Potbelly (PBPB 2.28%) may have been a hot eatery IPO two Fridays ago, but Wall Street afterward had a bout of indigestion. Shares of the baked sandwich shop chain surrendered 10% of its value last week.
It's clearly not an overall disappointment. Potbelly wound up selling nearly 8.5 million shares at $14 in its debut, meaning it still has nearly doubled to reach last week's close of $27.81. However, it's easy to see why the stock has decided to pull back in recent days, including a sharply lower open this morning. Potbelly may be in the sweet spot of restaurants these days -- fast-casual is smoking fast food on the low end and casual dining on the higher end -- but it's not growing as quickly as other market darlings.
Noodles (NDLS -1.76%) was no Chipotle Mexican Grill (CMG 0.59%) when it more than doubled out of the IPO gate this summer, and Potbelly is no Noodles. In short, Potbelly is a poor investor's Noodles just as Noodles is a poor investor's Chipotle.
Source: Potbelly.
I did my part. I hit up Potbelly three times the week it went public. I ordered twice from its outlet at Reagan National Airport and attended a Motley Fool event where Potbelly catered. I checked out three sandwiches in that span. They were tasty, but not in a way that would make it seem as if Quiznos, Jimmy John's, and any indie gourmet sandwich shop are on borrowed time. Noodles at least has a somewhat unique product on the market.
Potbelly grew sales by less than 12% through the first half of the year, which is not a very compelling snapshot of a company that's about to go public at a valuation more befitting a faster-growing company. Noodles was growing at a more rapid pace, and Chipotle was growing faster than both companies at the time that it went public.
Bulls will argue that there's accelerating growth to be had now that Potbelly has access to the financial means to expand beyond its more than 300 stores. That is certainly true, but where's the beef? (Please don't come back with "It's in the A Wreck sandwich.") Chipotle has excelled because of its cult-like status that sets it apart from other burrito rollers. This isn't a subjective assessment of the winding queues at a local Chipotle during lunchtime -- the consistent comps and store-level economics bear that out. Potbelly has turned in positive same-store sales in recent years, but 1.8% in 2010 and 1.7% in 2011 before bouncing up to 3.4% growth last year suggest the chain is barely keeping pace with inflation. Just for comparison's sake, Chipotle's comps have climbed 9.4%, 11.2%, and 7.1% over those same three years -- and it's doing this with five times as many locations. So much for the theory that nimble equals speed.
We'll start seeing Potbelly's underwriters chiming in with their ratings and profit targets in the coming weeks, and that will provide some insight as to where they see the company headed. They will likely all offer up bullish assessments, even if they were offering the stock at just $14 a pop earlier this month. If growth can accelerate -- and it should now that the IPO will give the brand name wide recognition -- it may eventually justify its debutante pop. However, now that investors are realizing that not every fast-casual operator is the next Chipotle, it wouldn't be a surprise to see the stock meander or drift lower until the underwriters lend their support.
