A warning to Shake Shack: Beware Noodles & Co.

March 11, 2015, 11:18 AM UTC
Jeff Flug, Danny Meyer, Randy Garutti
Jeff Flug, President of Union Square Hospitality Group; Danny Meyer, Founder & CEO of Union Square Hospitality Group; and Randy Garutti, Shake Shack CEO, fourth left to right, celebrate as they ring the New York Stock Exchange opening bell, Friday, Jan. 30, 2015. Shares of Shake Shack Inc. have more than doubled minutes after they debuted on the stock market Friday.(AP Photo/Richard Drew)
Photograph by Richard Drew — AP

The next order of business at Shake Shack: be more like Chipotle, and less like Noodles & Co.

The New York burger chain on Wednesday afternoon will report its’ first quarterly results since debuting on the New York Stock Exchange in late January. It is projected to report $33 million in sales, with a loss of three cents per share.

So far, things are looking really good for Shake Shack (SHAK). Its share price more than doubled on its first day of trading as investors bet that another fast-casual restaurant operator with just a handful of locations could become the next Chipotle (CMG). Fast-casual restaurant chains have menus that are filled with food that consumers see as healthier fare than the offerings from fast-food competitors, but without the table service found at casual dining chains.

Chipotle has expertly ridden that wave. Its share price has leapt almost 2,900% since the company went public in 2006, as rapid expansion and strong traffic trends at existing restaurants helped the company report more than $4 billion in revenue last year, more than double what it reported in 2010.

But buyers should beware: while fast-casual operators enjoy splashy debuts on the public markets, maintaining enthusiasm has been a challenge for them.

Noodles & Co. (NDLS) in particular is having a tough time. Its shares more than doubled on the first day of trading in June 2013, climbing as high as $39.70. But the stock is now worth less than $18, the offering price that Noodles commanded when it went public. Sales results have missed Wall Street’s expectations for five of the past seven quarters.

Executives at Noodles — which sells a mix of Asian, Mediterranean and American noodles and pastas — say the company’s biggest challenge is a lack of brand awareness in new markets. Volumes can be 15% to 20% higher in more established markets, so Noodles is clearly struggling getting its newer restaurants up to speed. It’s planning to increase marketing spending to address the problem.

The stock performance of sandwich chain Potbelly (PBPB) has also disappointed investors. That company’s shares traded as high as $33.78 on the first day of trading, far above the offer price of $14. But the stock is now at around $13. Grilled chicken maker El Pollo Loco (LOCO) is faring a bit better, with the stock price roughly even to the IPO pop that occurred last summer.
[fortune-brightcove videoid=4023628040001]

But Shake Shack doesn’t appear to be too concerned. Better burgers are here to stay, according to founder Danny Meyer. As it planned for its IPO, Shake Shack told investors it could open at least 450 Shacks, up sharply from the 63 Shacks it opens today. Noodles & Co. and Potbelly have also sold investors on their ambitious expansion plans.

While investors feasted on Shake Shack’s IPO, some banks remained reluctantly on the fence. J.P. Morgan kicked off coverage on the company by touting its love of the brand, saying Meyer and his team have set “a new standard from a customer perspective” by selling tasty cheeseburgers, fries and shakes in an old-fashioned yet modern atmosphere.

But the bank set a $34 price target on the stock, which is roughly $10 below where it traded in the days leading up to the first quarterly report.

The price target reflects “a very positive long-term view of the growth prospects of the business matched by the unavoidable (to us) conclusion that shares should be owned lower,” said J.P. Morgan analyst John Ivankoe.

Read More

Great ResignationInflationSupply ChainsLeadership