Is the Potbelly (NASDAQ:PBPB) IPO, which debuted with much fanfare and an impressive 120% premium from its offering price, another instance of market hysteria, or is there something to be said for the high-profile, fast-growing business that clearly enticed more than just sandwich-eaters? The company has a steep trailing price-to-earnings, and thus far in the year has incurred a drop in net income, which is tough to stomach for even the most growth-hungry investor. But we have seen this play before with other super-performing QSRs. Could Potbelly defy the physics of valuation and continue its run forward?
In 2012, Potbelly brought in just under $275 million in revenue, which represented growth of 15.5% over the prior year. On the net income level, the company earned $24 million. Investors should note that the company had a $16 million tax benefit for the year. In the first half of this year, the company saw an additional 11.7% in sales gains but lost around $200,000 at the other end of the income statement.
In the first half of 2013, Potbelly opened an additional 17 locations, with plans to do a full 32 to 35 on the year. In total, the company has around 300 stores, with the vast majority in the United States and a handful in the Middle East (which are largely franchised stores).
Since 2008, revenues have grown at an annualized rate of just 8.1%. Income from operations grew nearly 12%, and same-store sales grew 1.5%. The same-store sales growth, as mentioned in the company's S-1, was a result of a higher average check and fewer entrees.
In many ways, Potbelly is the kind of company a value-oriented investor immediately balks at and walks away from. But compared to some of its peers, the IPO and current valuation aren't that insane.
Management has pegged the company's growth to opening new stores at a rate of 10% per year.
From 2011 to 2012, adjusted EBITDA grew by about 17.6% while the company opened 30 new company-owned stores. The adjusted EBITDA margin ticked up slightly from 11.2% to 11.4%. In 2010, adjusted EBITDA grew by 27% as the company opened 16 new stores. The shop-level profit margins are a bit above 20%. For comparison, Chipotle Mexican Grill enjoys shop operating margins of more than 26%.
Three years from now, if all goes somewhat according to plan, the company will have opened another 100 stores and has the potential to substantially improve its margins on a unit basis.
By no means is Potbelly a cheap stock based on normal valuation metrics, and quite simply it just isn't supposed to be an attractively priced stock. It's a high growth stock that looks akin to other QSR stocks investors have seen play out well -- such as Chipotle, Panera, and Noodles & Co. With just 300 stores, the company has a lot of catching up to do to approach Chipotle's 1,500 locations or Panera's 1,600-plus. The truth is, for the growth the company expects to provide, Potbelly's seemingly silly run-up on IPO day isn't that egregious an act.