Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=231374
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Potbelly struggling, despite growth

by Eman Shurbaji
Jun 23, 2014


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Potbelly Corp. a Chicago-based sandwich restaurant chain, is looking to reverse its gloomy financial prospects through an ambitious expansion program.  

  

The company is moving to open restaurants in new hubs every 18 to 24 months. Nationwide there are 330 locations. Potbelly is counting on a strong Midwest presence in launching stores in cities like Denver.  

 

Still, Wall Street is downbeat to neutral in its outlook.  

  

Indeed, the company lost 56.3 percent of share value in the last year. The 52-week high was $32.40, reached on Oct. 7, 2013 and the low was $14 on Oct. 3, 2013. It closed Friday at $16.14.

  

Market capitalization fell 38.2 percent from $735.7 million Dec. 29 to $455 million June 12. 

  

Potbelly is betting big on its construction initiative goal: 35-40 new restaurants in 2014, on top of 34 opened in 2013. 

  

In addition, the company plans more menu items and will create an order/pick app for smartphones. 

  

“Potbelly recently added 'Bigs' to the menu in New York City and Boston, which is expected to be an important sales driver in both developing markets,” wrote Analyst Sharon Zackfia of William Blair and Co.  

 

“The company is introducing Flats—a thin multigrain sandwich with 90 fewer calories than Originals— at a $0.20 price point premium and better margin profile than Originals, with results in tests showing encouraging results regarding customer frequency and driving new customer visits,” Zackfia continued. 

 

Potbelly executives insist the way to profits is building brand loyalty, and creating an image of friendliness and accessibility. 

 

 “We decided to brand as a neighborhood sandwich shop…our deal is we get a fair share of loyal and high frequency customers,” CEO Aylwin Lewis said in a conference call. 

 

But sales, despite the additional stores, have not grown commensurately in the last two years. In Potbelly's first quarter ended March 30, sales increased 7.5 percent to $73.9 million from $68.7 million in the year-ago quarter. 

 

The quarter was barely profitable. Net income increased 128 percent to $200,000, or 1 cent per diluted share, from adjusted net income of $89,000, or nil per share. 

  

However, despite Potbelly's establishing an image, some analysts see growth as a hindrance to profits. 

 

Jennifer Bartashus of Bloomberg Industries wrote recently, “relative performance have been negative as far back as six months."