WALL STREET: HOW ABOUT A BREW WITH THAT BIG BURRITO?

Bob Krummert

Chipotle's stock was so hot its initial offering has already been enshrined alongside that of Boston Chicken (up 143 percent on its first day of trading in 1993) in the IPO Hall of Fame. Which shows you how big a premium investors will place on a good restaurant idea.

But there's a downside to a hot IPO, too. After investors fork over the money (proceeds from the Chipotle IPO were $200 million), they expect a lot from the newly public company. Wall Street wants good numbers immediately, even-better numbers the next time, and so on into perpetuity. And they don't care what you have to do to get them.

In Chipotle's case, you'd better believe CFO Jack Hartung knew how to play the game. First quarter as a public company? The numbers have to be consistent with the growth story that enabled the company to go public in the first place.

Chipotle's results were sterling. Sales were up 36 percent over the previous year and operating income rose 400 percent. So the conference call (it is archived at http://biz.yahoo.com/cc/5/66355.html and other places on the Internet) must have been a lovefest, right? Well…mostly.

As we've written about several times in Restaurant Hospitality, Chipotle adheres to a "food with integrity" stance. The chain's burritos are stuffed with naturally raised meats free of hormones and antibiotics, plus equally pristine non-protein ingredients, many of them organically grown. The company first made headlines when it began to source pork from Niman Ranch for its carnitas offerings, then it began to feature Bell & Evans chickens and like product for its beef offerings. Right now, all of Chipotle's pork, half its chicken and about one-third of its beef come from naturally raised animals. Given Chipotle's modest price points ($5.50 for a burrito), it's an operational miracle.

Doing business this way is consistent with Chipotle's core strategy. But stock analysts look at it differently. One point they raised: Hey, commodity chicken prices are low, so what is Chipotle doing to put pressure on its commodity suppliers for lower prices? The answer: not much. Company founder Steve Ells noted that part of the Chipotle strategy is to appeal to customers' minds as well as their wallets. If that means buying "food with integrity" that costs a little more and trims profits a bit, Chipotle's going for it. "Quite simply, better raw ingredients mean better quality food, more customers and better financial performance, ultimately" is the argument Ells makes.

In other words, Chipotle's not going to change its philosophy just to give a short-term boost to its quarterly results. Also in the works at Chipotle is a plan to use organic beans, lettuce, tomatoes, corn and flour for its tortillas. Management told analysts that it's sticking to its beliefs that customers want to know where their food comes from and how it was produced, and that aligning the company's values with those of its customers will produce the best long-term results.

That's an admirable stance, although it won't be enough to permanently enamor the Wall Street crowd. But they did perk up when Chipotle management said that adding organically grown ingredients gives the chain the power to raise prices. That part they liked.

Chipotle (486 stores), Tim Horton's (2,600 units in Canada, 288 in the U.S.) and the soon-to-go-public Burger King (11,000 restaurants) are not exactly fledgling operations. Neither is the full-service Gordon Biersch Brewery Restaurant Group, Inc. a Restaurant Hospitality Concept of Tomorrow not too long ago. But with 25 units and a niche in the slow-growing brewpub category, what's going to attract Wall Street to its IPO? Is there a compelling growth story here?

There may be. The late 1990s were the heyday of microbrewing, brewpubs and the specialty beer industry. But it's not so hot lately. The Brewers Association reports that at least 500 brewpubs and microbreweries closed between 2000 and 2004-more than the number of startups.

So, a shrinking industry? Could be. Or it could be one where specialty beer (whose production grew by nine percent in 2005 and is the product on which Gordon Biersch hangs its hat) is gaining market share against mainstream products (where consumption is flat) in what is a 6.3 billion gallon U.S. beer market. With just 25 units, Gordon Biersch could be well-positioned to produce the kind of growth Wall Street loves.

There's no telling how its IPO will be received. But at least the most recent IPOs for full-service restaurants have been solid performers. Morton's of Chicago went public in February at $17 a share, trading just above that mark as the RH e-newsletter went to press. It has changed hands for as much as $20.25. Ruth's Chris went public last August at $18, gaining 15 percent on its first day. It's recently traded in the $24 range.

Those aren't Chipotle-esque numbers. But they do indicate that the market still has an appetite for full-service restaurant stocks.