Potbelly gets major heartburn

The company has had a brutal time since its IPO in October.

By InvestorPlace Jul 18, 2014 2:25PM
A Potbelly Corp. sandwich & drink cup in Washington, DC, on Friday (© Andrew Harrer/Bloomberg via Getty Images)By Tom Taulli

Potbelly (PBPB), an operator of sandwich shops, pulled off a huge IPO back in October, with the stock soaring 120 percent to $34 on its first day of trading.

But since then, life as a public company has been downright miserable. Lately, the stock's price has been hovering just above $11.

What's going on here? Well, the growth rate is slowing down.

Just look at the latest announcement from the company, which provided a warning for fiscal second-quarter earnings. Potbelly expects to post a meager 6.9 percent increase in sales to $83.6 million, which compares to the Wall Street estimate of $87 million.

And don't expect the situation to improve anytime soon. Potbelly also provided a revision of its full-year forecast. Earnings are now forecast at 18 cents to 21 cents per share, down from 43 cents to 46 cents per share. Oh, and comparable store sales are expected to be flat-to-negative low single digits. (Potbelly will report its official earnings on Aug. 5.)

So is does this mean that investors should stay away from Potbelly stock? Or is this the time to jump in?

There are certainly some positives for Potbelly. The company's concept goes back to 1977 and involves a menu of toasty, warm sandwiches, signature salads and cookies, which are all made fresh to order. What's more, each location is has a unique design reflecting the local community.

There's also much room for growth. After all, there are only about 300 Potbelly shops in 18 states (consider that Subway has more than 40,000). Each location requires a relatively small amount ($600,000) of up-front capital, yet the margins generally reach 25 percent within the two years.

Finally, Potbelly is in the fast-casual category, which has been the sweet spot of the restaurant business. Some of the top players include Panera Bread (PNRA) and Chipotle Mexican Grill (CMG). The fast-casual formula provides high-quality food at reasonable prices, without servers.

Despite all this, Potbelly still has serious issues. For example, there are many direct competitors, which include players like Subway, Jason's Deli and Quiznos. And of course, Potbelly must deal with many local mom-and-mom shops. Let's face it, compared to other business ventures, it isn't all that hard to set up a sandwich shop.

The valuation is also still not cheap on Potbelly stock. Based on the new full-year earnings forecast, the price-to-earnings ratio is roughly 53. This compares to 21 for Panera Bread (PNRA) and 56 for Chipotle Mexican Grill (CMG). However, both of these companies have larger footprints, stronger brands and heftier growth rates.

According to the preliminary earnings release, Potbelly's CEO indicated that he is taking moves to revamp the operations, saying: "We intend to vigorously test a number of new marketing, menu and operational tactics during the second half of the year."

While it is good to change things up, it looks like the company is scrambling. Potbelly could be feeling the pressure from the competition as well problems with flagging consumer interest in the concept.

So even with the big drop in Potbelly stock, there is still not much to get excited about. In other words, there appears to be no catalyst to get things back on track.

More from InvestorPlace

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tags: PBPB
Jul 21, 2014 8:19AM
Did not know they (Potbelly) existed. 
Jul 18, 2014 2:35PM

C'mon...It was a "Pig in the Poke" and a "Pie in the Sky"....Sweet Geezus...

This is why most people shouldn't "buy" IPOs....IMO.

Have you ever counted how many Subway's are around, just for starters...??

Jul 18, 2014 5:04PM
It likely shouldn't be more than a penny stock anyway....these things are a dime a dozen!
Jul 21, 2014 12:41PM

I was the VP and COO of a 27 unit sandwich chain in California in the late 90s. All of them either had a potbelly stove with barn wood décor or a general stored décor. The sandwiches, were hand made with healthy ingredients , the soups were from the owners fathers recipes everything was fresh.

They were and still are successful ( grown to over 40 now ) because the owner had a vision and a commitment to quality that he would not compromise.

When a concept goes public you have the pressure to maximize short term profits, many times at the expense of quality, or your stock tanks.

Good luck Potbelly

Jul 18, 2014 6:37PM

In the old days dining out while on the road for business or pleasure was more like a voyage of discovery.  You often would encounter little local establishments that had some of the most amazing food you could find and then a little further down the road you might encounter a first class ptomaine palace.  LOL  Now almost everything is franchised serving pretty much cookie cutter menus where nothing ever changes.  For me eating out has really become rather boring unless I am going to the high dollar unique specialty places.

In small towns in particular you might encounter a place that may be called simply Ruby's or Dad's place.  They were invariably on the town square across from the court house or something.  Another joy was the truck stops but unfortunately they pretty much  have all caved to the fast food entities now so they are no different than everyplace else.


For real food or a close facsimile you are left with places like Golden Coral or Ryan's and of course Cracker Barrel and Bob Evans.  They beat the heck out of the fast food joints with much more variety and cheaper prices for what you get plus in the first two it is all you can eat.  Actually they have the potential to be faster than the fastest fast food joint except they are so popular they are always crowded.

Potbelly is just a small fish in a very large pond and will have to just survive for awhile in order to get bigger.  If they make it they will join the ranks of more mundane same ole same ole grub shops like Subway, Penn Station, and Quiznos.     

Jul 19, 2014 10:12PM
It's a sandwich shop...period.  There prices are higher than their competitors and the food isn't all that much different.  Just another hyped up stock that a few made a bunch of money on the IPO while the rest of the suckers who bought in are left nothing but "crumbs"
Jul 18, 2014 4:06PM
Jul 21, 2014 5:58PM
hear about the restaurant that opened up on the moon?
  the food is terrific,but there's no atmosphere.

this guy walks into a restaurant and asks the cook,'how do you prepare your chickens?'
   the cook says,'nothing special.we just tell them they're gonna die'.

i knew this guy who was so fat,when he stood on the scale,it read,'to be continued'.  

Jul 19, 2014 8:55AM
There's a sandwich chain named Potbelly?
Jul 21, 2014 11:55AM
Jul 18, 2014 10:02PM
I really enjoy Potbelly in Cincinnati and Florence, KY however visited one last night at the airport in Washington DC and the experience was a train-wreck.  I wont do that again.. Big Mistake. 
Jul 21, 2014 11:28AM
A restaurants success is based on QUALITY food and Quality people not price. If the food is excellent and the help good they will thrive because of that not PRICE....guarantee you. Just look around.
Jul 21, 2014 2:37PM
Why does every company have to go public? What's wrong with privately owning a business or a partnership?
Jul 21, 2014 6:57PM
The name is terrible and it WILL FAIL !  Fat gut Americans will not want to show up there and have other customers sit there and laugh as another mammoth belly waddles up to order. BAD PLANNING !
Jul 21, 2014 10:38AM

Yup went back and read 2nd. time...Potbelly has competition, lots of competition.

Subways,... just about every corner in a lot of towns...in many gas stations or convenience stores.

Panera's...Much bigger backing and probably nicer surroundings

Chipotle...About the same.


Jimmy Johns...

Jason's Deli....?

Just about All the major Pizza shops or restaurants.


Thousands of Regional shops and Bars...

And just about every major Shopping or Resort area, has a Mom &Pop...deli. 

****edited.....Some locations do have "gluten free" products..

We have a friend that has a couple pizza places....Sells "gluten free everything" and products in their specialty shop to go, so you can make or bake your own stuff...In a Resort type area.

Jul 21, 2014 4:38PM

Potbelly's has THE BEST oatmeal chocolate chip cookies.  If you don't believe me, get one and try it - then you will.  Their food is good, but agree that they have stiff competition and they are a little pricey for a sandwich shop.  I like them, but don't eat there much.

Jul 21, 2014 6:53PM
What the heck is a potbelly, another (TP) republicans who eat too much, we use to call them Fat Butts.
Jul 21, 2014 5:28PM
This sandwich place is nothing to write home about. Subway and Jimmy John's is much better.
Jul 21, 2014 6:10PM



Jul 21, 2014 4:28PM
I would never invest heavy in a restaurant stock. It only takes one supplier with tainted meat or contaminated vegetables to ruin you. Not to mention it only takes one knucklehead employee to post a picture on the Internet of them bathing in a sink to hurt your company.
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