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Potbelly Sandwich Shop IPO Serves Fast Casual Frenzy
By: Investor's Business Daily
Quick-service restaurant chains often come with a unique story and simple beginning.
Chipotle Mexican Grill ( CMG ) started in 1993 as a small burrito shop in Denver. The idea forBuffalo Wild Wings ( BWLD ) came about in 1982 after two friends met up to watch a figure skating competition.Panera Bread ( PNRA ) evolved out of a bakery-cafe chain in St. Louis in 1998.
Now into the annals of restaurant history comesPotbelly ( PBPB ), 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 2008.
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 ( YUM ), 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 atmosphere.
"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 channels.
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 expenses.
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 various roles.
BofA Merrill Lynch, Goldman Sachs
Offering price: $9-$11
Expected date: Friday, Oct. 4