Potbelly Stock Hit Hard on Guidance; Is It Justified?

Potbelly is looking out of shape following its business update.

Jul 25, 2014 at 9:00AM

Source:  Wikimedia Commons

"We are disappointed by our performance during the second quarter, which fell short of our expectations," stated Aylwin Lewis, CEO of Potbelly (NASDAQ:PBPB). Its outlook went from bad to worse throughout the quarter, causing the company to slice its guidance to levels that left investors feeling malnourished; the stock price plunged 25% on the news that day.

The less-than-meaty update
On July 9, Potbelly issued its preliminary fiscal second-quarter 2014 results and business update. Revenue did rise 6.9% to $83.6 million, which doesn't seem too bad. Same-store sales slipped 1.6% compared to a 3% gain in the year-ago period.

Adjusted net income was $2 million, or $0.06 per diluted share. This was around half of what analysts were expecting on earnings. Potbelly tried to blame advertising and public company expenses as some of the reasons for the shortfall, but let's be honest: Those expenses are not one-time, unexpected, or unusual.

Lewis stated:

Comparable store sales growth improved as we moved throughout the quarter, but fell short of anticipated levels. Given our results in the first half of the year, we have revised our full year guidance to reflect current trends within our business.

The reassurance could use more seasoning
Potbelly did its best to reassure investors. Lewis pointed out that the company hit the mark on operational productivity and new store development, even though it failed on same-store sales.

The problem here is this is such a young company with a high expectations.  It needs strong growth in its brand popularity as measured by positive same-store sales.

Lewis stated the new "Flats offering," which is basically thin bread, is resonating well. He added:

Additionally, we intend to vigorously test a number of new marketing, menu and operational tactics during the second half of the year. We plan on discussing these initiatives in more detail on our upcoming second quarter conference call next month.

These initiatives sound vague at best.  Unfortunately for shareholders this may mean "Unfortunately for shareholders this may mean the company..."?the company is still crafting what it will try to do.

Source:  Wikimedia Commons

The bland outlook
Nearly halfway through the second quarter on May 6, Potbelly's full-year 2014 outlook called for low-digit same-store sales growth along with adjusted net income growth of between 25% and 35%. That would have put adjusted earnings at between $0.30 and $0.36 per diluted share.

Potbelly's revised outlook is now expecting flat to negative same-store sales along with adjusted net income of between $0.18 and $0.21 per diluted share. That's a big drop in earnings-per-share expectations of between 38% and 47% in just two months. Ouch.

Again back on May 6, Lewis had stated, "We believe 2014 will be an exciting year for Potbelly." He was hoping that Potbelly long term would have at least 20% annual adjusted net income growth "for the foreseeable future." Instead of a 20% gain, we're looking at a plunge of somewhere around 40%. For the company to stumble just two months later is concerning.

Foolish takeaway
I'm not sure if Potbelly was overly optimistic and was originally providing its guidance based on faith, communicated poorly and hasn't learned the whole under-promise/over-deliver thing, has a bad handle on handicapping its business, or something just simply went very wrong operationally.

Whatever the true case, there is too much of a question mark at this time about what's really going on, and the sell-off -- and perhaps more -- seems justified. You may still want to order a Potbelly sandwich, but I'd leave the stock on the side for now.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Nickey Friedman 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information