Immersion Investments has penned a letter to Potbelly Corporation’s board of directors and management team urging immediate action to maximize value for shareholders. The activist investor holds 299,906 shares of Potbelly, making it one of the company’s top 20 shareholders.
In the letter, Immersion said it believes Potbelly is an underappreciated growth story, adding that the market continues to value the stock at a “meaningful discount” compared to its peers, despite improvements to the business.
The chain’s share price has ranged from $6.28 to $14.36 over the past year, with a market cap of $253.64 million. By comparison, Portillo’s range is $8.66 to $16.98, with a market cap of $909.13 million. Other fast casual concepts, including Chipotle, Wingstop, Shake Shack, and Sweetgreen are trading exponentially higher.
“The status quo is unacceptable,” the company wrote. “We urge you to act with haste …”
Immersion wrote it is “impressed” by management’s stewardship of the business since Bob Wright was appointed chief executive officer in July 2020, with unit level revenue and margin improvements exceeding pre-COVID levels and a significant pipeline of franchise commitments. However, the investor adds that the chain’s share price has not kept pace with those improvements.
“Potbelly is an unlevered growth company, yet its current valuation is more reflective of a slow growth, highly levered mature company,” the investor wrote. “Given the company’s market capitalization and liquidity, we do not believe this is a ‘let the results speak for themselves’ situation.”
Potbelly initially filed for its IPO in 2013 with a share price of just over $30. In 2020, it fell under $2, prompting a change at the top, with Wright’s appointment. The chain also navigated activist investor activity prior to the pandemic, when it struggled with weak sales, traffic, and closures. Immersion cited this period in the business in its letter, writing: “Several years ago, the business was barely profitable, burning cash and had zero visible growth prospects. Today, we are profitable, generating cash, and have a franchise pipeline capable of delivering low-to-mid teens EBITDA growth for the next several years, yet the stock has been range-bound for nearly four years.”
Immersion believes Potbelly can achieve value creation in one of three ways:
- Undergoing a strategic review process to evaluate a sale of the business.
“Given the unlevered balance sheet, we believe there is significant interest from private equity. Additionally, a sale would allow the company to easily refranchise the existing store base, which creates substantial noise in reported financial results and is generally more difficult to execute and properly communicate as a publicly traded business,” the investor wrote.
- “Aggressively” repurchasing shares, despite a share repurchase authorization put into place earlier this year that only yielded 86,000 shares for $700,000.
“At this pace, it will take more than seven years to exhaust the current buyback authorization,” Immersion wrote.
- Making “slow internal investments in technology and headcount and look to reduce operating expenses.”
Immersion notes that the company has yet to leverage its spending into meaningful improvement.
“In the absence of acceleration in same-store sales, management needs to show investors greater operating leverage and profitability. Continuing to spend money without a tangible and expedient (return on investment) is unacceptable,” the letter states.
“Because the company’s forward-looking growth is franchise-led, which requires significantly less capital than a company-owned unit growth strategy, the current valuation (8x on current EBITDA and <6x future EBITDA) is simply too cheap,” the letter concludes.
The restaurant industry has been a growing target for activist investors as of late, as traffic, sales, and profits have declined amid a tough consumer backdrop. Cracker Barrel, Starbucks, BJ's Restaurants, Noodles & Company, Portillo's, Bloomin' Brands, and, most recently, Red Robin, have all managed activist investor demands in the past several quarters. In several of those instances, including Starbucks, BJ's, and Bloomin', new CEOs have been named.
Contact Alicia Kelso at [email protected]
