El Pollo Loco (NASDAQ: LOCO) Shadows Zoe’s Kitchen (NYSE: ZOES) IPO

418

By Mark Michaels on August 4, 2014 Company, Consumer Staples

The success of El Pollo Loco (NASDAQ: LOCO)’s initial public offering last week was certainly a surprise to some investors. The company had set its IPO price at $15, and it successful IPO has pushed the valuation of the company to over $1 billion.

However in the hype over El Pollo Loco, another company’s IPO was all but ignored when it was first released and performed badly compared to El Pollo Loco’s IPO.

Both companies are restaurant chains that function in the fast casual dining portion of the market. Both companies are constantly compared to the likes of Chipotle Mexican Grill (NYSE: CMG) to follow in its success, and trying not to imitate the shortcomings of Potbelly Corp (NASDAQ: PBPB).

What is strange about this is that recent occurrences in the industry show that investors should prefer the Mediterranean-inspired restaurant that is Zoe’s Kitchen. While El Pollo Loco was showered with love from investors and most likely underpriced its IPO, its stock’s upward trend are prompting investors to ignore the company’s pre-IPO figures.

What Is So Special About El Pollo Loco

El Pollo Loco restaurants feature a Mexican inspired menu, specializing in fire grilled citrus marinated chicken. The business has over 400 locations across the nation, and plans to hit 2,300 locations in the future. However, the company only owns 168 of these locations; the others are franchises in the states of Arizona, Texas, California, Colorado, and Utah.

In the first quarter of the 2014 fiscal year, the company’s sales increased 7.2%, but revenue only increased 5.7% to $81.4 million.

Another concerning point is that in 2011, the company has 412 stores open for business. Since then, El Pollo Loco has closed 11 of those stores, and currently operates on 401 locations.

Unfortunately, El Pollo Loco is riding more on hype than its real achievements. Recent financial reports is most likely not able to grow like Chipotle. The company has plans to grow the store base at roughly 10% per year, and will open only 8 to 10 store fronts by the end of this year.

Zoe’s Kitchen Has Better Potential For Growth

Zoe’s Kitchen’s stock has done well ever since its initial public offering. However, the company has yet to see the incredible gains and hype that immediately follow the first day after the initial IPO price of $15. The stock closed its first day of public trading at roughly $25, and now trades at the price of $29.

El Pollo Loco priced its IPO at $15 as well, and is now priced at $38. Ironically, Zoe’s Kitchen is performing better in terms of sales growth, and provides more potential for long term growth with a much smaller store base.

At the end of 2013, Zoe’s Kitchen had only 102 stores in operation, and plans to increase that number to 130 by the end of this year. The company’s long term goal is to have 1,600 stores in operation, which is quite a conservative goal when compared to Chipotle’s expectations. Chipotle already has over 1,600 stores open.

Revenue is also surging at the company. In the first quarter of 2014, the company posted a 47.4% gain. Comp sales increased by 5.7%. However, the company’s net loss was $0.02 during the first quarter. For the full year, analysts expect an overall profit, and a slight improvement of $0.07 for the year 2015.

Conclusion

Investors and analysts believe that Zoe’s Kitchen is on track to be the next Chipotle for the main reason that it fits into a different food segment in the healthy eating trend. It is concerning that the pre-IPO filings will release an additional 4.6 million shares.

The advice for investors is to pullback on the El Pollo Loco hype, especially when Zoe’s Kitchen has a valuation of $530 million with predicted revenue to rise above $200 million next year.