July 11--Shares of Potbelly Corp. lost one-fourth of their value Thursday, after the Chicago-based sandwich chain gave a bleak report on its latest quarter and slashed expectations for the year.
Even as Wall Street analysts cut their forecasts, some said they still believe in Potbelly's long-term story, which includes plans for continued expansion. But industry watchers cautioned that Potbelly might not be doing enough that is different to woo diners right now, given trends such as the rise of gluten-free dining and the focus on local and sustainably sourced items.
Late Wednesday, Potbelly said it expected to report that comparable-store sales fell 1.6 percent during the second quarter ended June 29.
Comparable-store sales are a key way to track industry performance as they exclude results from locations that opened recently. Potbelly's comparable-store sales at company-owned locations fell 2.2 percent during the first quarter, and the company attributed that decline to the severe winter weather.
David Tarantino, senior restaurant analyst at Baird, said his firm's survey of private fast-casual chains has suggested second-quarter industry comparable sales growth near 2.5 percent, or an improvement of about 1.3 percentage points from the first quarter.
The size of the comparable sales shortfall at Potbelly is "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," Tarantino said. He has a "neutral" rating on Potbelly, and he cut his price target on the shares by $5 to $14.
Potbelly, which went public in October, plans to "vigorously test" new marketing, menu and operations during the second half of the year, Chairman and CEO Aylwin Lewis said Wednesday in a statement.
Potbelly said it expected to report a profit of about 6 cents per share for the second quarter on revenue of about $83.6 million.
Analysts on average were expecting it to earn 12 cents per share on revenue of $86.7 million, according to Thomson Reuters I/B/E/S.
Shares of Potbelly ended Thursday's trading session down 25.1 percent, at $10.97, after falling as low as $10.91 earlier in the day. The share price is well below the level when the company debuted on the Nasdaq stock market in October. Shares opened at $14 and ended their first day of trading at $30.77.
"It's a combination of not being particularly on trend and the consumer being under pressure," said Rob Campagnino, director of consumer research at SSR LLC. Potbelly "certainly has a following" but it is "facing dual head winds now in terms of not necessarily being a preferred choice for dining out and the consumer making economic decisions."
Even though comparable-store sales at company-owned locations fell, Potbelly said such sales improved as the quarter progressed.
It now expects comparable-store sales to be flat to down in low single-digits this year, versus a May forecast of growth in a low single-digit range and a 1.5 percent increase in 2013.
Chains such as Potbelly and Panera Bread Co. are facing pressures even as other chains, including fast-casual leader Chipotle, continue to do well, Campagnino said.
In April, Panera posted a lower first-quarter profit and reduced the high end of its sales and profit forecasts for the year. The chain, which features breads, sandwiches and salads, said severe winter weather cut its quarterly same-store sales by as much as 1.5 to 2 percentage points. Panera is working on improving customer service with efforts such as improving online ordering and starting to deliver food to the table, rather than customers picking up their food at a counter.
For the year, Potbelly expects to earn about 18 cents to 21 cents per share. In May, Potbelly said it expected its 2014 profit to be 25 percent to 35 percent higher than 2013 income of 34 cents per share.
Potbelly said it still expects to open 40 to 48 new locations this year. The chain has more than 300 stores now. It still expects to develop at least 1,000 U.S. locations.
Potbelly plans to report its full second-quarter results Aug. 5.
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