IPO

One industry Amazon hasn't gobbled up

October 11, 2013: 11:01 AM ET

Fast-casual restaurants are having their day in the sun on Wall Street. Potbelly's recent IPO is a case in point. A look at what's fueling the segment's growth.

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FORTUNE -- Ten months into 2013, the list of top performing initial public offerings is full of what you might expect: biopharmaceutical corporations and tech companies. But there are two outliers: fast casual restaurant chains Potbelly and Noodles & Company, which both saw their share prices more than double on their first days of trading.

While hype might have factored into the market debuts of bio and tech companies, Potbelly and Noodles got a boost for a different reason: Put simply, they are consumer-facing businesses that can do what Amazon can't.

Shares of Potbelly (PBPB), a Chicago-based sandwich shop that also offers salads and shakes, more than doubled from their initial trading price of $14 last Friday. They shot up to $28.66, giving the chain, which has nearly 300 domestic stores and a dozen overseas, a value of $802.5 million. A week later, the company's share price is still at double its starting point.

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Potbelly's IPO came just a few months after an impressive market debut by Colorado-based Noodles & Company (NDLS). In June, the 350-store restaurant chain that offers customers noodle dishes from a variety of cuisines saw its IPO starting price of $18 jump 104% in its first day of trading. On Friday, Noodles shares hovered around $45.

Both offerings highlight the current frenzy over the fast-casual restaurant industry, which also includes eateries like Panera (PNRA) and Chipotle (CMG). This segment of the restaurant industry falls somewhere between fast food joints like McDonald's (MCD) and casual dining spots like Applebee's and Chili's, and it has grown 57% in the United States since 2007, accounting for $17 billion in sales in 2012, according to Euromonitor International. The fast food industry as a whole -- which includes fast casual restaurants -- grew by 12% during that same period.

"Fast casual has had an incredibly impressive five years," says Elizabeth Friend, a consumer foodservice analyst at Euromonitor International, noting that they did well even in the recession.

Consumers like fast casual restaurants for their low prices, numerous menu options, and relative quality. Meals are priced between $8 and $10, so eating out doesn't cost a customer significantly more than staying in. Potbelly has an even lower price point: You can buy a sandwich there for $5.

Investors are fans of fast casual because they have lower operating costs than fancier sit-down restaurants, and they meet consumers' demand for cheap, ostensibly healthy meals on-the-run.

But fast casual restaurants also offer investors something else that's proven elusive: growth in consumer business. Retail segments like bookstores, shoe stores, and small electronic shops have seen their growth stunted by the likes of Amazon.com (AMZN) and big box chains like Wal-Mart (WMT) and Costco (COST). Though the reach of these mass merchants is vast, it hasn't creeped into restaurants' cheap, hot meals.

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"There aren't a whole lot of growth concepts in [the] consumer space anymore" because of competition from the likes of Amazon, says R.J. Hottovy, Moringstar's global director of consumer cyclical and defensive research. As a result, "investors have shifted from traditional retailers to restaurants, where they think there's a longer runway of growth."

Industry watchers expect the 10-11% annual growth that fast casual restaurants have seen over the past few years to continue. "If you look at market sizes, traditional fast food industry is $200 billion and fast casual makes up $17 billion of that," says Friend. "The room for growth there is still very large."

That is, unless Amazon figures out a better way to get you a hot, toasty sub.

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