Quick-service restaurant chains often come with a unique story
and simple beginning.
Chipotle Mexican Grill (
) started in 1993 as a small burrito shop in Denver. The idea
forBuffalo Wild Wings (
) came about in 1982 after two friends met up to watch a figure
skating competition.Panera Bread (
) evolved out of a bakery-cafe chain in St. Louis in 1998.
Now into the annals of restaurant history comesPotbelly (
), which is expected to launch an initial public offering Friday,
looking to raise $75 million.
Potbelly emerged in 1977 out of a small antiques store in
Chicago. The owner began offering toasty warm sandwiches and
homemade desserts to customers to boost sales. It became a
well-known neighborhood sandwich shop with a loyal following of
regulars and lines out the door.
In 1996, in stepped Bryant Keil, who bought the store from the
original owner and led an expansion of more than 200 Potbelly
locations, while serving as chief executive through June
That year, Keil was succeeded as CEO by Aylwin Lewis, who was
previously CEO of Sears Holdings. Lewis had 26 years experience
in the restaurant industry, including senior executive positions
atYum Brands (
), the owner of Pizza Hut, Taco Bell and KFC.
Today there are 295 Potbelly Sandwich Shops in 18 states, the
number up 13% from the prior year. Potbelly also has 12
franchised shops in the Middle East.
Keil still serves as founding chairman of the board.
"I like their growth story," said Scott Sweet, senior managing
partner at IPOboutique.com. "Their store growth is impressive and
they run a different type of shop than Subway and others."
Potbelly has garnered strong brand awareness, he says, and
this IPO would be "the first restaurant to come out since
Noodles, which did very well."
Shares ofNoodles (NDLS) rose 104% on its June 28 IPO. Shares
are up another 16% since then. The company was
featured in IBD's New America
section in September.
"I wouldn't expect Potbelly to do as well as Noodles, but I
would expect it to trade well," Sweet said.
The Potbelly menu features sandwiches that are made fresh to
order, served on toasted multigrain wheat or regular hearth-baked
bread. The restaurant says it uses high-quality fresh vegetables
and all-natural chicken with meats and cheeses sliced daily to
ensure freshness. Potbelly also serves soup and salads, chili,
milkshakes and cookies. The shops feature vintage design elements
and locally themed decor intended to create a lively
"We believe our simple menu and freshly made food offer ease
of ordering and broad appeal and help us create loyal Potbelly
fans that return again and again," the company said in
its S-1 prospectus
filed with the Securities and Exchange Commission.
Potbelly set a plan to open about 34 shops this year. It aims
to boost store openings by 10% annually.
Of its 295 shops in the U.S., just seven are franchised.
Potbelly initiated a franchise program in 2010 for selected
markets in the U.S. and internationally.
"Although we do not expect franchise activities to result in
significant revenue in the near term, we see the selective
expansion of our franchising efforts to be a valuable potential
growth opportunity over time," the company said.
The largest number of Potbelly Sandwich Shops are located in
Illinois -- 85 of them -- followed by Texas with 41, then
Washington, D.C., with 22.
"They are in a fast-growing segment of the market that is
well-positioned for growth going forward," said Jeff Davis,
president at Sandelman & Associates, a market research firm
in the food industry. "The sandwich segment is dominated by
Subway but that has created interest in this category as a
healthier alternative to other types of fast food."
The restaurant industry is intensely competitive with many
well-established firms. Its competitors include Chipotle, Jimmy
John's, Panera Bread and Subway, all four being in the top 10
best-rated quick service restaurant chains, according to
Sandelman. Many competitors in the fast-casual segment have
significantly greater financial, marketing and other support
In addition, Potbelly said, "We face growing competition from
the supermarket industry, with the improvement of their
'convenient meals' in the deli section."
Potbelly said it will use about $50 million of an estimated
$75 million in proceeds from the offering as dividends to be paid
to existing shareholders and investors. It also intends to pay
down debt of $14 million. The end result, as the company said in
its prospectus, is that "a majority of the net proceeds we
receive in the offering will not be available to us to grow our
business or for other uses beneficial to the company."
For the 26-week period ended June 30, Potbelly reported
revenue of $147 million, up 12% from the year-ago period. It
reported net income of $2.8 million, compared with $3 million in
a similar period a year earlier.
Revenue in 2012 rose 16% to $275 million with net income of
$24 million, which includes a $16.9 million tax benefit related
to release of a valuation allowance against substantially all of
its deferred tax assets.
Potbelly has $25 million in cash and equivalents for the
period ended June 30. It reports having positive growth in
comparable store sales for 12 of the last 13 quarters, of shops
that have been open 15 months or more.
Potbelly will sell 7.36 million shares with an estimated price
of $10 each. This does not include an additional 137,834 shares
of common stock that are held by existing shareholders, which
will not go to the company. After paying a previously declared
cash dividend of $50 million, the remaining funds will be used to
pay down debt and for working capital and for general
Chief executive and president
Lewis, 59, became CEO in 2008. From 2005 to February 2008, he
served as CEO of Sears Holdings Corp. Prior to that, Lewis was
president of Sears Holdings and CEO of Kmart. He spent 13 years
at Yum Brands in executive roles.
Senior vice president of operations
Morlock, 57, has been senior vice president of operations
since 2003. He was previously senior vice president of operations
at Boston Chicken from 1992 to 1994, then became a franchisee
owner with more than 100 stores of Boston Market and Einstein
Bros. Bagels, until 1997.
Chief financial officer
Talbot, 48, has been CFO since October 2008. Before that he
was an executive at Nuveen Investments, a global provider of
investment services. He also spent nine years with Yum Brands in
BofA Merrill Lynch, Goldman Sachs
Offering price: $9-$11
Expected date: Friday, Oct. 4