On Tuesday, Krispy Kreme announced that it had privately filed documents with federal regulators to go public. It was a bit of a surprise, but maybe it shouldn’t have been. Two other chains, Dutch Bros Coffee and Torchy’s Tacos, are believed to be looking at an initial public offering.
There are bound to be more, too, and for good reason: Valuations are going through the roof again.
The median restaurant stock is up 24.5% so far in 2020, according to a Restaurant Business analysis of data from the financial information site Sentieo. By comparison, the S&P 500 index is up 13% this year. Since the end of 2019, the median restaurant stock is up almost 39%.
There are plenty of reasons for such performance—namely, that restaurant sales are soaring, with some expectation that demand could remain for some time. In addition, publicly traded restaurants improved their cost controls, cutting menu items and finding other efficiencies, which is helping their profitability. And they all suddenly figured out technology.
Nothing lures companies to the public markets quite like strong stock performance, especially among an industry’s peer set.
Private equity companies and other investors looking for an exit want to get as much out of their investment as they can—while overcoming potential objections from management that generally doesn’t like being public. When stock prices for other restaurants take off, the equity markets look like a better bet for these investors to get the highest possible valuation in that exit.
And, when stock prices start soaring, as they are now, the institutional investors that bid on these IPOs start looking more favorably upon the prospect of having other companies in which to invest. That opens up the market for more companies. Restaurants are hot right now, so it’s only natural that restaurant IPOs would be alluring.
It’s worth noting that we’re talking about the market for traditional IPOs. There are at least a half-dozen blank-check companies with publicly raised cash, potentially looking at restaurant chains to take them public through the back door. These special purpose acquisition companies, or SPACs, would love to have any of the aforementioned chains considering an IPO, and that’s still possible with the right deal.
But on balance sponsors of companies looking to tap the equity markets tend to prefer the attention that comes with a traditional IPO—not to mention the possibility of a higher valuation that can come out of a well-done offering.
Krispy Kreme is an interesting candidate. It is a well-known name and its numbers have been surprisingly strong—its U.S. system sales rose 4.5% last year and global sales have increased nearly 60% since 2015, the year before investment firm JAB Holding took the company private. That’s especially impressive given a 12% decrease in international sales last year due to the pandemic, according to data from Restaurant Business sister company Technomic.
That’s the type of result that could generate a return on JAB’s original $1.65 billion investment.
It’s also worth noting, however, that this is the second IPO for a JAB-owned company. Last year, JAB took public JDE Peet’s in Europe, after merging its U.S. Peet’s business with the European Jacobs Douwe Egberts.
Two IPOs in two years would suggest that other JAB-owned companies could also be potential candidates to go public again, at least once numbers look good enough to satisfy investors. JAB had been an acquisitions machine over the past decade, buying up just about any chain that even thought about breakfast, including Panera Bread, Caribou Coffee, Einstein Bros Bagels and Bruegger’s.
It had been thought of as a buy-it-and-keep-it investor but it appears that JAB could be opportunistically taking some of its holdings public.
In any event, the market is there for them, at least for now.