Several weeks ago, S. Truett Cathy died in his home in Clayton County, Georgia. While you might not know who he is, you’ve almost certainly heard of his business.
Cathy was the former chairman and CEO of the fast-food chicken restaurant chain Chick-fil-A. He is survived by his son, Dan Cathy, who will take over his role within the company.
Aside from inventing the boneless chicken breast sandwich, T. Cathy was known for being a devout Southern Baptist, which means Chick-fil-A doesn’t do business on Sundays. That’s at least one-seventh of potential revenue that is flat-out turned away.
While this kind of thing might fly within a privately owned company, if Chick-fil-A were to go public, the majority of shareholders would be wondering why their gains have to suffer because religion says so.
Can we expect some profit-boosting policy changes and an eventual Chick-fil-A IPO in the near future now that Junior is at the reins?
The Name in Chicken
Founded in 1946 as the Dwarf Grill in Hapeville, Georgia — now called the Dwarf House — Chick-fil-A’s early success can be attributed to T. Cathy pushing for his restaurants to expand into the emerging shopping mall sector in the 1960s.
The first Chick-fil-A restaurant opened at a mall in Atlanta, Georgia in 1967, and after 46 consecutive years of positive sales growth, Chick-fil-A has over 1,800 locations in 40 states and Washington D.C., with plans to expand into Canada, the Philippines, and South Korea.
In 2013, Chick-fil-A made over $5 billion in revenue, up from 4.6 billion in 2012, and it’s growing nearly three times as fast as the distant second most recognizable name in chicken, KFC.
Its closest relative is Yum Brands, Inc. (NYSE: YUM), the owner of KFC, Taco Bell, and Pizza Hut. With 40,311 locations worldwide and $13 billion in total revenue for 2013, Yum Brands doesn’t hold a candle to Chick-fil-A, which made nearly 40% of that in the same year and with less than 5% of the amount of restaurants.
On top of that, the quick-service restaurant sector is nearly recession-proof. For instance, during the 2008 crisis, the S&P 500 lost 55% of its value, and Chick-fil-A’s top competitors, Yum Brands, Inc. (NYSE: YUM) and McDonald’s Corp. (NYSE: MCD), lost 37% and 22%, respectively. In the following five years, while the S&P only grew 29%, McDonald’s stock rose over 50%, and Yum Brands soared 105%.
Despite these appealing numbers, there’s a reason or two why Chick-fil-A isn’t quite an IPO chaser’s dream.
As a private company, Chick-fil-A doesn’t have millions of outside shareholders constantly keeping its public image in check, and this has shaped some of the company’s more broadcasted policies over the years.
In June of 2012, Chick-fil-A received national media attention for anti-marriage equality statements made by then President and Chief Operating Officer, Dan Cathy.
This resulted in a severe backlash against the company, including organized boycotts of all Chick-fil-A establishments and several prominent politicians speaking out against Chick-fil-A, strongly discouraging the company from expanding to their respective constituencies.
D. Cathy later apologized for his remarks, but the impression had been made. Given the political climate at the time on marriage equality, and even more so now, publicly opposing a highly sympathetic trend that’s only gaining traction is simply bad business — particularly with such a small degree of separation from a major restaurant chain with an image at stake.
In the ensuing media circus, millions in donations made to groups opposed to equal LGBT rights through Chick-fil-A’s charitable body WinShape Foundation came to light and reinforced the company’s damaged image.
This, in combination with Chick-fil-A not operating on Sundays, makes the company something of a fixer-upper for potential investors… but it would undoubtedly be worthwhile once an IPO or sale got the green light.
Despite all of the negative media attention and public fallout, Chick-fil-A remains a highly profitable company and shows few signs of slowing down. The restaurant chain actually came out of the other side of the media crucible better off than it was before. As they say, any press is good press.
Still, many investors would balk at investing a large sum of capital in a company that has alienated a large portion of its potential customers and rejects arguably more than a seventh in potential revenue.
However, we aren’t kidding anyone — in its present state, a Chick-fil-A IPO would make a lot of investors not only very happy but also very wealthy.
If the new leadership makes the necessary changes to things that might otherwise sully what could be a stellar IPO, you’d be wise to strap yourself in early and hold on all the way to the bank. Just don’t hold your breath until that day comes.