After Bojangles’ IPO comes the challenging part: growth

The Bojangles on Charlottetowne Avenue at Third Street just southeast of uptown Charlotte.
The Bojangles on Charlottetowne Avenue at Third Street just southeast of uptown Charlotte.

Charlotte-based Bojangles’ is slated to go public on Friday at a hot time for fast-casual restaurant IPOs.

Bojangles’ priced its shares at $19, according to a securities filing Thursday, and responding to investor demand this week, the fast food chain has upped the number of shares it will sell in its initial public offering to 7.75 million.

Since banks underwriting the IPO also have the option to buy an additional 1.6 million shares, the offering could raise $169 million.

Analysts say the fast-food chain, known for its chicken and biscuits, is drawing interest from all kinds of investors but still faces a number of challenges after the IPO as it works to satisfy Wall Street’s push for expansion.

In its IPO filing, Bojangles’ outlined an ambitious plan that includes increasing the number of locations by 7 to 8 percent a year, mostly in markets in which it’s already concentrated. The company operates 622 stores in 10 states and the District of Columbia, and two-thirds of its restaurants are in the Carolinas.

“Investors will be receptive given the company’s strong brand and consistent track record they’ve had with growth ... and the unit expansion opportunity that’s ahead of them,” said Will Preston, a research analyst with Renaissance Capital.

Shares of California-based Habit Burger as well as New York-based Shake Shack both more than doubled in their first day of trading last year, and analysts say it wouldn’t be unusual to see the same with Bojangles’.

Since 2013, the average after-market return for restaurant stocks – the increase in the share price since the close of the first day of trading – is 16.6 percent, Preston said.

Aaron Allen, a restaurant consultant at Aaron Allen & Associates, said ordinary people are interested in restaurant stocks as they see some of the companies as more than just as an investment opportunity.

“They’re in some ways buying into an idea and/or supporting the companies they believe in,” Allen said.

Still, challenges lie ahead.

Bojangles’ hopes to capitalize on its popularity in the breakfast segment. The fast-food chain generated 38 percent of its sales before 11 a.m., or on average over $650,000 per company-operated restaurant, in 2014, the company said in a recent securities filing. But competitors such as Taco Bell are elbowing their way into the breakfast market.

“Anytime you draw competition, it’s a challenge,” Preston said. “It does speak to the value of the area, though. Competitors are trying to get more exposure to it.”

When it tried to grow in the 1980s, Bojangles’ faltered and scaled back to fewer than 200 restaurants. Analysts say Bojangles’ faces the challenge of expanding its brand outside of the Carolinas while remaining profitable, and a number of factors could hold back profits.

“We have chicken prices that are remaining elevated through 2015, and those are expected to weigh on gross margins. (Bojangles’) also has increased labor costs related to the Affordable Care Act,” Preston said.

The restaurant chain also may need to tweak its menu to reflect changing consumer trends, such as demand for ethically raised animals, Allen said, citing the example of Chipotle, which says it sells only ethically raised meat.

Bojangles’, he said, can sometimes seem “disconnected” from a younger audience.

“Millennials are such an important audience, particularly for quick-service restaurants, because they spend more as a percentage of their discretionary income than any other audience … in the quick-service industry,” Allen said.

And a good day on Wall Street does not guarantee Bojangles’ success thereafter, said Brian Hamilton, chairman of Sageworks, a research firm that analyzes private companies.

“There’s been a lot of buzz around fast and fast-casual IPOs, but their actual market performance has varied,” Hamilton said. “Companies like Shake Shack and El Pollo Loco have done very well, while Potbelly and Noodles & Co. have struggled since their debuts.”

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Twitter: @katieperalta

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