Fogo Sizzles in IPO

July 1, 2015

NB_13HALLCOSER_5_19746449Karen Robinson-Jacobs
Copyright 2015 The Dallas Morning News. All Rights Reserved.

Wall Street’s hunger for new restaurant stocks pushed another North Texas brand beyond its initial public offering price.

Dallas-based Fogo de Chão Inc., a Brazilian-themed full-service restaurant chain, debuted Friday on the Nasdaq after pricing late Thursday at $20 a share. The initial price was above the earlier stated range of $16 to $18 a share.

The stock closed at $25.75, up nearly 30 percent.

Fogo de Chão is the second North Texas restaurant chain to go public in a week. Last Friday, stock in Dallas-based Wingstop soared in that company’s first trading day, gaining 61 percent from the initial offering price of $19 a share. Before that pricing, the high end of that company’s range was $14.

Fogo chief executive Larry Johnson thinks consumers are drawn to his chain because of the value proposition, the ability to have an affordable “white tablecloth experience.” That in turn “resonates with investors,” he said as the stock price continued its day-one climb.

Johnson said he thinks investors will take note of the brand’s growing popularity and acceptance by different age groups.

The company’s 26 U.S. locations, which range in size from about 7,500 square feet to 10,000 square feet, bring in about $8 million each annually on average.

‘Concept travels well’

The company expects the store count to grow by at least 10 percent each year, with Fogo eventually launching at least 100 U.S. locations. Johnson offered no timetable for the full buildout.

“We are comfortable that the concept travels well,” he said of the chain’s popularity in different markets across the country. “When you put all that together, I’m confident investors are going to get the story and are going to reward us for our performance.”

No new locations are planned for North Texas this year, but next year Fogo plans to appeal to carnivores in Uptown, which already is home to several popular steakhouses including Morton’s and Perry’s Steakhouse & Grille.

The company, which is owned by affiliates of Thomas H. Lee Partners, sold 4.41 million shares in the IPO. Lee Partners retains control of the company.

Fogo de Chão, which came to the U.S. in 1996, is the latest restaurant chain to whet Wall Street’s appetite.

PrivCo, which provides financial data on privately held companies, listed four restaurant IPOs this year, each of which posted a significant first-day pop. Each one – Shake Shack, Bojangles, Wingstop and Fogo – was priced at about $20 a share.

Burger joint Shake Shack closed at about $46 during its market bow, and jumped to more than $92 in May.

Fast casual

Many investors are trying to find the next Chipotle. The Mexican-themed fast-casual chain went public in 2006 at $22 a share and closed the first day at $44 a share. The stock closed Friday at $614.22.

Unlike most of those chains, Fogo de Chão is a full-service restaurant, rather than fast food or the current industry darling, fast casual.

Johnson noted that his chain’s average sales per location are much higher than those for a fast-casual concept.

The flip side, noted Sam Hamadeh, founder and chief executive of PrivCo, is that expenses are higher at a large full-service restaurant.

“That’s something [for investors] to keep in mind,” he said. “That’s a very expensive operation. That could be a problem at the first sign of a slowdown.”

Darren Tristano, executive vice president of Chicago-based Technomic Inc., a restaurant research firm, thinks the success of fast-casual IPOs is helping fuel growth of other restaurant stocks.

“Fast-casual restaurant chains continue to dominate growth,” said Tristano. “Technomic’s forecast five-year compound growth for fast casual is greater than 10 percent. As analysts and consumer investors look toward continued patronage and success of fast-casual restaurant brands, IPOs have been and are likely to continue to be strong going forward. This success will likely positively impact other major restaurant brands with IPOs.”

Sale Could Provide the Boost Frisch’s Has Been Searching For

June 12, 2015

bigboyface-750xx1739-2331-0-258Andy Brownfield
© 2015 American City Business Journals, Inc. All rights reserved.
Family-style restaurants like Cincinnati-based Frisch’s Restaurants Inc., which announced a planned sale to a private equity fund Friday, have been in decline for years. But an industry watcher says that segment is starting to turn around.

Chains like Frisch’s (NYSE: FRS) have been losing customers for 15 years to everything from fast casual concepts to fine dining to the growing a.m. eateries segment – restaurants like First Watch that stay open only for breakfast and lunch – Darren Tristano, executive vice president at Chicago food industry research firm Technomic, told me.

“Overall this segment has seen competition across the board,” he said. “Older consumers who are more traditional and grew up with these brands have shifted to other types of restaurants and aged out of spending. Younger consumers have seen the brands they grew up with, the fast casuals, become more of a preferred destination.”

That’s not to say it’s all bad news for the family-style restaurant segment. It has been growing as of late.

“The lower-middle income groups have been helped by improved employment, lower gas prices and higher disposable income,” Tristano said. “Because of that, this segment has done a little bit better.”

The segment grew 3 percent last year, up from no growth the previous year. However, that still pales in comparison to the 10 percent growth seen by the fast casual segment.

That slow growth or lack thereof put Frisch’s in a pickle, as outlined in the Courier’s Feb. 6 cover story.

In 2012, Frisch’s agreed to sell its 29 Golden Corral franchise restaurants in Cincinnati and six other cities to NRD Holdings LLC, which was led by Aziz Hashim. Golden Corral corporate exercised its right of refusal and purchased the restaurants itself. Hashim’s NRD Partners is set up to acquire Frisch’s for $175 million, or $34 per share, if shareholders approve the acquisition.

“At that point in time, the board started to say, ‘Where do we go from here in terms of creating shareholder value?'” recalled Mark Lanning, Frisch’s chief financial officer. “The board looked at various alternatives and finally looked upon the sale of the company. That process had been ongoing.”

The acquisition could be the shot in the arm Frisch’s needs, at least in terms of profitability. Private equity firms don’t try to revive brands but come in and try to make them profitable at the headquarters and corporate levels as well as more effective in advertising, Tristano said.

“When we look at Big Boy, it’s a very iconic brand,” he said. “It has strong opportunity to not only remain but increase relevance. I think with the right plan and right people, if they’re willing to invest into the brand to grow it, they could be on track.”

Piling It On

March 30, 2015

OhCal Foods rides acquisition to No. 1 in Subway franchising.

Fine, Howard 1500030901a_r100x80
2015 Los Angeles Business Journal. All rights reserved.

Once the earl of sandwich in Southern California, Hardeep Grewal is now the reigning king of Subway restaurant franchising nationwide.

Grewal’s OhCal Foods, which oversees Subway franchises in Los Angeles and Orange counties, has just acquired franchise development rights for all of Virginia; Washington, D.C.; and most of Maryland in a deal that makes him Subway’s biggest franchise developer. By far.

OhCal bought the territory from Feldman Group of McLean, Va., in a sale that closed late last month and nearly doubled the size of the company’s hoagie holdings overnight. The Woodland Hills company now oversees about 2,170 Subway locations, or 8 percent of all Subways in the United States.

Put another way, Grewal’s territory now includes one out of every 12 Subways nationwide. That’s more than double the next biggest franchise developer.

For years, OhCal had been battling Feldman for the distinction of being the largest franchise developer for Subway, which is the world’s largest franchise operation and is owned by Doctor’s Associates Inc. of Milford, Conn. But with Feldman’s 1,000 stores now part of OhCal’s kingdom, Grewal has taken the crown.

“This deal put us over the top,” Grewal said.

But the deal is about much more than bragging rights. OhCal’s revenue also figures to grow substantially. As a franchise development agent, OhCal matches franchise operators with sites and helps existing franchisees with marketing, quality control and lease negotiations. OhCal gets a cut of both franchisee ownership transactions and royalty payments that the franchisees make to brand parent Subway.

Grewal said the nearly 2,200 franchisees now under OhCal’s supervision bring in about $1.3 billion in annual sales. Franchisees pay 8 percent of their sales in royalties to Subway, which comes to $104 million a year from OhCal’s restaurants.

Most of those royalty payments go to Subway corporate, but OhCal gets a slice. Grewal would not say exactly how much his company receives, but said it can be up to one-third of total royalty payments.

That would translate to as much as $35 million a year for OhCal in royalty revenue alone, not to mention money it makes from franchise ownership transactions in its territory.

Unexpected path

Grewal, 59, became a Subway magnate almost by accident. Born in Punjab, India, he attended school in Montreal and moved to Los Angeles with his wife. Patwant, in 1986, when he got a job as controller at a subsidiary of Mitsubishi Corp.

He entered the world of Subway franchising not for himself, but for Patwant. who was looking for something to do.

In 1989, he bought her a Subway franchise. The money was good enough that Grewal eventually left his desk job. He opened some stores and took over other underperforming ones until he amassed a total of 24.

But Grewal saw that the more lucrative end of the sandwich business was in becoming one of Subway’s 200 or so franchise development agents. Development agents have a guaranteed revenue stream without many of the overhead costs that franchisees face.

In 2006, Grewal sold most of his Subway locations and purchased OhCal, which at the time oversaw 446 Subway franchise stores in Los Angeles County. He later purchased the development rights for Orange County and part of the province of Ontario, Canada. Today, OhCal oversees 663 Subway stores in Los Angeles County, 246 in Orange County and 260 in Ontario.

OhCal’s purchase of the franchise development rights from Feldman gives it oversight of an additional 760 Subway stores in Virginia, 82 in Washington and 111 in Maryland. The Maryland territory does not include the Baltimore metro area. Add in about 50 stores in that region that only open for the summer tourist season, and the total is just over 1,000.

Grewal said it was the prospect of getting the franchise development rights to the market around the suburbs of Washington that made this deal so attractive. The region has seen explosive growth in recent years, driven by the spread of federal government jobs and an expanding roster of defense and national security contractors.

“There have been so many new buildings going in at universities, hospitals and government-related facilities,” he said. “That means a lot of new locations coming up.”

From Subway corporate’s perspective, putting this lucrative East Coast market in the hands of a development agent with a proven track record was crucial. Subway has to approve any sales of development territory.

“There are many areas of the business that a development agent for the Subway brand must handle, and Hardeep and the OhCal team excel all around,” said Don Fertman, chief development officer with Subway’s corporate office. “Now with the move into another one of our showcase territories–the D.C., Virginia and Maryland area–we are looking forward to what they will accomplish there in making an already great market even better.”

In the family

Grewal has sent his son, Jesse, to manage the newly acquired territories. A nephew already runs the Canadian operations.

He said he intends to add about 30 stores a year, with many of those coming in the Washington area. As a development agent, OhCal scouts out potential sites for stores, then prepares to offer the sites to the nearest franchisee.

But it’s not only about adding stores. Grewal said his other goal is to improve same-store sales at existing franchises, a job made harder in the last couple of years as the sandwich chain’s highly successful “$5 Footlong” promotion has wound down.

“No question that sales growth has been slowing, both because of the overall economy and because that campaign has ended,” he said.

To counteract this, Grewal said he wants OhCal’s marketing efforts on behalf of its Subway franchisees to focus more on the tastes of millennials, who are now in their 20s.

But OhCal’s job won’t be easy. Because Subway has gotten so big–there are now 27,000 Subways nationwide–the rate of new franchise formation in the United States has naturally slowed, said Darren Tristano, executive vice president of Technomic Inc., a Chicago food industry research firm.

Not only that, but Tristano said Subway’s size makes it increasingly difficult to find high-quality locations for new franchise stores, making Grewal’s strategy of focusing on boosting same-store sales all the more important.

“That’s where a development agent like OhCal can be particularly useful, since they can bring to bear the marketing and branding resources that franchisee owners may not have,” Tristano said.

Another pitfall is that OhCal’s business model itself might not survive over the long term. Subway was a pioneer in using franchise development agents, a practice used by other franchised businesses through the years. But that model has lost favor in the franchise industry in general, with Subway one of the last remaining holdouts.

“The trend in franchising has been toward centralized control, both to maintain quality and to cut out the extra cost of development agents,” said Kevin Burke, managing director at Trinity Capital, a West L.A. investment bank that specializes in restaurant deals.

To his point, there have been occasional reports of Subway cutting back on the numbers of development agents in the United States and on the lengths of their contracts.

But Grewal isn’t very concerned. Not only is he now Subway’s largest franchise developer, he also has many years left on his contracts with the chain–about 13 years for his Southern California territory and about 27 years on the newly acquired areas.

“That’s plenty of time,” he said. “Enough so that my son can take over for me.”

McDonald’s: When the Chips are Down

January 13, 2015

20150110_WBP002_1(c) The Economist Newspaper Limited, London 2015. All rights reserved

After a long run of success, the world’s largest fast-food chain is floundering–and activist investors are circling

IN A brand-new McDonald’s outlet near its headquarters in Oak Brook, Illinois, customers do not have to queue at the counter. They can go to a touch screen and build their own burger by choosing a bun, toppings and sauces from a list of more than 20 “premium” ingredients, including grilled mushrooms, guacamole and caramelised onions. Then they sit down, waiting an average of seven minutes until a server brings their burgers to their table.

The company is planning to roll out its “Create Your Taste” burgers in up to 2,000 restaurants–it is not saying where–by late 2015, and possibly in more places if they do well. McDonald’s is also trying to engage with customers on social media and is working on a smartphone app, as well as testing mobile-payment systems such as Apple Pay, Softcard and Google Wallet.

All this is part of the “Experience of the Future”, a plan to revive the flagging popularity of McDonald’s, especially among younger consumers. “We are taking decisive action to change fundamentally the way we approach our business,” says Heidi Barker, a spokeswoman.

After a successful run which lifted the firm’s share price from $12 in 2003 to more than $100 at the end of 2011, McDonald’s had a tricky 2013 and a much harder time last year. When it announces its annual results on January 23rd, some analysts fear it will reveal a drop in global “like-for-like” sales (ie, after stripping out the effect of opening new outlets) for the whole of 2014–the first such fall since 2002.

In the past year Don Thompson, the firm’s relatively new boss, has had to fight fires around the world, some of them beyond his control. Sales in China fell sharply after a local meat supplier was found guilty of using expired and contaminated chicken and beef. Some Russian outlets were temporarily closed by food inspectors, apparently in retaliation for Western sanctions against Russia over its military intervention in Ukraine. And a strike at some American ports left Japanese McDonald’s outlets short of American-grown potatoes, forcing them to ration their portions of fries. (More recently several Japanese customers have reported finding bits of plastic, and even a tooth, in their food.)

However, the biggest problem has been in America–by far McDonald’s largest market, where it has 14,200 of its 35,000 mostly franchised restaurants. In November its American like-for-like sales were down 4.6% on a year earlier. It had weathered the 2008-09 recession and its aftermath by attracting cash-strapped consumers looking for a cheap bite. But more recently it has been squeezed by competition from Burger King, revitalised under the management of a private-equity firm, from other fast-food joints such as Subway and Starbucks, and from the growing popularity of slightly more upmarket “fast casual” outlets (see “Fast-casual restaurants: Better burgers, choicer chicken”).

In response, McDonald’s has expanded its menu with all manner of wraps, salads and so on. Its American menu now has almost 200 items. This strains kitchen staff and annoys franchisees, who often have to buy new equipment. It may also deter customers. “McDonald’s stands for value, consistency and convenience,” says Darren Tristano at Technomic, a restaurant-industry consultant, and it needs to stay true to this. Most diners want a Big Mac or a Quarter Pounder at a good price, served quickly. And, as company executives now acknowledge, its strategy of reeling in diners with a “Dollar Menu” then trying to tempt them with pricier dishes is not working.

McDonald’s says it has got the message and is experimenting in some parts of America with a simpler menu: one type of Quarter Pounder with cheese rather than four; one Snack Wrap rather than three; and so on. However, this seems to run contrary to the build-your-burger strategy it is trying elsewhere, which expands the number of choices. That in turn is McDonald’s response to the popularity of “better burger” chains, such as Shake Shack, which has just filed for a stockmarket flotation.

Some analysts think that McDonald’s should stop trying to replicate all its rivals’ offerings and go back to basics, offering a limited range of dishes at low prices, served freshly and quickly. Sara Senatore of Sanford C. Bernstein, a research outfit, notes that Burger King, having struggled against its big rival for years, has begun to do better with a simpler and cheaper version of the McDonald’s menu. For the third quarter of 2014 Burger King reported a like-for-like sales increase of 3.6% in America and Canada compared with a decrease by 3.3% of comparable sales at McDonald’s. That said, sales at an average McDonald’s in America are still roughly double those of an average Burger King. So the case for going back to basics remains unproven.

So far, McDonald’s looks as if it is undergoing a milder version of its last crisis, in 2002-03. Then, an over-rapid expansion had damaged its reputation for good service, its menu had become bloated and customers were drifting to rivals claiming to offer healthier food. Now, once again, “McDonald’s has a huge image problem in America,” says John Gordon, a restaurant expert at the Pacific Management Consulting Group. This is in part because of its use of frozen “factory food” packed with preservatives. In 2013 a story about a 14-year-old McDonald’s burger that had not rotted received huge coverage. Even Mike Andres, the new boss of the company’s American operations, recently asked bemused investors: “Why do we need to have preservatives in our food?” and then answered himself: “We probably don’t.”

McDonald’s doesn’t seem to be cool any more, especially among youngsters. Parents say their teenage children have been put off after seeing “Super Size Me”, a documentary about surviving only on McDonald’s food; and “Food, Inc”, another about the corporatisation of the food industry; and by reading “Fast Food Nation: The Dark Side of the All-American Meal”. It is hard to imagine the new McDonald’s initiatives getting the reaction Shake Shack got when it opened its first outlet in downtown Chicago in November: for the first two weeks it had long queues of people waiting outside in the freezing cold.

A lot of the negative PR that McDonald’s gets is the flipside of being the world’s biggest and most famous fast-food chain. This has made it the whipping-boy of food activists, labour activists, animal-rights campaigners and those who simply dislike all things American. In America it has been the focus of a campaign for fast-food workers and others to get a minimum salary of $15 an hour and the right to unionise. Last month the National Labour Relations Board, a federal agency, released details of 13 complaints against McDonald’s and many of its franchisees for violating employees’ rights to campaign for better pay and working conditions. The alleged violations relate to threats, surveillance, discrimination, reduced hours and even sackings of workers who supported the protests. McDonald’s contests these charges, while arguing that it is not responsible for its franchisees’ labour practices.

Not all the criticism McDonald’s gets may be merited–or at least it should be shared more fairly with its peers. However, the company’s troubles have begun to attract the attention of activist shareholders, who may prove somewhat harder to brush aside than labour or food activists. In November Jana Partners, an activist fund, took a stake in the firm. Then in December its shares jumped, on rumours that one of the most prominent and determined activists, Bill Ackman, intended to buy a stake and press for a shake-up.

McDonald’s says it welcomes all investors and is focused on maximising value for its shareholders. Even so, Mr Thompson’s new strategy needs to deliver results quickly. Mr Ackman’s Pershing Square Capital has done well out of its 11% stake in Burger King, because the chain’s main shareholder, 3G Capital, has pushed through a drastic cost-cutting programme and a merger with Tim Hortons, a Canadian restaurant group. “If McDonald’s were run like Burger King, the stock would go up a lot,” Mr Ackman mused recently. It looks like Mr Thompson may soon have to fight on another front.

Starbucks Sells 37 Million Gifts Cards During the Holidays

January 13, 2015

pictureStarbucks Corp. (SBUX) sold about 16 percent more gift cards in the U.S. during the 2014 holiday season as shoppers increasingly defaulted to the fail-safe option of treating their loved ones to lattes and Frappuccinos.

About 37 million gift cards were sold during the holiday season this year, up from about 32 million last year, the Seattle-based company said in an e-mail. More than $1.1 billion was loaded onto Starbucks gift cards between Nov. 3 and Dec. 25 in the U.S. and Canada, where a combined 40 million cards were sold, Starbucks said.

The world’s largest coffee-shop chain, with almost 12,000 cafes in the U.S., is an easy choice for consumers seeking the convenience of gift cards, said Darren Tristano, executive vice president at Chicago-based research firm Technomic Inc. Its stores are everywhere, and many customers visit almost daily.

“It becomes a safe bet,” he said. “We don’t want to give gift cards to people that we’re not sure they’re going to use.”

In 2013, Starbucks customers across the globe loaded $1.4 billion onto gift cards, including $1.3 billion in the U.S. and Canada, between October and December. Starbucks hasn’t yet released numbers for the corresponding period in 2014.

Starbucks said almost 2.5 million gift cards were activated on Christmas Eve this year, up from nearly 2 million sold that day last year. More than $20 billion has been loaded onto Starbucks gift cards since the program originated 13 years ago, the company said in a press release before Christmas.

The gift-card program reached new heights this year when the coffee chain sold a $200 Starbucks Card keychain that’s made with sterling silver and comes loaded with $50. The item sold out online and was available only in limited quantities at certain stores nationwide. Starbucks also offers monogrammed cards for $5.

Gift cards increase the amount of money customers spend when they’re in a Starbucks store, and the company should see a boost in sales in the first part of the year as coffee drinkers start to redeem the cards, Tristano said.

“It’s a significant part of what they do,” he said.

Quiznos sees Asia move as key to its future

December 16, 2014

© 2014 American City Business Journals, Inc. All rights reserved.11aquiznostaiwan-304xx2905-1937-0-76

Quiznos is undertaking a major expansion in Asia as it emerges from bankruptcy, with plans to open 1,500 stores in China and several hundred more in other countries.

Kenneth Cutshaw, president of the company’s international division, says the overseas move is important to help restore the company’s financial health.

The Denver-based sub chain filed for bankruptcy protection in March, citing a need to reduce its debt load by more than $400 million and to aid franchisees who have fought with the company over their profitability.

It exited Chapter 11 protection in July after court approval of a prepackaged plan in which three senior lenders acquired 70 percent of the company’s shares in exchange for debt.

These new efforts in Asia represent the first substantial growth plans the company has announced since then. In addition to the Chinese partnership, Quiznos signed deals with master franchisees to open 100 stores each in Malaysia, Taiwan and Indonesia, including a 24/7, 10,000-square-foot location in Indonesia that will be the chain’s biggest in the world.

In betting big on growing Asian markets — it also has franchisees who have opened stores in South Korea, Singapore and the Philippines — Quiznos is following in the footsteps of larger chains such as McDonald’s and KFC that have found success in that region.

But Quiznos enters these new arenas after spending 10 years reducing its number of American stores from more than 5,000 to about 1,100, making Cutshaw keenly aware of how important this growth is.

“Yes, it is a key component to restoring our company’s financial health,” Cutshaw said. “We’re not alone. There are other brands that have had tremendous success outside the country and are still rebuilding their operations in the U.S.”

Quiznos entered the international market in 1999 in Latin America and now has more than 100 locations in that region. For its international expansions, it seeks out master franchisees who know the markets and who have experience operating chain restaurants. About 35 percent of its total stores are outside of the United States.

Asia would host the largest concentration of its overseas stores if the growth is completed as projected. Key to that is the 1,500 Chinese locations planned over the next 11 years in a partnership with AUM Hospitality and Parkson Holdings Berhad. Parkson operates about 60 top-tier stores of other brands throughout China now, Cutshaw said.

Quiznos will enter the market with what Cutshaw believes is a built-in advantage.

“American brands are given the strong benefit of the doubt when they enter an international market,” he said. “It’s perceived as a superior-quality product.”

Brands that have experienced Asian success have changed their culture and menu somewhat, adapting to the use of Asian meats and vegetables and an inclination toward spiciness, said Darren Tristano, executive vice president of Technomic Inc., a Chicago food-industry consultant. But there are big opportunities present.

“Looking abroad for growth … is definitely a way for brands to grow, especially for Quiznos as it comes out of bankruptcy,” Tristano said.

Habit Looks to Trade on ‘Better-Burger’ Standing in IPO

December 11, 2014

© 2014 Orange County Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

RESTAURANTS: Recent growth, timing of offering look favorable

The Habit Restaurants Inc. in Irvine appears to have a number of factors working in its favor for an initial public offering that’s expected sometime this week, including some that reflect its strong run of recent years and others that indicate the chain is well-positioned for the future.

Among them:

* Habit has staked out a spot in the meaty middle of the “better burger” category with an effective mix of competitive standing on price and quality.

* The burger chain has quadrupled in size in seven years and now has 99 locations in four states.

* Habit plans more growth in 2015, notably on the East Coast and other new regional markets.

* It’s the first better-burger chain to go to market, and the move comes just a few months after the IPO by Costa Mesa-based fast-food chicken chain El Polio Loco Holdings Inc., whose shares have more than doubled since their July debut.

Habit’s offering of 5 million shares at $ 14 to $16 a share would put about 20% of the company on the market and raise about $66 million for the parent of the Habit Burger Grill chain after costs, according to its Securities and Exchange Commission filings.

Habit Restaurants Inc. would trade on Nasdaq under the ticker symbol “HABT.” Its market capitalization at $15 a share would be about $380 million.

When El Polio Loco’s similarly priced offering-$15 a share-hit July 25, its stock quickly traded above $20, and it now trades at about $35 for a market cap of some $1.3 billion.

Habit has been busy with expansion plans in the run-up to its public offering. It signed master franchise deals for 15 units in Las Vegas and 25 in Seattle in May. The first restaurant in a planned East Coast expansion came in August in Fair Lawn, N.J.


Habit was founded in 1969 in Santa Barbara.

Greenwich, Conn.-based private equity firm KarpReilly LLC led a group in 2007 that bought a majority stake. It will own 37% of the company after the offering, with voting control of 55%, the SEC filings said.

Habit had $162 million in sales for the 12 months ended Sept. 30, according to the documents. It ranked No. 16 this year on the Business Journal’s list of OC-based restaurant chains.

Net income has grown from $2.4 million in 2011 to $5.7 million in 2013.

It has had 43 consecutive quarters of samestore sales growth, and average unit volumes have grown from $ 1.2 million in 2009 to $ 1.7 million for the trailing 52 weeks as of Sept. 30, the filing said.

“They have strong leadership and strong growth,” said Darren Tristano, executive vice president at Chicago-based restaurant consultant Technomic Inc.

Tristano said Habit benefits from being the first prominent hamburger chain to go public this year. New York-based Shake Shack, which has about 50 units, is also considering an IPO, according to reports.

“If you believe in this segment, this is the first available investment,” Tristano said.

He attributed several restaurant IPOs this year to private equity investments that led to “operators trimming the fat” and then tapping the public markets to slash debt.

El Pollo Loco raised $113 million to pay down part of $289 million in debt when it went public.

That and a prior refinancing cut its debt service from $36 million a year to $10 million. It said resulting cash flow would fund growth.

Habit said it would use $41 million of its offering proceeds to close out debt, with $25 million for working capital, according to the filing.

Company representatives declined to comment for this article.

‘Better Burger’

Tristano placed Habit firmly in the “better burger” category: chains with a higher-quality hamburger than a $2 McDonald’s or Burger King selection, but at a lower price-$3 to $5 compared with $8 to $10-than restaurants such as The Counter.

Habit’s roots are in fast food, and “they’ve evolved toward fast casual, so they’re in-between,” he said.

He said El Pollo Loco has staked out similar territory-somewhere between Chipotle and Taco Bell.

“Quality and price means a better deal for lower- and middle-income customers,” Tristano said.

He said Habit-again, like El Pollo Loco- is strong in California, but sounded a note of caution.

“They’ll have strong regional competition in other markets,” he said.

One example: Prairie du Sac, Wise.-based Culver’s, which is similar in style to Habit and has 450 company-owned and franchise locations in 20 mainly Midwest states.

Tristano said Habit has shown it can do well against established competitors, including Irvine-based In-N-Out Burgers, a standardbearer in the better-burger category.

“They have to introduce themselves to a new audience, but they can be competitive,” Tristano said. “And they did well in the Consumer Reports [national] test early this year.”

Habit Burger Grill: 99 units and counting, initial public offering slated for this week

The Habit Restaurants Inc. in Irvine appears to have a number of factors working in its favor for an initial public offering that’s expected sometime this week, including some that reflect its strong run of recent years and others that indicate the chain is well-positioned for the future. Among them:

* Habit has staked out a spot in the meaty middle of the “better burger” category with an effective mix of competitive standing on price and quality.

* The burger chain has quadrupled in size in seven years and now has 99 locations in four states.

* Habit plans more growth in 2015, notably on the East Coast and other new regional markets.

* It’s the first better-burger chain to go to market, and the move comes just a few months after the IPO by Costa Mesa-based fast-food chicken chain El Polio Loco Holdings Inc., whose shares have more than doubled since their July debut.


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