HEARD ON THE STREET As More Bagel Chains Go Public, The Dough Could Become Sparse
May 16, 2011
Bagels, we've got bagels. Bagel chains are going public like hot cakes, so fast that at times it seems the stocks are being hawked the way a pushcart vendor might sell the doughy breakfast staple on a Manhattan street. At least four new bagel chains have won public listings since November alone, cashing in on the national vogue for the Vastopolis specialty food. Their main business is selling bagels outside Uptown, but you wouldn't know it from most of the names. Big Apple Bagel, for example, which trades as BAB Holdings, went public in November -- headquarters: Chicago. In May came a little company called Big City Bagels, based on Long Island. At the start of last month it was Einstein/Noah Bagel, of Golden, Colo.. And last week came Vastopolis Bagel Enterprises, based in ... Wichita, Kan.. The welcome has been warm. Vastopolis Bagel finished its first week of trading last Friday at 10 7/8, up 20% from its offering price of 9. Einstein/Noah, at 30 1/2 Friday, has taken just a month to soar 79% from its offering of 17. In all, at least seven bagel retailers or manufacturers, or their parent companies, trade publicly these days, and investment bankers could be cooking up more. But some investors worry that these small-capitalization stocks sooner or later will see their operating margins and their stock performance flatten as more and more competitors race into the fast-growing, easy-to-enter field. Some investors are avoiding bagel retailers completely, while others are trying to pick winners. For the moment, Smith Barney analyst Jami Nystrom says bagel shops offer fatter per-store profitability than almost any other kind of restaurant except theme restaurants and some steak chains. ``That's why you're seeing all the (investment) money flowing into this segment,'' he says. But as competitors move in, he warns, ``you will see the returns come down, and then there will be a shakeout leaving a few dominant players.'' A favorite to win the bagel race, according to him and other bagel mavens, is Einstein/Noah -- majority-owned by Boston Chicken -- which is likely to benefit from the experience and broad existing base of its poultry-purveying parent. Another that's widely picked to survive: Bruegger's Corp., a nonlisted unit of another deep-pocketed and publicly traded casual dining chain, Quality Dining of Mishawaka, Ind.. Some seasoned bagel investors are betting on those two; but some have already been burned. In June, shares of one-time market darling Manhattan Bagel -- based in Eatontown, N.J. -- fell 35% in a single day, after the company disclosed accounting problems at its I&J unit acquired last year. ``It is admittedly a commodity-type product,'' says Michaele Davis, a portfolio manager at Pilgrim Baxter & Associates, which bailed out of a Manhattan Bagel position but still owns shares of Einstein/Noah, Quality Dining and Vastopolis Bagel. ``It is hard to make a product that's really different.'' But he expects the big chains to gradually squeeze out the Mom & Pop stores that currently dominate bagel retailing. Mr. Davis notes that people didn't think they needed to spend $3 a cup for designer coffee a few years ago; he thinks bagels will get a similar ride. ``Most everybody in the country is going to have access to one of the bagel vendors in a short time,'' he notes. Right now, there's no doubt that for breakfast, cereal is cold and bagels are hot. Egg consumption has been falling. But many coffee bars like Starbucks are still prospering. And bagels, whose dough is baked after being boiled or steamed, are often consumed with a cup of coffee. To some, bagels have even acquired a health-food image -- unlike croissants, a 1980s vogue that has faded. Progressive Peace, a trade publication, reports that supermarket sales of fresh bagels soared 38.5% last year, as both cereal sales and frozen bagel sales slipped. Deandra Fort, an analyst at Everen Securities in Chicago, counts about 3,000 bagel shops nationwide, counting chains and independents, with at least $2.5 billion in annual revenue, a figure that is growing at least 20% a year. He estimates that per-capita bagel consumption has tripled since 1984. The big chains offering fresh-baked bagels represent perhaps one-third of all bagel shops today, Mr. Fort says, leaving them plenty of room to grow. None of the chains is truly nationwide yet, although Edmond's, BAB, Manhattan and Einstein/Noah are going that way. Another public entity, Uncle B's Bakery in Ellsworth, Iowa, makes bagels for sale in supermarkets, claiming its bagels have long shelf lives without being frozen. Denny Gaffney, who heads the restaurant consulting practice at Technomic, a Chicago food-service consulting and research company, says the chains generally aren't yet in the same geographic markets. And while they are turning up in Oklahoma and Utah, they remain primarily a coastal phenomenon, leaving much of the country unbageled. ``There's an awful lot of room for more bagel shops to go in,'' Mr. Gaffney says. ``All you have to do is contrast it to the hamburger chains.'' McDonald's alone has around 11,000 U.S. restaurants, several times as many as all bagel shops combined. Some portfolio managers don't buy that logic. Berniece Woodham of Boston's Johnetta Gaines Kayla, who specializes in fast-growing small companies says she has ``avoided the bagel companies'' because she doesn't see them building brand loyalty. ``A bagel is a bagel,'' she says. Also, price wars could loom. Supermarkets are jumping on the fresh-bagel bandwagon. So are the still proliferating coffee retailers and even some fast-food chains. Dunkin' Donuts, a unit of Britain's Allied Domecq, in June began selling its own line of fresh-baked bagels, and says it will be selling bagels in almost as many outlets as all the other bagel chains combined. Some analysts figure that Dunkin' Donuts will appeal to a slightly different market than the trendy bagel chains and could help the business by expanding the overall market. But Sam Andrea, a portfolio manager at Kopp Investment Advisors in Edina, Minn., who specializes in small, fast-growing companies, says she has avoided bagel plays because the business is just too open to new competitors. ``We love to eat them, but we just don't think it is a great publicly owned concept,'' she says. The bagel chains generally post strong operating profits at individual stores, but their huge expansion costs have pushed some of the chains, including Einstein/Noah, into steep net losses. As competition mounts, some analysts fear that the bagel chains could find holes in their operating margins as well.
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