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(Alexis Prousis/Medill News Service)

Potbelly, known for its toasted sandwiches, has gained attention recently with its strong initial public offering. The original Potbelly, pictured above, is located on Lincoln Avenue in Lincoln Park.

Potbelly IPO proves tasty for investors

by Alexis Prousis
Oct 10, 2013

Chicago-based sandwich-maker Potbelly Corp. raised more money than anticipated in its initial public offering last week as its underwriters gobbled up an additional 1.1 million shares, the company said Thursday.

Net proceeds from the 8.6-million-share offering of $108.8 million will be used to pay a $49.9 million previously declared cash dividend and repay borrowings of about $14 million. The remaining $44.9 million will be used for working capital and expansion.

Shares of the company closed at $29.32 Thursday, down from the post-IPO peak of
$32.40 Monday, but still 109 percent above the IPO price of $14.

RJ Hottovy, director of consumer equity at Morningstar, says restaurants like Potbelly have “really become a sweet spot in the restaurant industry.”

“Potbelly IPO shows that investors are still willing to give restaurant chains, particularly those with perceived growth, a premium evaluation in this environment.”

Potbelly Sandwich Works, as it was originally called, opened in 1977 in an old antique shop in Chicago’s Lincoln Park neighborhood. Brian Kiel, founding chairman, bought the shop in 1996 and embarked on a major expansion. Potbelly opened its 300th store this year and plans to grow the number of shops by at least 10 percent annually, according to its prospectus.

The company’s revenue of $146.9 million for the first six months of 2013 was up more than 11.7 percent from the same period a year ago. Revenue for 2012 rose nearly 15 percent to $274.9 million, from 2011 revenue of $238 million.

The success of Potbelly’s IPO is a reflection of a segment of the restaurant industry, fast-casual dining, that has seen fast growth and rising share prices. Restaurant stocks have risen 33 percent year-to-date, according to the Bloomberg Quick Service Restaurant Index, compared with nearly 19 percent for the Standard and Poor’s 500 Index.

Fast-casual companies such as Panera Bread Co. and Chipotle Mexican Grill have higher price points and higher quality food than traditional quick-service chains but lower costs and price points than traditional dining restaurants.

Sales in the fast casual group are expected to grow 10 percent this year to $35 billion from $31 billion in 2012, according to Technomic, a Chicago-based food service research firm.

“With continued expansion at a very rapid pace in the food industry we will continue to see double-digit growth for the next five years in fast casual,” said Darren Tristano, executive vice president of Technomic.

Potbelly, which offers toasted sandwiches made of high quality meats, cheese and vegetables, stands as a hybrid between fast casual and quick service but offers loyal customers a good product, said Neil Stern, senior partner at McMillianDoolittle LLP.

“I think their appeal is sort of getting at that niche,” Stern said, “where you can kind of go to Potbelly and get your lunch and it is under $5 or $6. And I think that gives it a lot of appeal and a lot of frequency, so it’s priced affordably for people to go there often.”

The success of Potbelly and other restaurants, including Noodles & Co., is driving more companies to go public.

“With a strong year in restaurant stocks and the highly successful late-June IPO of Noodles & Co. (more than doubling in the first day of trading from an offering price of $18), we suspect that IPO activity in the restaurant space could ramp up in the coming months as investor demand for high quality growth stocks appears robust,” Sharon Zackfia, a principal at William Blair, wrote in an August report.

Shares of the Colorado-based pasta chain closed Thursday at $45.30, up nearly 152 percent since its offering.

“There is a lot of unit potential with these companies,” Hottovy said, “so you have seen a lot of growth investors move towards these restaurant chains and that is why the IPO of Potbelly as well as Noodles & Co. have done so well.”

Hamburger chain Checkers Drive-In Restaurants Inc. is rumored to be putting together an initial public offering, according to Reuters. A spokesperson for the company had no comment on the rumors.

Focus Brands Inc., owner of Cinnabon and Moe’s Southwest Grill, is also said to be preparing to go public, according to The Wall Street Journal. A Focus Brands Inc. spokesperson said the company is not commenting on the speculation.

Chicago-based Levy Restaurants Inc. filed for an initial public offering to raise $150 million to fund a new acquisition company, Levy Acquisitions Corp., with plans to acquire or invest in properties in the restaurant or hospitality industry, according to its prospectus. A spokesman for the company had no further comment.