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Potbelly Corp. opened eight company-operated shops and one franchised-shop in the third quarter.

Investors feast on Potbelly Corp. as third-quarter earnings beat estimates

by Alexis Prousis
Nov 13, 2013

Investors feasted on Potbelly Corp., sending the company’s shares up more than 9 percent, on third quarter adjusted profit and revenue that far exceeded Wall Street estimates.

For the quarter ended Sept. 29, net loss increased to 52.49 million, or $12.29 per diluted share, compared with $2.9 million, or 75 cents per diluted for the quarter ended Sept. 23, 2012, the company reported late Tuesday.

Potbelly said the wider loss was driven by one-time costs and fees related to its $104 million initial public offering in October, as well as a cash dividend paid to shareholders.

Excluding these costs, Potbelly’s adjusted net income soared 25 percent to $3.2 million compared with $2.55 million in the third quarter of 2012. Adjusted net income per diluted share was 15 cents per share, beating the analysts’ consensus estimate of 9 cents per diluted share, according to Bloomberg LP.

Sales of the Chicago-based sandwich chain rose 11.7 percent to $78 million from $69.9 million in the year-ago period.

“Given solid results during the quarter and reiteration of the long-term model, we maintain our confidence in the Potbelly growth story,” Nicole Miller Regan, an analyst for Piper Jaffray, wrote in a research note.

Shares of Potbelly soared more than 17 percent late Tuesday to $32.11, a level not seen since the first day of trading following its IPO. Potbelly closed Wednesday at $29.58, up $2.52, or more than 9 percent. 

Potbelly saw occupancy expenses as a percent of net sandwich shops increase 12 percent for the quarter, due to more shops operating in higher rent markets such as New York City and Boston.

Potbelly Chief Financial Officer Charles Talbot said on a conference call with analysts that the company spends less than 2 percent of sales on marketing, as much of its growth drivers are centered on neighborhood outreach, word-of-mouth marketing and promotions.

Company-operated comparable store sales increased 2.5 percent for the third quarter. The sandwich-maker also opened nine new shops, including eight company-operated shops and one franchised shop, during the third quarter.

“In terms of where we are opening, it’s a mix between our heritage markets and some of the new hub cities. It’s been roughly 50-50 for most of the year with that,” said Talbot. Heritage markets are areas where Potbelly has operated for a number of years, such as in the Midwest, whereas hub cities are newer markets, said Talbot.

For the full year, Potbelly is expected to open around 34 new company-owned stores and up to eight franchise shops. Next year, it plans to open up to 40 company operated shops and another eight franchise shops.

At quarter-end the company operated 288 shops located in 18 states and the District of Columbia, and had 19 franchise-operated shops, seven located in the U.S. and 12 in the Middle East.

“While we continue to like Potbelly’s long-term expansion prospects, we view the near-term reward potential as limited.” Sharon Zackfia, an analyst for William Blair & Company, wrote in a research note. Potbelly’s share price is valued at 90 times forward earnings, compared with fast casual bakery café Panera Bread Co. at 25 times earnings.

Potbelly said it expects adjusted income between $7.5 and $8.1 million and revenue of $300 to $303 million for the 2013 fiscal year, beating Wall Street estimates of $5.2 million and $301.2 million.

For the nine months ended Sept. 29, adjusted net loss rose to $60 million, or 14.12 per diluted share, compared with $8.3 million, or 2.09 per diluted share, in the year-ago period. Revenue rose 11.7 percent to $225 million from $201.4 million a year ago.