Why Potbelly’s Stock Is Down Over 30% This Year

A total of 222 companies went public in 2013 -- the most since 2000. Potbelly (NASDAQ: PBPB  ) was one of 19 IPOs that joined the consumer goods segment last year. But the chain so far has been one of the worst performers of not just the consumer goods segment, but the entire IPO class of 2013.

Coming into the market last year, many analysts had doubts on how Potbelly would overcome competition from established chains like Panera Bread (NASDAQ: PNRA  ) , while often drawing comparisons to Noodles & Company (NASDAQ: NDLS  ) , which made its own market debut a couple months before Potbelly.

After seeing its stock fall over 21% in 2013, why have Potbelly shares plunged another 30% year to date?

Credit: Potbelly Corp

Recent earnings comparisons between Potbelly and its peers
In the first quarter of fiscal 2014 , Potbelly delivered revenues that rose 7.5% to $73.9 million. But the big disappointment came when the company reported a net loss of about $300,000. In the same quarter a year ago Potbelly earned $18,000.

By comparison, Panera Bread and Noodles & Company delivered much better first quarters. Panera Bread's revenues increased 8% to $605 million while net income fell 12% to $42 million. Noodles & Company saw its revenues grow 10.1% to $89.5 million while net income soared 56% to $1.4 million.

The bigger issue with Potbelly was the winter weather and its effect on comp sales, which fell 2.2%. While both Panera Bread, and to a lesser extent Noodles & Company, cited weather as a challenge during the quarter, it appears that Potbelly suffered the most. Potbelly's management stated that the severe winter weather brought comp sales down 3.75%.

Nevertheless, while first quarter earnings for Potbelly disappointed shareholders overall, the quarter was just the outer crust of many deeper issues at Potbelly.

Why Potbelly's stock is down over 30% this year
First quarter fiscal 2014 earnings was really just another data point highlighting the lack of net income growth at Potbelly. Even though Noodles & Company hasn't been hitting it out of the park regarding its own quarterly net income trends, Noodles & Company has been consistent in reporting positive net income.

In contrast, net income for Potbelly has turned negative the past two quarters and has never come close to the $18.5 million seen in the fourth quarter of fiscal 2012. Because Potbelly has just over 300 locations and is still viewed as a young growth company, the lack of strong growth in terms of either revenue or net income is problematic.

Potbelly's net income has drifted negative the past two quarters while revenues have remained mostly unchanged.  Credit: SEC filings

It also doesn't help that management in February of this year told the market that sales in 2014 wouldn't be much better than in 2013. This alone caused Potbelly's stock to fall by double digits.

Potbelly originated in Chicago, Illinois, an area known for some of the harshest winters in the U.S. In fact, nearly 90 of its locations are in Illinois today. So it becomes a big question mark when the company reports how susceptible they are to bad weather in the past two conference calls.

It also doesn't help when the company recently reported opening its first location in North Dakota in April of this year followed by plans to create a new hub market in Denver, Colorado. Outside of its locations in Texas and Arizona, the majority of the other locations are in northern states where severe winter weather is commonplace.

Then there is the expansion rate plans at Potbelly.

Noodles & Company highlighted in a recent shareholder presentation of long-term goals to expand into California and Florida as well as several other southern states. Because Potbelly's philosophy is to start a new hub market every 18-24 months, there is no clear vision to shareholders on if, or when, they will expand to southern states and densely populated areas like California.

Is Potbelly expanding as fast as it should? Credit: Potbelly Corp

Tremendous competition and the lack of differentiation have also plagued Potbelly so far.

Last quarter Potbelly introduced new flat bread sandwiches. Similarly, Panera Bread introduced not one, but three flat-bread flavors. In March, Potbelly introduced a new mobile ordering app. In the same month, Panera Bread announced plans to spend $42 million -- over half of Potbelly's recent quarterly total revenues -- on the technology for its Panera 2.0 IT platform.

Outside of Panera Bread, Potbelly suffers from competition from dozens of other nationwide chains that have several times the locations of Potbelly.

The lack of innovation and penetration outside of lunch hours also hurts Potbelly. In their last conference call, management reiterated that 60% of Potbelly's business occurs between 11:30 a.m. and 2:30 p.m. This closes opportunities that other nationwide chains have that include dinner and dessert menus as well as alcoholic beverage options.

While franchising is not a requirement for success, it definitely could help Potbelly expand quicker and more efficiently. The perks of franchising outside of quicker expansion include lower company costs, streamlined management, better market penetration, greater commitment by franchisees, and international growth potential. Without franchising plans in place, it is likely that Potbelly will continue to expand at a rate limited by upper management resources.

In the end, though, comp sales may be the biggest driver that has forced Potbelly's stock down over 30% this year. Even with comp sales the past two quarters adjusted for weather, 1.9% and 1.6% growth, respectively, these numbers aren't going to satisfy shareholders that expect Potbelly to have significant long-term growth potential.

Comp sales have drifted down the past couple of years after a solid 2012. Credit: Potbelly

Bottom line
There is no single reason why Potbelly's stock down over 30% this year. The chain has yet to prove early doubters wrong about dealing with competitors like Panera Bread who seem to have a lot more cash to stay ahead of Potbelly. While Noodles & Company hasn't shown stellar revenue and net income growth, it has consistently stayed in the green on both numbers -- unlike Potbelly.

In the end, Potbelly's stock won't begin to reverse its path downward until the chain can prove to shareholders and critics why its stock deserves to move upwards. But the biggest obstacle for Potbelly may be convincing customers why they should have a sandwich at their restaurant when there are countless other options.

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  • Report this Comment On July 09, 2014, at 10:15 AM, sandiegoman wrote:

    down almost 60% from post IPO...hilarious. anytime i need a good laugh, i look at ticker $pbpb

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