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 (PBPB -3.82%). 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.