How Potbelly Corporation's Store Concentration Hurts It

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Earlier this week, Potbelly Corporation (NASDAQ: PBPB  ) announced its fourth-quarter and full fiscal year sales. While the market doesn't usually act as a single entity, this time it did, and it was unimpressed. Weak sales left shares flapping in the wind and drove the stock's price down more than 10%. Most of the blame was heaped on factors outside of the business's control, with management citing weather and the government shutdown as major drags. If that's true, what can Potbelly do to avoid bad luck in the future?

Bad-news Bears -- and Nationals, I guess
Potbelly's store footprint is heavily concentrated in a few cities. Chicago's city limits contain more than 40 locations, while Washington, D.C., has more than 20. That means that around 20% of the company's total locations are accounted for in two cities. The October through December 2013 period saw a government shutdown in Washington and an exceptionally harsh winter in the Midwest.

Potbelly's concentration of locations makes it especially susceptible to local disruptions. Estimates from the Washington, D.C., city government put revenue declines at local restaurants around 7.5% during the shutdown. Potbelly almost certainly took a hit over the two-week shutdown, which not only affected government employees, but also put the kibosh on most tourist activity.

In Chicago, Potbelly's home city, the weather hasn't let up. Winter has punished small businesses, keeping customers at home. Again, Potbelly isn't immune to the movements of the broader market, and it seems unlikely that this quarter's results are going to show a stellar turnaround for those Midwest locations.

Expanding the business to mitigate risk
Potbelly's long-term plan is to open new "hub" markets every year-and-a-half or two years. These areas give the business a way to reach further into new regions using "spoke" markets that extend from the hub. As the company adds new hubs, the risk of weather, government, and other local disturbances disrupting the whole business drops.

Potbelly still doesn't have any locations in Florida or California -- not counting its California, Md., store -- leaving a lot of room for growth. At the same time, its slow-moving plan means the upside from any new openings is likely to take a while to be seen. This week's hit was a reflection of investors' concerns that the growth they hoped for is further away than they wanted, and that right now, the company is subject to the whims of weather and bad governance. Potbelly still has a lot of gas in the tank, but it's not speeding down the highway.

A faster ride in 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

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

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: 2846165, ~/Articles/ArticleHandler.aspx, 9/2/2015 6:06:22 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...

Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:00 PM
PBPB $10.20 Down -0.06 -0.58%
Potbelly Corporati… CAPS Rating: **