The Habit Restaurants (HABT) opened for trading Thursday with a big first-day gain -- doubling from the IPO pricing level -- making it the latest fast-casual chain to join the market along with recent offerings such as Zoe's Kitchen (ZOES) and El Pollo Loco (LOCO).
Lately, the stock was at $36.11, giving it a whopping 100% bump from the pricing, which occurred Wednesday at $18, and a 20% advance from the $30 opening trade. Habit, an Irvine, Calif.-based company effectively controlled by private equity firm KarpReilly, offered 5 million Class A shares to the public. The pricing was above the anticipated range of $14 to $16 a share, raising proceeds of $90 million before accounting for costs related to the offering.
Considering how Wall Street values other fast-casual companies, including Chipotle (CMG) and Panera (PNRA), and how it will perceive Habit's prospects and highly regarded burgers, we had speculated this week that it probably wouldn't stay near the pricing point for long. Many IPOs meet early buyers, but more importantly for Habit, it operates in the buzzy fast-casual "better burger" segment, an arena that, while still small, is influential and popular thanks to names such as Five Guys, Smashburger and In-N-Out, as well as Shake Shack, another possible burger IPO.
For every fast-casual restaurant that goes public, it's customary for the media to ask if it's "the next Chipotle." Regardless of whether it is or isn't -- and we can't know that for years -- we thought it wouldn't be surprising to see Habit's shares climb potentially to the mid-$20s soon after trading began. That was based on the valuations of seven other fast-casual operators now on the market, where earnings multiples (setting aside some of the more outlandish price-to-earnings ratios) generally average in the high 30s. But we also believed that guess might be conservative given the market's demand for growth stocks, and it turned out to be.
First-day "pop"
For all practical purposes, everyday investors have no chance to get any stock at an initial pricing (unless it declines, of course). Outside of a few investors who are able to, the pricing essentially serves only as a talking point from which to hype the first-day "pop." The realistic price where most individuals can start buying is higher, sometimes much higher. In the case of Habit, it was $12 a share, or 67%, above the pricing.
However, now the story will start to be about Habit the business, not Habit the IPO. Data from food industry research firm Technomic says that U.S. burger sellers had sales of $72 billion last year, about $2.4 billion, or 3.3%, of that occurring at better burger stores like Habit. Food trends being what they are, Habit is happy to promise a great deal of growth.
Sales indeed are soaring. Through the first nine months of this year, revenue was $126.3 million, an amount already above the sales of $120.4 million for the entire 12 months of 2013. Although that reflects the effect of additional stores that have opened, same-store sales are consistently positive, as well. It also doesn't hurt the brand that a reader survey in Consumer Reports named The Habit Burger Grill as having the best-tasting burger in America.
The first Habit opened 45 years ago, but its expansion to 99 stores in four states -- the vast majority in California -- has mostly taken place in the last five years. It believes it has the ability to surpass 2,000 U.S. locations in total. This is the type of growth goal investors will flock to. And they'll certainly flee if any bumps are encountered.
Potential cost concerns
Among the key concerns at Habit are beef costs, which have been elevated, though about 40% of its sales are sandwiches other than burgers and salads. That should offer some protection on the cost side. The theoretically larger worry is that Americans have been eating less beef annually over time, but the offset is that the better burger category would appear capable of holding its ground for at least the near term.
Being a restaurant, competition is always going to be stiff, yet Habit's hope is that its average per-person check of $7.56 will give it a perceived value advantage.
Rising labor costs naturally will cause fretting for shareholders. At the moment Habit has these at manageable levels, at under 30% of revenue. The company's SEC documents note that "our pay scale starts in excess of the minimum wage." Habit also will have to open new shops at the proper rate -- fast enough for investors, but not too fast that it falls apart financially.
It does depend on Southern California for two-thirds of its current revenue, meaning continued market diversification will be needed to mitigate geographic risk.
