Potbelly's Problems Put on Parade

Potbelly made a meal of its bad news and investors have been left holding the bill.

Jul 10, 2014 at 12:05PM

There are some things that you can't blame Potbelly (NASDAQ:PBPB) for. For instance, that it would release bad news on the same day that the market decided that 17,000 is unsustainable because of, I'm not sure, 'math' maybe. The company is surely getting more than its fair share of hammering due to the overall market sentiment today, but bad news is still bad news.

Potbelly issued a much dreaded "business update" last night, letting the market know that, 'Hey, we might not sell all these sandwiches.' Actually the company said that it was going to sell less and make less than it anticipated. Is this a sign of things to come, or just a stumbling block for Potbelly?

Sales take a tumble at Potbelly
The underlying problem at Potbelly is that sales are on the way down. The company's original prediction for the fiscal year was that comparable store sales would increase by low single digits. In its updated guidance, the company is now expecting sales to fall slightly or remain flat, at best. Preliminary results for the current quarter have comparable sales falling 1.6%.

That's going to have a big knock-on effect for the company's bottom line, and what looked like a sizable increase in earnings per share has been revised down to a decline. It's a hard lesson for Potbelly, a company that hit the ground running last year. The company's IPO last year was considered a smashing success by the media, with shares exploding after its debut.

Now it seems like reality has set in, and the market is readjusting to the idea that maybe a largely regional sandwich chain isn't worth the $860 million that it seemed to be at first. After this morning's fall, the company's market capitalization is down to a mere $330 million.

Can Potbelly bounce back?
I've never been overly bullish on Potbelly for the reasons listed above -- it's regional, smallish, and in a saturated business. The company still wants to open between forty and forty-eight stores this fiscal year, and it needs to if it's going to weather future storms. Earlier this year, the company was hammered when bad weather in its densest areas caused customers to stay home and pushed sales down through the floor.

Potbelly doesn't have the brand strength of many competitors and I'm not even sure it has more brand strength than Quiznos, a company that was forced to file for bankruptcy earlier this year. On the other hand, Quiznos wasn't just a victim of weak sales, but of financial and structural mismanagement, as well. Potbelly's management has been fine, if not outstanding.

I don't think Potbelly is headed the way of Quiznos, but don't look for a huge bounce anytime in the near future. There's a lot of work to be done before this brand has the momentum it needs to get through tough times without taking a major hit.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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