Potbelly sinks below IPO price as sales fall short

For shares of Potbelly (PBPB), the steep downward trend that's been the hallmark of its brief time as a public corporation got even worse on Thursday, as the Chicago-based sandwich shop had the worst decline since its IPO.

In recent trading, the stock was sinking 24.1% to $11.12 after it told investors second-quarter revenue and earnings would miss expectations, with a shortfall in same-store sales getting the blame. That continues a horrid time for the shares, which started trading last October and reached a high of $33.90. Since then, it's been almost entirely down, and it's now beneath the initial public offering price of $14. Even before the latest slide, the stock was already 57% below its peak. Now, it's 67% from its best level.

At this point, Potbelly expects to report revenue of about $83.6 million for the quarter. While that's up from $78.2 million in the prior-year period, analysts were looking for $85 million, according to FactSet. Same-store sales for company-owned stores likely declined 1.6%, whereas the expectation was for an unchanged reading. Earnings will be 6 cents a share, 3 cents below the consensus forecast.

The full-year outlook also naturally deteriorated as a result. Comparable-store sales, previously seen up in the low-single digits, will be flat to negative instead. Earnings for the year, Potbelly said, will be 18 cents to 21 cents a share, badly missing the 32-cent Wall Street projection.

It's profitable, and overall sales are up -- that might be enough if it weren't public, but how many companies could say the same? Potbelly's got the problem now of having shareholders who don't take well to disappointing quarterly results, especially when it's had previous misses.

The competition factor

But the real problem remains direct competition. Potbelly is part of a crowded sandwich group that has names such as Subway, an outlet with even more locations than McDonald's (MCD), Jersey Mike's, Jimmy John's and Firehouse Subs. Along with those chains, local delis, traditional fast-food stores and fast-casual shops are options for the same customers Potbelly needs. Its supporters will undoubtedly say it makes a good sandwich, but it's also not difficult to get to a $10 or $12 check with soup and a soda added. Cheaper alternatives are out there.

Now with more than 300 stores, Potbelly is staying with its plan to build up to 48 more this year. As it is, it does have room for growth, believing it can run 1,000 or more U.S. locations in time. Still, to do so, it will have to be winning at a time when other sandwich makers also are expanding their own bases, and for the most part existing as privately held companies. That means the other operators don't have all that investor ire to worry about, and they can make mistakes more quietly.

It's right to be wary on Potbelly, even now. With a history back to the 1970s, it isn't a fad, but value-oriented investors would be mistaken to think it can't go lower. Potbelly's valuation, despite the stock being two-thirds off its record, remains one of the highest in the restaurant industry, measured by forward price-to-earnings.

As of Wednesday's close, it had a multiple of almost 64 on the next 12 months' expected earnings, according to FactSet. Now that's down to 49.5, though it still considerably exceeds most restaurant stocks, which average a P/E in the 20s. In comparison, McDonald's has a 16.8, while Noodles & Co. (NDLS), another new public stock, has a 56, and fast-casual burrito chain Chipotle (CMG) has a 42.

Having a multiple that's far ahead of the group, and the market, is fine if growth supports it. For Potbelly, it isn't, not remotely. Presumably at some point, traders will find a level at which they'll start buying, but where?