Why Do Fast Food Restaurant and Cafe Stocks Drop Despite Their

Not every drop in a restaurant stock indicates a collapse of its business, and an increase in sales does not automatically mean that its market value should rise.

Revenues may grow because the company opened new branches, while its profits decline due to rents, salaries, delivery commissions, and expansion costs. Profits may actually improve, but the stock continues to drop because the IPO valuation assumed faster growth or higher profitability than what was later achieved.

This paradox is evident in several restaurant companies listed in the Saudi market. The market value of three out of four companies under study has fallen by about 60% to 78% from their valuation at the IPO, while the value of the fourth company remained close to its official IPO valuation.

However, interpreting these numbers requires distinguishing between three different things: the offering price, the market value of shareholders' equity, and the economic value of operational activity.

How was the comparison made?

The company's valuation at the IPO was calculated by:

Offering price × Total number of shares after the offering

The current market value was calculated by:

Share price at the time of verification × Number of shares currently issued

This comparison measures the change in the value of shareholders' equity and does not necessarily represent the total return to investors; it does not include cash distributions, nor does it equate to the value of the entity that adds net debt and similar obligations to debt.

Results from 2025 are used because they are the last full annual results that can be compared among the four companies, even though some companies have already announced results for 2026.

Sources of offering valuations: prospectuses and official offering announcements. The current values are based on the prices and numbers of shares published on Tadawul at the time of verification.

Burgerizer: An Exception Testing the Hypothesis

Burger House Restaurant offered 725,000 shares, representing 29% of its shares at that time, at a price of 165 riyals per share. Thus, its official valuation at the IPO was 412.5 million riyals, not 666 million riyals as sometimes stated in undocumented comparisons.

Its market value at the time of verification is about 413 million riyals, which nearly matches the offering valuation. When reading its stock trajectory, one must consider changes in the number of shares, including the issuance of bonus shares; therefore, a direct comparison between the old and new share price does not accurately reflect economic performance.

Its results also improved in 2025. Revenues increased from 299.6 million riyals to 366.5 million riyals, and net profit rose from 8.2 million to 11.1 million riyals. The company generated operating cash flows of 57.8 million riyals, compared to 34.8 million in the previous year.

Therefore, Burgerizer does not support the hypothesis that restaurant companies necessarily lose most of their value after listing. Instead, it shows that the trajectory of valuation varies depending on the initial price, subsequent results, and investor expectations.

Sultan Food: Rapid Growth Not Reaching Net Profit

Sultan Food's valuation at the IPO was 268.8 million riyals, based on a price of 84 riyals per share and 3.2 million shares. Its market value at the time of verification was about 58.2 million riyals, which is about 78% lower than the offering valuation.

This decline occurred despite a 15.7% increase in revenues in 2025 to 209.1 million riyals. However, operating profit declined by about 53%, and net profit fell to approximately 2 million riyals, with a margin not exceeding 1% of revenues.

Details of the announcement indicate that selling and distribution expenses increased with expansion, increased marketing, and a higher share of sales through delivery platforms, as well as increased administrative expenses and wage costs. Financing burdens related to lease obligations also rose.

There is an accounting point here that should not be overlooked: the company restated its comparative figures for 2024 after correcting estimates and treatments related to lease contracts under IFRS 16, and the auditor's report included a paragraph of emphasis. This does not necessarily indicate a problem with the continuity of operations, but it adds an element of reporting and comparison risk that investors may factor into their calculations.

This case illustrates the difference between volume growth and value growth. An increase in the number of branches or orders may raise revenues, but value does not improve unless sales convert into profits and cash flows with an acceptable return on capital.

Alamar: Better Profits and Lower Valuation

Alamar Foods' valuation (owner of Dunkin' and Domino's franchises) at the IPO was about 2.93 billion riyals, based on a price of 115 riyals per share and 25.5 million shares. Its market value at the time of verification is about 967 million riyals, a decrease of nearly 67%.

However, the 2025 results do not show an operational collapse. Revenues increased by 6.1% to 945.9 million riyals, operating profit rose by 26.9%, and net profit increased by 28.6% to 45 million riyals. The company also reported generating 130 million riyals in operating cash flows and maintaining a strong net cash position.

However, part of the revenue growth benefited from the addition of 29 stores in Mecca and Taif starting from the fourth quarter; therefore, not all growth can be attributed to improved sales from the existing branch network.

The Alamar case reveals that a company may achieve profit growth while its stock declines when the multiple that investors are willing to pay for those profits decreases.

If a company achieves ten million riyals in profits and is valued at 300 million riyals, its price-to-earnings multiple is 30 times. If profits remain stable, but investors reduce the acceptable multiple to 15 times, the value drops to 150 million riyals without any change in profit.

The question, then, is not limited to: Did profit increase? It extends to: Do the realized profit and its growth trajectory justify the price paid at the IPO?

Rishio: Revenues Rise but Profits and Cash Decline

Rishio's valuation at the IPO was 200 million riyals; five million shares were offered, representing 25% of the capital at a price of ten riyals, meaning the total number of shares was 20 million. Its current market value is about 79.4 million riyals, a decrease of 60.3%.

Revenues in 2025 rose to 54.1 million riyals, compared to 46.9 million riyals in 2024. However, net profit fell from 12.08 million riyals to 5.1 million, and operating cash flows declined from 9.1 million to 5.6 million riyals.

Investment activities recorded outflows of about 10.9 million riyals. These outflows do not necessarily represent a negative judgment on their own; they may be expenditures on new assets and branches. However, investors need to know whether the expected return from these investments will exceed the cost of capital and whether the new branches will compensate for the decline in profitability of the existing activity.

Why Does Repricing Occur?

Offering Valuation Precedes Operational Testing

The offering price is based on expectations regarding the growth of branches, revenues, and margins. After listing, these assumptions become testable in every financial disclosure.

If sales are achieved but margins are not, or if growth requires more capital than expected, the market lowers its estimate of future profits and cash flows.

Restaurants Are a High Fixed Cost Activity

Restaurants bear a mix of costs for materials, labor, rent, delivery, marketing, and equipment. Some of these costs do not decrease quickly when sales weaken.

Therefore, limited changes in gross profit margin or operating expenses can lead to much larger changes in net profit.

Expansion May Mask Weak Branch Economics

Opening a new branch increases total revenues, but it does not prove that the branch creates value. It may take months or years to reach breakeven and recover its establishment costs.

Thus, it is necessary to distinguish between:

• Total sales growth.
• Growth in sales of existing branches.
• Cost of opening the branch.
• Payback period.
• Return on invested capital.

Liquidity Affects Price, Especially in the Parallel Market

The companies under study differ in terms of market and trading volume and the percentage of free shares. In illiquid stocks, a relatively small number of trades may move the price more than in companies with broader trading.

However, demonstrating the impact of liquidity requires measuring trading volume, turnover of free shares, and the bid-ask spread, and it is not sufficient to infer it from price movement alone.

The General Environment Was Pressured

The Saudi market index ended 2025 down 12.84%, total market capitalization fell 13.55%, and trading value dropped 30.24%. This provides context for the decline in investor appetite and liquidity, but it does not alone explain the drop of some companies by more than 60%.

Moreover, comparing individual stocks to the general index remains limited, as the index includes companies with different weights and sectors. A more accurate comparison requires a sector index and risk-adjusted return.

Have Billions Disappeared from the Company?

When Alamar's market value drops from about 2.93 billion riyals to less than a billion, it does not mean that two billion riyals have left the company's treasury.

What has decreased is the marginal price at which investors are willing to trade the shares, and thus the market wealth attributed to shareholders has declined. The loss remains unrealized for the shareholder until they sell, and its size varies depending on their purchase price and the distributions received.

A change in price does not necessarily mean a change in intrinsic value by the same amount; the market may have been overly optimistic at the IPO or overly pessimistic later, or both prices may be justified by the information available at the time.

What Should Investors Monitor?

Revenues or the number of branches alone are not sufficient to judge a restaurant company. A deeper reading begins with:

Sales of Existing Branches: Is demand growing within the current network, or is all growth coming from new branches?

Operating Profit Margin: Can the company pass on rising costs to consumers without weakening demand?

Branch Economics: What is the cost of opening it, its profitability, and the payback period?

Free Cash Flow: How much cash remains after necessary expenditures to maintain operations and expansion?

Return on Invested Capital: Do investments generate a return that exceeds their financing cost?

Debt and Lease Obligations: Can the company service its obligations if sales slow down?

Quality of Disclosure: Are the numbers comparable, and are there any significant restatements or accounting notes?

And Then What?

The four cases do not prove that restaurant companies lose most of their value after listing. However, they demonstrate a more precise result: the market sharply repriced three companies, while a fourth company remained close to its official offering valuation.

In the cases of Sultan Food and Rishio, the decline coincided with a clear drop in profits despite revenue growth. In contrast, Alamar improved its profits, but that was not enough to maintain the high offering valuation. Burgerizer presents a counter case, as its total value remained close to the IPO valuation with improved results.

The economic lesson is not that the restaurant sector is inherently weak, nor that IPOs always misprice companies. Rather, revenue growth does not create value unless it translates into profits, cash, and a sustainable return on capital.

The offering sets a price at a specific moment. After that, a longer test begins: Can the company turn the growth story into repeatable branch economics, stable margins, and cash flows that justify what investors paid?

This material is a cognitive economic analysis and does not represent an investment recommendation or a fair valuation of the stocks of the mentioned companies.