Domino's Pizza's IPO, Papa Murphy's on the grow

July 19, 2004

If you've read any of the headlines trumpeting Domino's Pizza's June 13 public offering, you might think the delivery king made an extra-large screw-up. Take a gander at a few of these:

* "Domino's IPO near bottom of crop ... Pizza chain rings up 10th-worst debut since 1990."

* "Domino's insiders deliver a down move."

* The Wall Street Journal: "Domino's Pizza Initial Offering Fails to Deliver in NYSE Debut."

* The Motley Fool: "Domino's arrived cold and stale."

Sounds like an ugly day on Wall Street, doesn't it?

It wasn't, really. The IPO did exactly what the company wanted it to: reward principal shareholder

Steve Coomes, Senior Editor

Bain Capital with some meaningful ROI, plus generate some cash to pay down debt. (See Domino's Pizza's IPO: Great Expectations, Humble Beginnings.)

The problem is that some market watchers -- or at least a few select headline writers -- believe every IPO is supposed to make overnight millionaires of pre-offering shareholders, and if it doesn't, it's a dud.

To naysayers' credit, DPZ didn't set the investment world on fire. Not only was its $14 launch a dollar below the bottom of its anticipated offering range, it ended its first day of trading at $13.50. described the debut in these glowing terms: "Domino's Pizza shares fell deeper into the red Wednesday after the pizza chain turned in one of the weakest opening days among restaurant IPOs since 1990 ... ."

That may be the case, but let's examine the current state of some of the restaurant companies near Domino's on the low end of the IPO loser list:

* Woodroast Systems (which, as far as I can tell, no longer exists) dropped 13.6 percent

* Briazz (41 units) dropped 12 percent

* Smith & Wollensky (16 units) sank nearly 9 percent

On the other end of the scale, where the supposed winners are, is Boston Chicken's record rise in 1993: a jump of 143 percent. However, Boston Market (630 units), as it was later renamed, imploded amid an accounting mess and was purchased out of bankruptcy by McDonald's for, well, chicken feed.

Fresh Choice rose 91 percent in its 1992 debut, but 12 years later, it's only 40 units strong. Famous Dave's of America soared 71 percent in its 1996 offering, but it has yet to crack the 100-unit mark.

Call me clueless, but I thought small companies were supposed to grow when they go public.

The headlines describing Domino's IPO imply incorrectly that the stock should have done better when the company basically set out to brighten up its (and Bain's) balance sheet for the near term. Unlike all the restaurants listed above, Domino's didn't need the cash for growth or for infrastructure development; it's been there, done that and was an enormous force to reckon with before the IPO.

It instead did only what it needed to do: blast away a hunk of its mountainous debt. And by all indications, it intends to do more of that over the haul. Holders of the millions of shares of DPZ that didn't get flipped on the first day know this, and they expect the company will generate strong returns over the long term -- just as it has since its founding 44 years ago.

Perhaps Motley Fool's Bill Mann put it best in his July 14 commentary: "Let's set aside for a moment that people think that an IPO is a failure if it doesn't generate some big rise on the first day of trading. That's complete and total silliness. The purpose of an IPO is to raise money for the company. Period. Those dot-com-era fivefold increases on the first day: not good things. Seriously, how many of those big risers are still around at all?"

Papa's coming to you

Papa Murphy's Take 'N' Bake Pizza is out loud and proud about its 18-month growth plan. By the end of 2005, the world's largest take-and-bake chain wants to have 1,000 units, 125 more than it has now.

In a conversation I had a few years ago with PM's owner Terry Collins, I asked why he didn't grow the company faster than its average of 75 units a year. "Because we will never grow for growth's sake," he said.

That conservative strategy clearly has paid off for PM's, but now it's prepared to open the expansion throttle a little wider and pour in some cash borrowed from Charlesbank Capital Partners in Boston to accelerate store openings. Whether that means more company-owned units are on the way (it currently has about a dozen) is not clear, but at the very least, that new cash will fuel the development fires of a chain that few believed would cross the Mississippi as quickly as it has.

Expect not only to see Papa Murphy's stores in many major eastern U.S. markets sometime soon (Louisville, where I live, got two this spring), but expect to see them pop up in non-traditional locations, such as Wal-Mart Super Centers and large grocery stores (see Wal-Mart and Papa Murphy's Take 'N' Bake Pizza growing tasty partnership).

If anything, PM's is proving wrong those who continue to call take-and-bake pizza a fad.

Topics: Commentary , Domino's Pizza , Papa Murphy's Take 'N' Bake Pizza , Public Companies

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