In recent years, investors have feasted on the shares of newly public restaurant chains with the hopes that one day they’ll become just as big as Chipotle or Panera. But one of those promising debuts has largely slipped under the radar.
On Tuesday, Mexican fast-food restaurant chain Del Taco officially became the sole subsidiary of Levy Acquisition Corp. (TACO), after announcing a deal earlier this year to be acquired for $500 million, including debt. That transaction helped Del Taco pay down millions in high interest debt and put the restaurant company in a better position to use the cash it generates to fund expansion and other day-to-day operations.
But shares in the company, whose name changed to Del Taco Restaurants Inc., haven’t seen much trading action and were only up a slim 3% on Wednesday. That goes against the streak of double-digit or greater gains that other restaurant initial public offerings have notched over the past few years.
Despite the muted IPO, Del Taco has a fairly compelling story to tell. It ranks as the second largest fast-food purveyor of Mexican cuisine, only trailing Yum Brands’ (YUM) Taco Bell. And the company argues that it snugly sits between Taco Bell and fast-casual king Chipotle (CMG) in terms of the quality of its food and its prices. That echos what other newly public fast-food restaurant chains have tried to claim to investors and diners: their food is fresher than what’s sold at traditional fast-food operators, though their prices and other features, like drive through windows, are similar to the quick-service concepts.
“In the past, we talked price. But we’ve now moved on to talk about the freshness and quality,” Del Taco President and Chief Executive Paul Murphy told Fortune. “But you can come get one of our burritos for $5 with the speed of a drive through.”
In many ways, Del Taco sits squarely between Taco Bell and Chipotle. Take a look at its comparable-restaurant sales, a key metric for the industry that gauges the performance of established locations. At Del Taco, that metric increased 7.7% for the latest quarter, the sixth consecutive quarterly increase. Chipotle posted an impressive 10.4% jump in the most recent quarter, while Taco Bell’s grew 6%.
And while many neighborhoods already feature Chipotle and Taco Bell restaurants, Del Taco sees plenty of room for expansion. It operates about 550 restaurants in 16 states today but wants to hit 2,000 locations in the coming years. The company is hopeful it can lure more millennials and has also spent the fast few years courting more female diners after previously skewing more towards men.
“The fastest growing category in the restaurant industry is Mexican by far,” said Larry Levy, chairman of the Del Taco and Levy Acquisition boards. “We are in the sweet spot with a brand that is completely resonating with consumers.”
