Greenberg: Getting Restaurant IPO Indignation

This article appeared Wednesday, Aug. 13, on RealMoney.

SAN DIEGO (RealMoney) -- You could see this coming from a mile away: Noodles & Co. (NDLS), Potbelly (PBPB) and Papa Murphy's  (FRSH). All three were well-established before they went public, and all three, so far, are causing investors to grab the Tums.

Regardless of what Noodles reports today, it faces the classic retail/restaurant dilemma for an initial public offering: Quickly growing a concept that may or may not have appeal beyond a certain region to meet Wall Street's expectations, then finding the right real estate in a market that's often already glutted -- as in the case of Potbelly -- with sandwich shops.

As San Diego-based restaurant consultant John Gordon tells me, El Pollo Loco (LOCO), from the IPO class of last month, "Historically hasn't been able to grow north of Santa Barbara." He continues, "This is the former Denny's clone, under-managed for years, almost defaulted on debt in 2011. Private equity had to pump in $40 million, paying an 18% coupon. But now it's back from the grave. They have made menu improvements and two years of (same-store sales) gains. The Street was totally blitzed with them in late-July timing (the third week is a primo IPO week), a faulty comparison to Chipotle. Traders said, 'I want a fresh story, something to get in at ground level, it's cheaper than CMG, geesh! But most of my non-sell-side restro-analytical friends see it as the bottom of the heap.'"

What's at the top? In Gordon's opinion, Zoe's Kitchen  (ZOES) "is a real fast casual brand (as opposed to LOCO, which isn't), which is first in its sub-segment (Mediterranean) and is not so insanely overpriced yet such that there will be a year one-two 'shock effect' meltdown when earnings disappoint. Its store economics is solid."

Reality: Just because a company goes public, doesn't mean its concept has been validated. It means either a) the private equity or venture guys wanted out, or b) the investment bankers were persuasive, or c) the executives were tempted, or d) all of the above.

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Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security. He can be reached at herbonthestreet@thestreet.com.

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