Potbelly predicts soft 2Q same-store sales

Potbelly Corp.’s share price opened 20 percent lower in Thursday morning trading after reporting disappointing preliminary results for its second quarter after Wednesday’s market close, leading several analysts to lower their price targets for the Chicago-based company.

When Potbelly reports the results of its June 29-ended second quarter early next month, it expects revenue for the period to rise 6.9 percent, to $83.6 million, reflecting an expected same-store sales decrease of 1.6 percent at company-owned sandwich shops. Three securities analysts said their prior expectations for Potbelly’s second-quarter results mostly matched consensus projections for revenue of $87 million and a marginal same-store sales increase of between 0.5 percent and 1 percent.

Potbelly said it now expects to earn 6 cents per share for the second quarter, or half of the 12 cents per share the analysts expected before Wednesday’s announcement.

For the full year, Potbelly lowered its earnings per share guidance to between 18 cents and 21 cents per share, down from its prior projection between 33 cents and 35 cents per share. Same-store sales are now expected to be flat to down low single digits, compared with a low-single-digit increase Potbelly previously projected.

Chief executive Aylwin Lewis said in a statement that the company was “disappointed” by its quarterly performance.

“We have three main drivers of profit growth: comparable-store sales, operational productivity and profitable new-unit development,” he said. “Two of the three continue to deliver expected results. The obvious opportunity for us is to regain comparable-store sales momentum.”

Lewis added that Potbelly would “vigorously test” new initiatives for its menu, marketing and operations during the second half of 2014.

Nicole Miller Regan of Piper Jaffray wrote in a research note that Potbelly still intended to open between 40 and 48 company-owned and franchised restaurants this year, which would maintain the company’s long-term target for unit growth of at least 10 percent.

“The fact remains Potbelly missed earnings and lowered guidance with results generally half of what we and the Street were expecting, [which] has the stock trading down meaningfully,” Regan wrote. “While not defending the results with conviction — nor having a current catalyst to step in immediately — we do believe that the initial reaction was worse than the results read.”

Piper Jaffray lowered its price target for Potbelly’s stock from $19 per share to $14 per share.

Another investment bank, Robert W. Baird & Co., also took its target for the sandwich chain’s stock to $14 per share from $19 per share. Its restaurant industry analyst, David Tarantino, noted that Potbelly’s miss on its same-store sales projection was “somewhat perplexing and possibly a sign that some company-specific factors are at play, rather than a more troubling indication of industrywide softness at this stage.”

He added that Baird’s private-chain survey of fast-casual restaurants pointed toward an estimated increase of 2.5 percent for the segment’s average comparable sales for the second quarter, which would represent a 1.3-percent sequential improvement from the first quarter.

By contrast, Potbelly had reported a 2.2-percent decrease in first-quarter same-store sales, which included a 3-percent drag from harsh winter weather in its key markets like Chicago and Washington, D.C., which impacted about 40 percent of its operating days during the period.

“We had anticipated a greater-than-average sequential rebound in reported second-quarter comps,” Tarantino wrote, “given normalized weather and other internal initiatives, including the May launch and advertising of Flats.”

That line of flatbread sandwiches largely met expectations and achieved a sales mix in the midteens as a percentage of entrée sales, according to a research note from analyst Sharon Zackfia of Chicago-based William Blair & Company. Zackfia recently met with Potbelly Corp. management.

But “the new platform appears to have largely cannibalized other sandwich options rather than drive traffic,” Zackfia wrote. “However, given the early stage of the launch, we believe it might simply be too soon to see any evidence of changes in customer frequency based on the introduction.”

Potbelly owns and operates more than 300 locations in the United States and franchises more than 20 locations domestically and in the Middle East.

Contact Mark Brandau at [email protected].
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