Consumer IPOs Defy Bad Economic Data

by: Renaissance Capital IPO Research

In a week marked by the worst trading in months resulting from the political impasse on the debt ceiling, falling consumer sentiment, and GDP revisions, there was no ceiling on the stock prices for last week's consumer sector IPOs. The consumer sector deals produced an average return of 45%, buoying the average return on the last week's 8 deals to nearly 20%.

Consumer IPOs top last week's deals

Company Name Ticker Offer Price Closing Price Return
Teavana Holdings TEA $17.00 $28.13 66%
Dunkin' Brands DNKN $19.00 $28.97 53%
The Chefs' Warehouse CHEF $15.00 $17.70 18%
Tangoe TNGO $10.00 $11.50 15%
C&J Energy Services CJES $29.00 $30.82 6%
Horizon Pharma HZNP $9.00 $9.02 0%
Wesco Aircraft Holdings WAIR $15.00 $15.00 0%
American Midstream AMID $21.00 $20.70 -1%
Consumer Group Average 45%
Group Average 20%
S&P 500 Index* -4%
*S&P 500 Index, RTH (^GSPC)

The three consumer deals were the week's top performers, and two of the three posted gains in excess of 50%: loose tea retailer Teavana Holdings (TEA), quick serve restaurant franchisor Dunkin' Brands (NASDAQ:DNKN), and specialty food distributor The Chefs' Warehouse (NASDAQ:CHEF). When coupled with the 52% return on boutique retailer Francesca's Holdings (NASDAQ:FRAN) which debuted last week, these deals demonstrate a real interest by investors in the US consumer space. Indeed, Teavana's 64% return landed it a place in the top ten performing IPOs year to date. Consumer IPOs now account for five of the top 20 US IPOs of 2011.

Top 10 Deals YTD

Company Ticker Offer Price Closing Price Return from IPO
1 LinkedIn LNKD $45.00 $101.03 124%
2 Endocyte ECYT $6.00 $13.33 122%
3 ServiceSource SREV $10.00 $18.67 87%
4 Sagent Pharma SGNT $16.00 $27.87 74%
5 MedQuist OTCPK:MEDH $8.00 $13.27 67%
6 Teavana TEA $17.00 $28.20 66%
7 Taomee TAOM $9.00 $14.71 65%
8 Zillow Z $20.00 $32.22 61%
9 Qihoo 360 QIHU $14.50 $23.05 59%
10 GNC Holdings GNC $16.00 $25.20 58%

These results belie weaker than expected GDP growth (1.3% vs. estimated 1.8%) with Personal Consumption, which grew only 0.1%, the final July University of Michigan confidence figure of 63.7, the lowest level since March of 2009. How to reconcile this glaring gap between fundamentals and share performance?

One explanation is the consumer segment is generally considered an early-cycle group, which generally posts better results ahead of a recovery period in our economy. Because the economic data does not indicate that a resurgent consumer is a realistic scenario at present, this may not be the answer.

Another explanation may be that due to the effect of recession psychology on demand for small ticket items. Dunkin' Brands' quick serve restaurants generate a large portion of their revenue and growth from coffee sales and offer a low price alternative to more upscale coffee shops like Starbucks (NASDAQ:SBUX). Teavana caters to teaologists with a selection of tea and tea merchandise across a wide price range. Through their boutiques, Francesca's Holdings offers trendy fashion pieces, but at reasonable prices. These companies all provide creature comforts to the consumer with relatively low ticket items. As evidenced by the record sales of Swiss Chocolate during 2008, the average person is wont to seek out simple, low budget comforts during times of turbulence and stress, even while paring their overall expenditures.

If this holds true there should be a proliferation of similar niche consumer deals, with companies such as dining and entertainment group Dave & Busters (IGNI), or West Coast apparel retailer Tilly's (TLYS) going public in the coming months