Potbelly Skyrockets on Debut - Analyst Blog

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Chicago-based sandwich chain Potbelly Corp. ( PBPB ) soared on its debut on the Nasdaq on Oct 4. On its opening day, Potbelly shares jumped a havoc 119.79% to $30.77.

In late September, this restaurant chain announced the terms for its initial public offering (IPO) and priced 7,500,000 shares of common stock at $14.00 per share. The offering is expected to close on Oct 9, 2013. The sandwich chain expects to raise about $75 million through its IPO. The raised funds will be used to finance a previously declared cash dividend to its current investors, repay borrowings and fulfill working capital need.

What's Behind This Jump?

Potbelly currently has 295 restaurants in 18 states and the District of Columbia, among which only 7 are franchised. While most of the companies are transitioning to a franchise-centric model to reduce the volatility in earnings and increase cash flow generation, Potbelly's inclination towards company-owned unit openings speaks well of its fundamental strength and makes investors optimistic on the stock.

The chain also has 12 franchised locations in the Middle East. It plans to open 32-35 company-owned locations this year along with 10 franchised locations. Over the long term, it plans to increase the number of restaurants by at least 10% annually, suggesting a well-planned growth trajectory.

The company has witnessed steady sales growth over the last few years, registering an increase of 2.7% to $220.6 million in 2010, 7.8% to $237.9 million in 2011 and 15.6% to $274.9 million in 2012. In the first half of 2013, this sandwich chain recorded decent sales of $146.9 million thus indicating continued upward movement in the top line.

Comparable-store sales increased 3.4% in 2012 on top of the 1.7% expansion in comps in 2011. However, comps growth in the first half of 2013 was 1.5% compared with 4.8% in the year-ago period.

Despite suffering on the bottom line in the past, this restaurant chain turned around in 2012, recording a net income of $13.6 million from a loss of $10.2 million in the year-ago period. At the end of Jun 30, 2013, Potbelly had $21.7 million in cash with $15.1 million of debt. 

The company has been registering steady growth in operating cash flow. In 2012, it generated operating cash flow of $25.1 million, up 24.9% year over year.

As per marker researcher Technomic, Inc., limited-service restaurants (LSR) - a part of the restaurant industry -- accounted for 73% of the sales of the Top 500 U.S. restaurant chains in 2012. Potbelly operates in the "Other Sandwich" category, which includes LSRs specializing in sandwiches and wraps. Category sales grew 5.9% in 2012, surpassing the broader LSR growth rate of 5.6% over the said period, indicating promising category fundamentals.

Our Take

Going forward, Potbelly needs to fight for market share in the sandwiches and salad segments as one of the sector behemoths Panera Bread Co. ( PNRA ) enjoys scale advantage. On the brighter side, Potbelly shares are priced much lower than Panera, which traded at $159.17 as of Oct 4. Hence, improving growth fundamentals and lower share price can invoke further investor interest in the stock.  

However, competition is certainly stiff with several other restaurant chains like Noodles & Co ( NDLS ) and Cosi Inc. ( COSI ) selling similar offerings like noodles, soups, salads and sandwiches. Also, to give a further boost to the bottom line, Potbelly needs to work hard on cost containment.



NOODLES & CO (NDLS): Free Stock Analysis Report

PANERA BREAD CO (PNRA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: NDLS , PBPB , PNRA

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