Beware the Hidden Dangers at Potbelly, Steak 'n Shake, and Einstein Bros.

There are lots of ways to evaluate a company. The norm on Wall Street is to scour the financial statements, consider the market opportunity, and compare these two metrics to the stock's price.

Sometimes, spending all day in front of a computer can lead you to forget that companies are actually living, breathing entities, powered by people. And just as with any other organization, the culture that exists within a publicly traded company plays a big role in how successful it will be over the years.

Luckily for us, Glassdoor.com allows us individual investors to peer inside an organization to see what its culture is like.  Employees -- both current and former -- get to rate a company on a number of scales. The average rating for a company on Glassdoor is 3.2 stars out of 5, and the average CEO has an approval rating of 69%. 

After a search through Glassdoor's database of publicly traded restaurants, I found three that stood out as having particularly low ratings and toxic cultures. Both customers and investors need to be aware of this situation, as this can affect both service and long-term stock returns for each of these three companies.

Potbelly  (NASDAQ: PBPB  )
This newly minted public company released earnings results this week that wowed Wall Street: Revenue jumped 12% and adjusted net income grew an impressive 27%. Shares were up more than 16% on the news, which surely has a lot of investors happy.

But the company's culture leaves a lot to be desired, and it's something that every Fool should keep an eye on.

Rating (out of 5)

CEO Approval

Would Recommend to Friend

2.8

 55%

 41%

Source: Glassdoor. 

After reading through the reviews submitted in 2013, one key theme kept coming up over and over again: The company is experiencing some very real growing pains. Employees said that corporate culture used to embrace the employees at every level. That stance, they say, has changed. With Potbelly focusing so much on growth right now, there were several complaints of being understaffed and having unqualified persons in middle management positions. Though complaints like that can be found with any company, they seem particularly common at Potbelly and seem to indicate a company that may be trying to grow faster than is healthy.

Einstein Bros. Bagels (NASDAQ: BAGL  )

Source: Dwight Burdette, via Wikimedia Commons. 

Like Potbelly's, Einstein's stock was also making huge moves this week. But unlike Potbelly's, the news was a big disappointment for investors. Though it won't receive any money, Einstein's announced that it was offering 2.5 million shares in a secondary offering at roughly $17.25 per share -- a 5% discount from where they opened the week. The offering was on behalf of one of its largest shareholders, Greenlight Capital.

But long-term investors need to look beyond short-term fluctuations and focus on what could be a very serious culture problem.

Rating (out of 5)

CEO Approval

Would Recommend to Friend

2.4

 25%

 22%

Source: Glassdoor. 

Reading through this year's reviews, there weren't any specific concerns that stood out above the others. Instead, it was clear that this a company that really doesn't value having a cohesive, nationwide culture evident in its stores. Mediocrity, at best, seems to be the norm. Management is apparently happy as long as revenue stays where it is -- which has been essentially flat over the past three years.

Steak 'n Shake

Source: Dwight Burdette, via Wikimedia Commons 

Owned by Biglari Holdings (NYSE: BH  ) and run by CEO Sardar Biglari, Steak 'n Shake easily takes the prize of worst company culture among restaurants. Back in 2008, Biglari essentially took over after being voted to join the board of directors. Business quickly turned around, with the company swinging from a $100,000 loss per day to a $100,000 profit per day in just one year. 

But that was then and this is now. Employees are simply not happy.

Rating (out of 5)

CEO Approval

Would Recommend to Friend

2.3

 19%

 23%

Source: Glassdoor. 

The feedback that employees give on Glassdoor is pretty uniform. Many are sure to include that there are, in fact, many great opportunities for promotion within the company. But the overwhelming sentiment is that Steak 'n Shake is simply trying to do too much with too little. Prices for food are very low, meaning that staffing can be scant during busier hours, and no food is premade, meaning that many employees are forced to wear many hats all at once.

While that approach seems to have helped the company return to profitability, there's no question Steak 'n Shake might be reaching the point where it will see severely diminished returns from this approach.

Better options for your money
You can probably do a lot better than these three stocks when it comes to making investments that will help you retire comfortably. In the special free report, "3 Stocks That Will Help You Retire Rich," we'll share investment ideas and strategies that could help you build wealth for years to come. I already own two of these companies, and they make up an astounding 16% of my real-life holdings.  Click here to grab your free copy today.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2725281, ~/Articles/ArticleHandler.aspx, 8/29/2014 4:32:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement