The casual restaurant space with its plethora of companies
trading for premium valuations continues to be volatile this
While there have been a few winners like
Chipotle Mexican Grill (
Panera Bread (
that have managed to shoot higher after results were reported,
there have been a few notable losers.
One such loser is
. The company shed 9% on Wednesday after reporting earnings
results on Tuesday after the market closed.
On the profit side, the company's adjusted earnings of 6 cents
per share in the fourth quarter beat estimates by 2 cents per
share. That's where the good news stops.
On the sales side, revenues of $74.8 million were below the
estimate of $76 million. Same-store sales were up a paltry 0.7%
down from a gain of 2.5% in the previous quarter.
In addition to those weak numbers, Potbelly lowered its
guidance to single-digit same-store sales growth for the
remainder of the year.
Spinning the numbers, management remained optimistic about
hitting 10% unit growth and 20% earnings per share growth per
To be fair, the company was hit by poor weather and rightly
blamed the polar chill for its poor results in the last quarter
weak guidance, but these results stink, especially for a newly
minted publicly traded company.
Investors deserve better when they pay the premium valuation
that Potbelly obtained when first offered to the public. Indeed,
it has been nothing but downhill for investors in the six short
months of trading publicly.
Will Potbelly go down as a failed IPO or is the weakness,
exacerbated on Wednesday, an opportunity?
Management commitment to 20% earnings per share growth is
enticing, assuming they can deliver. So far that has not been the
At a certain price, though, shares will be attractive and that
may or may not be the case now.
Analysts expect Potbelly to grow profits by 12% in 2014 far
from the 20% goal stated by management. At current prices
including the 9% drop on Wednesday, shares trade for 54 times
2014 estimated earnings.
Now we understand why the stock is dropping. Has it gone low
I don't think so.
The weakness of the fourth quarter will surely hit the company
in the first quarter of 2014. Profits for the year are at risk to
be weaker than expected - perhaps dropping growth to the single
That would be a disaster.
I'd avoid Potbelly until shares drop another 10% or more. This
one could fall 25% to 30% if the disappointment continues.
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