In 2006, Chipotle Mexican Grill went public at $22 per share, after a pre-IPO process in which the company increased its asking price. The shares took off once they hit the markets, closing at an even $44. And it hasn’t stopped. Chipotle’s stock price is up 4,563% since that first-day close.
Investors have seen this, and ever since then they’ve pounced on anything that could draw even remote comparisons to the fast-casual Mexican chain. On Thursday, they found another one in Cava, the Mediterranean chain that appears poised to emerge as a potential competitor for Chipotle’s customers.
Cava’s offering, in fact, was like that of Chipotle. The company had an experienced backer in former Panera Bread CEO Ron Shaich, somewhat though not completely like Chipotle’s ownership at the time of its IPO by McDonald’s. Cava’s offering generated pre-IPO enthusiasm (though some skepticism, to be sure), ultimately priced at $22 per share, and came just a few cents from closing at $44, a 99% first-day pop.
The challenge for Cava is reaching the expectations investors now have for the company. Cava ended Thursday with a market cap of $4.9 billion, higher than Papa Johns, Shake Shack and Wendy’s and not all that far from the $5.7 billion market cap of Wingstop.
Cava has the makings of something of a divisive stock. On one hand, its restaurants are profitable (restaurant-level margins were 25% in the first quarter) but the company itself is not (but it says profits are coming). It is a Mediterranean chain with a health halo, but so far such companies have struggled to gain widespread acceptance on either Main Street or Wall Street, as Sweetgreen is discovering and the Cava-acquired Zoe’s Kitchen already knew.
IPOs are carefully measured. Companies are generally taken public only when the conditions for such offerings are right, and they often limit the shares available at least in part to generate some demand that leads to growth on the first day. Strong first-day performances are the norm, not the exception.
But history also shows just how much of a challenge Cava will have in maintaining its first-day stock price, let alone becoming “the next Chipotle.” For this, we present the following table of a handful of notable IPOs over the past decade:
Four companies bested Chipotle’s first-day pop and only one of them, Shake Shack, has managed to grow the value of its shares in the years since that day. Everyone else has declined.
Noodles & Co was the first chain to draw the curse of the “next Chipotle” label. Its stock took off in the days after its opening, only to decline and never really stop. On Thursday it closed at just over $3 per share, a 91% decline from that close on the first day of trading.
Potbelly’s IPO, which was also in 2013, generated even more investor enthusiasm on its first day, with a first-day pop of 120% that no other restaurant company has been able to equal. It’s down 73% since that first day. Habit Burger, which went public in 2015 just before the now-famous Shake Shack IPO, came close to Potbelly only to succumb to a lack of investor enthusiasm. It was sold at $14 per share to Yum Brands, 65% lower than its first-day close.
Zoe’s Kitchen was the poster child for the fast-casual bubble between 2013 and 2015, having gone public despite an EBITDA (earnings before interest, taxes, depreciation and amortization) of about $10 million. It lasted all of four years on the public markets before Cava acquired the company and then converted its restaurants into Cavas.
We included Sweetgreen in the above table, though not the other companies from the 2021 IPO class, largely as a warning for what Cava could face if it disappoints investors in the short term. In fairness to the salad chain, 2022 was a brutal year for stocks and particularly those in the restaurant space. But the company has also struggled to prove that it can sell its salads at a profit.
Why do the companies struggle upon their IPO? Lots of reasons. Their offerings were overblown. The stress of being public leads to poor decisions. The restaurant business is difficult.
Time will tell just how well Cava will do. But based on recent history, it has a one-in-four chance of keeping enough investor interest to grow its stock price from here.