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Can Potbelly and BJ's Bounce Back?

By Rick Munarriz - Feb 24, 2014 at 9:38AM

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Potbelly and BJ's Restaurant Group stumble on weak reports.

It was a rough week for Potbelly (PBPB -1.89%) and BJ's Restaurant Group (BJRI -4.75%) investors. Shares of the sandwich shop and casual dining chain tumbled 11% and 10%, respectively, last week after posting uninspiring quarterly results.

Revenue growth at BJ's decelerated to 8%, and that was solely the handiwork of the 17 new locations it opened last year. Comps fell for the second quarter in a row, dragging all of 2013 into negative territory. BJ's thought it had a unique niche, combining deep-dish pizzas with signature brews, but folks just aren't coming the way they used to. BJ's is introducing a new menu this week, but analysts are hosing down their profit targets for the balance of the year on cautious words about near-term margin constraints.  

Potbelly fared relatively better, but sales still fell short of expectations. The rapidly expanding chain specializing in baked sandwiches posted positive comps of 0.7%. Potbelly has been a disappointment since peaking the day after going public four months ago. It hit a fresh post-IPO low on the ho-hum report.

Potbelly and BJ's are just the latest restaurant chains to stumble this earnings season, and this new week offers opportunities for more eateries to fall short. 

Noodles & Co. (NDLS -3.49%), Wendy's (WEN -0.84%), and Cracker Barrel (CBRL -0.93%) are just some of the restaurants reporting this week. These three companies will provide snapshots of all three niches of the restaurant industry, which has been under fire after contracting margins, escalating costs, and crummy December weather started to weigh down on the eateries that have already reported.

Wendy's, naturally, is a fast-food chain, flipping square burger patties as it hopes to upsell hurried diners into premium items beyond its value menu. Cracker Barrel is a representative of the casual dining niche, providing table service for its comfort food staples in a throwback country environment. Noodles & Co. is in the fast-casual niche that straddles the fast-food and casual dining categories. Investors have been hungry for fast-growing fast-casual chains, to the point where Noodles & Co. and Potbelly were big winners the day they went public last year.

The reports may not necessarily impress the market. Wendy's is expected to post flat earnings growth on a slight dip in sales. Analysts see Cracker Barrel posting a modest uptick in earnings per share on flat sales growth. Noodles & Co. is expected to post more convincing growth than Wendy's or Cracker Barrel, but it merely met expectations last time out.

The restaurant industry failed two tests last week. It's going to have to hold up better this time around, but it's not going to be easy.

Rick Munarriz owns shares of Cracker Barrel Old Country Store. The Motley Fool recommends and owns shares of BJ's Restaurants. 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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Stocks Mentioned

BJ's Restaurants, Inc. Stock Quote
BJ's Restaurants, Inc.
$26.67 (-4.75%) $-1.33
Potbelly Corporation Stock Quote
Potbelly Corporation
$6.23 (-1.89%) $0.12
Cracker Barrel Old Country Store, Inc. Stock Quote
Cracker Barrel Old Country Store, Inc.
$109.25 (-0.93%) $-1.02
The Wendy's Company Stock Quote
The Wendy's Company
$21.15 (-0.84%) $0.18
Noodles & Company Stock Quote
Noodles & Company
$5.26 (-3.49%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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