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Potbelly Gets Major Heartburn

The company has had a brutal time since its IPO in October


Potbelly (PBPB), an operator of sandwich shops, pulled off a huge IPO back in October, with the stock soaring 120% to $34 on its first day of trading. But since then, life as a public company has been downright miserable. Just look at today’s chart, in which PBPB stock falls off a cliff. As of now, the price is hovering just above $11.

potbelly ipo pbpb stockWhat’s going on here? Well, the growth rate is slowing down.

Just look at the latest announcement from the company, which provided a warning for fiscal second-quarter earnings. PBPB expects to post a meager 6.9% increase in sales to $83.6 million, which compares to the Wall Street estimate of $87 million.

And don’t expect the situation to improve anytime soon. PBPB also provided a revision of its full-year forecast. Earnings are now forecast at 18 cents to 21 cents per share, down from 43 cents to 46 cents per share. Oh, and comparable store sales are expected to be flat-to-negative low single digits (PBPB will report its official earnings on August 5).

So is does this mean that investors should stay away from Potbelly stock? Or is this the time to jump in?

There are certainly some positives for PBPB. The company’s concept goes back to 1977 and involves a menu of toasty, warm sandwiches, signature salads and cookies, which are all made fresh to order. What’s more, each location is has a unique design reflecting the local community.

There’s also much room for growth. After all, there are only about 300 PBPB shops in 18 states (consider that Subway has more than 40,000). Each location requires a relatively small amount ($600,000) of up-front capital, yet the margins generally reach 25% within the two years.

Finally, PBPB is in the fast-casual category, which has been the sweet spot of the restaurant business. Some of the top players include Panera Bread (PNRA) and Chipotle Mexican Grill (CMG). The fast-casual formula provides high-quality food at reasonable prices, without servers.

Despite all this, PBPB still has serious issues. For example, there are many direct competitors, which include players like Subway, Jason’s Deli and Quiznos. And of course, PBPB must deal with many local mom-and-mom shops. Let’s face it, compared to other business ventures, it isn’t all that hard to setup a sandwich shop.

The valuation is also still not cheap on Potbelly stock. Based on the new full-year earnings forecast, the price-to-earnings ratio is roughly 53. This compares to 21 for PNRA and 56 for CMG. However, both of these companies have larger footprints, stronger brands and heftier growth rates.

According to the preliminary earnings release, Potbelly’s CEO indicated that he is taking moves to revamp the operations, saying: “We intend to vigorously test a number of new marketing, menu and operational tactics during the second half of the year.”

While it is good to change things up, it looks like the company is scrambling. PBPB could be feeling the pressure from the competition as well problems with flagging consumer interest in the concept.

So even with the big drop in Potbelly stock, there is still not much to get excited about. In other words, there appears to be no catalysts to get the things back on track.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, http://investorplace.com/ipo-playbook/potbelly-gets-major-heartburn/.

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