Is Potbelly Getting Any More Appealing at These Levels?

One of the fast-casual darlings of 2013, Potbelly (NASDAQ: PBPB  ) , is giving investors yet another costly lesson in the woes of investing in overhyped IPOs. With tremendous national growth potential and strong industry tailwinds, the long-term future for Potbelly is undeniably golden. The thing is, the market awarded it a valuation that simply couldn't hold up without a few hiccups along the way. In its recent earnings report, the delicious sandwich maker posted tepid top-line earnings, nearly flat same-store sales, and lower year-over-year profit -- prompting a sell-off that brought Potbelly's stock price to its lowest point since its IPO last October. The question now is, does the 30% discount give investors a more attractive entry point?

Stale figures
Revenue rose just 1.7%, while same-store sales barely budged -- up 0.7% for Potbelly's just-ended quarter. Net loss came in at $3.7 million, about 5% greater than the year-ago quarter's loss. Once you exclude IPO expenses, the company pulled a $1.9 million profit -- still down from an adjusted $2.4 million in the year-ago quarter.

There's a discrepancy between how the market perceived Potbelly and the reality of the business -- and that may not be a bad thing for the long run. Fast-casual restaurants are all compared to the golden standard, Chipotle Mexican Grill. But if you look at Potbelly's 2013, it doesn't much resemble Chipotle's massive buildout of stores and lightning-fast sales growth. For one thing, the company tacked on 42 new restaurants throughout the year. It also doesn't post the striking same-store sales growth that first excited Chipotle's legions of followers.

This sort of cautious growth may not energize the market and hungry investors, but it's a far better strategy than mindlessly adding locations -- especially considering that existing ones aren't posting substantial comparable-sales gains.

A better buy?
Potbelly, at less than $20 per share, is a much better deal than at $31 per share -- its price at the end of its first day on the market. Management is still targeting 10% new unit growth, and 20% EPS growth annually. Same-store sales figures remain iffy in the low single digits, but some of that is due to the macroeconomic environment, which hasn't lent itself well to many retailers and restaurants.

The stock trades at nearly 40 times its expected forward earnings. Now, you don't buy Potbelly for its earnings next year -- you buy it for its potential 10 years from now. With 40 to 48 new stores on the horizon for the current year, and likely more than the 50-count mark in the following year, investors will, without a doubt, see top-line growth. Short-term profitability might not be too appealing, as food costs are high, and the aforementioned economic environment is timid to say the least.

Potbelly has never been very appealing to value-seeking investors, and it remains an extremely expensive stock at 40 times earnings, and 21 times EV/trailing EBITDA. But at these lower levels, more optimistic growth investors could take a closer look. It may not be the "next Chipotle," but Potbelly has a formula that works, and a taste that people love. The chain looks well able to hold its place in the national fast-casual scene. 

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Read/Post Comments (6) | Recommend This Article (1)

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  • Report this Comment On February 19, 2014, at 4:20 PM, chowdachief wrote:

    This company from an investor perspective is interesting. Yes, currently it's another on the list of over-hyped IPOs (as you pointed out), but the sandwich shop has what I'll call the 'special' element. The chain appears to have a strong following and almost always has a line out the door during lunch hours. And their through put methods seem very similar to Chipotle. I know I don't get too discourage when I see a line at Potbelly b/c they'll get you in and out pretty quick. I'm a long term bull on this company but I don't expect the stock to follow for many years.

  • Report this Comment On February 19, 2014, at 4:39 PM, TheCommonTulip wrote:

    I agree with most of what you said Michael. I personally love the food and experience, I'm sure others do as well.

    The one thing they have to do is improve comparable sales, or their unit growth plans won't happen.

    It's not Chipotle. But...I do find it interesting that Mr. Market is rewarding Panera and punishing Potbelly today, for having very similar quarters.

    Adem Tahiri

  • Report this Comment On February 19, 2014, at 4:52 PM, sandiegoman wrote:

    Potbelly is STILL OVERVALUED. End of story. I'm not long term on this company because of lack of innovation. Throwing a tomato on a sandwich isnt revolutionary or anything interesting that makes me want to come back.

  • Report this Comment On February 19, 2014, at 5:38 PM, TheCommonTulip wrote:

    ^How many restaurants are really serving you something innovative, aside from fine dining and maybe Chipotle? Are you shorting them all?

    i.e. Subway isn't innovative, just an extremely profitable operator.

    Not saying PBPB is a buy, need to get comps up, but I wouldn't site innovation personally.

  • Report this Comment On February 20, 2014, at 9:22 AM, dackerman21 wrote:

    Tough call on whether to invest in PBPB. I love their sandwiches and I love the unique vibe of their stores.

    I absolutely hate that they gave $50 million in dividends to pre-IPO shareholders from money raised in the IPO. Why the hell would you do that? That just makes me question the smartness/dumbness of management.

    I'd say if the price drops to $15-16 it might be worth a shot.

  • Report this Comment On February 20, 2014, at 12:37 PM, sandiegoman wrote:

    CommonTulip -- how many offerings does a subway have? are they innovative, not so much. but FAR more offerings than potbelly. I'd say 3x more menu options at subway than potbelly and that constant menu development will drive traffic

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