Could Potbelly Be A Savory Stock Pick?

Sandwich lovers rejoiced when Potbelly (NASDAQ: PBPB  ) went public back in October. Originally priced at $14, shares for the sandwich shop popped at $33.78 on the same day. Since then, Potbelly's stock has floated around the $25-$31 per share range. This sandwich maker may have emerged victorious from its IPO, but it also faces steep competition within the fast-casual and sandwich industries. Does Potbelly have what it takes to stand out in a sea of deliciousness?

What sets Potbelly apart?
Tasty made-to-order sandwiches are a great investment for lunch, but need a bit more substance to be taken seriously as a stock. Even though Potbelly is fresh out of the oven as a public company and needs a bit of time to cool, it certainly has some favorable characteristics even now.

Like fellow fast-casual sandwich titans Subway and Quizno's, Potbelly uses an assembly line to make it your way fast, but ups the ante with a friendly atmosphere that combines splashes of down-home comfort with kitschy antique shop flair. That, and milkshakes.

It's perhaps no surprise then that Starbucks CEO Howard Schultz has been a Potbelly backer for almost a decade. Schultz has similarly strived for a comfortable, friendly neighborhood shop feel, even as the company has grown to astronomical proportions, and clearly sees the same potential in the sandwich maker. Having him on board could help keep Potbelly's heart in the right place as it broadens its scope and size.

Growth story
While its down-to-earth atmosphere and delicious food have already led to solid revenue growth over the past few years (since 2008, annual sales have risen from $207.6 million to $274.9 million), Potbelly still has yet to reach its full market potential. The sandwich shop is currently only available in 18 states and the District of Columbia, but CEO Ailwyn Lewis plans to expand its base of 307 shops by 10% year-over-year "for a long period of time ." For investors looking to get in on a growth story while the getting is good, Potbelly might be the little sandwich maker that could.

Besides location expansion, Potbelly is also working to diversify its product offerings, while still keeping a tight grip on quality. While Lewis explained that investors won't see "menu proliferation with items that don't fit right in our sweet spot," Potbelly has already rolled out new Q3 offerings that are utilizing high quality ingredients. The higher quality bacon bits for the new Turkey BLT offering, for example, helped send the company's cost of goods sold up 29.5% last quarter, but Lewis expects those costs to drop in Q4.

Does this Potbelly make my portfolio look fat?
Potbelly is still a relative newbie to the stock market, and while its debut has certainly been promising, the company will need to continue keeping its head on straight if it wants to see continued, healthy long-term returns.

One way to do that is to refuse to sacrifice, even a little bit, on the quality of the customer experience- much like Howard Schultz eventually did with Starbucks when he returned to its helm in 2008. If Potbelly can keep its heart (both in its food and in atmosphere) while still growing across the country, investors could be very pleased with its long-term results. If that heart somehow gets lost or obscured, however, investors should see it as a sign to head for hills.

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11/26/2014 3:59 PM
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