewhat dodgy market, and avoided the jitters that appear to have perturbed the hopes of other IPOs.
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Yahoo Finance had speculated that traders might well send Zoe's into the $25 range, a suggestion not based simply on the idea that IPOs often soar. This company is a small chain with outsized growth forecasts, something Wall Street tends to gravitate toward, and it operates in a segment of the restaurant industry that's viewed as the place to be — better-for-you fast casuals, a tier occupied by the likes of Chipotle (CMG) and Panera (PNRA). But, more than that, it's also about comparables, and judging by how similar operators are valued, the expectation was that traders would assign richer multiples to the stock.
That doesn't mean it will last, of course. When considering the landscape Zoe's inhabits, it was with an eye toward the middle-$20s "sometime" — not necessarily in the minutes after trading began. This is an excitement buy for some investors, even though it may prove to have ample merit, because Zoe's does have issues that eventually will need tending to if shares are to remain aloft. It's entering the public market with losses, which it's had for years. Its expense structure isn't currently one that allows it to yield profits down on the income statement, with an earnings before interest, taxes, depreciation and amortization margin that lags its peers and restaurants at large. It's expanding, but at a sizable cost. Undoubtedly, some investors will see the pop as overdone and bet on a pullback.
Hungry, then not
Clearly, if that happens, and one need only recall sandwich chain Potbelly (PBPB), whose $14 pricing last fall quickly turned into a stock that was trading above $33. Since then, it's been practically nothing but pain for investors, and shares are down to around $17. Pasta seller Noodles & Co. (NDLS) was another successful IPO from 2013 that bolted early, stayed elevated for a few months, then retreated. It peaked above $51 and is now about $35.
So that elation obviously can wane. Zoe's is getting star treatment at the moment, but it's far from a guarantee that holds on day two, three and beyond, to say nothing of what happens after earnings reports start arriving over the next few months. Alternately, the buzz can continue, but the market at large might have a few words to say here, considering equity traders seem more skittish about stocks than they have in some time. Every company exists within that broad framework, and growth stock or not, there's a potential impact on Zoe's.
For now, investors may be more inclined to wed themselves to the promise of these shops, where vegetables, chicken and hummus are sold to fairly affluent diners looking for "healthier" offerings and paying just below $10 per person on average. Zoe's, which had $116 million in revenue last year, says it can get north of 1,600 stores ultimately from its base of 111 in late February. The trick, as it always is, will be to do so while making actual money.
The easy part's been done. Any warts are being overlooked, and perhaps they will be long in the future. But in most cases, free passes don't last forever. The onus goes on Zoe's management to not merely talk a good game about trendy fare, but to deliver financial results that support premium pricing from investors. If, that is, it's to keep on climbing.