3 reasons not to worry about potbelly today

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3 Reasons Not to Worry About Potbelly

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Potbelly just can't seem to catch a break lately. However, long-term investors could use this as an opportunity to take a bite out of a delicious business in the early stages of its growth plan.

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Page 1: 3 Reasons Not To Worry About Potbelly Today

3 Reasons Not to Worry About Potbelly

Page 2: 3 Reasons Not To Worry About Potbelly Today

1. Top line growth remains intact

• Despite declining comps, Potbelly expects an increase in revenue to $83.6 million, up from $78.2 million a year ago.

Revenue slated to grow 7% in Q2.

Page 3: 3 Reasons Not To Worry About Potbelly Today

Looking beyond the numbers • Potbelly warned investors that same-store-sales

for the second quarter are expected to fall 1.6%. Yet this is an improvement on the 2.2% decline in the prior quarter.

• Potbelly went public less than a year ago and therefore must combat increased costs related to stock-based compensation.

• These things will pressure the stock in the near term, but the longer-term picture looks bright because the company’s fundamentals are intact.

Page 4: 3 Reasons Not To Worry About Potbelly Today

2. A sustainable long-term growth plan

• The company opened 42 new stores last year and currently owns and operates 300 locations in the U.S.

• For comparison, rival fast-casual chain Noodles & Company added 53 new stores in fiscal 2013.

Potbelly is on track to grow its store count by at least 10% in fiscal 2014.

Page 5: 3 Reasons Not To Worry About Potbelly Today

Why this approach is important• By not opening too many new stores at once, it should

help Potbelly sidestep the risk of overextending itself. • Often when companies grow their store count too

quickly they are later forced to close underperforming locations.

• Potbelly only has 300 stores in the U.S. today, leaving ample room for growth.

• Potbelly plans to have at least 1,000 U.S. stores in the future.

Page 6: 3 Reasons Not To Worry About Potbelly Today

3. International growth

• Potbelly currently has more than a dozen units in the Middle East, which are operated by franchisees.

Potbelly is uniquely positioned to expand overseas.

Page 7: 3 Reasons Not To Worry About Potbelly Today

Franchising key to outsize growth?• All of Potbelly’s company-owned stores are within

the U.S. today. • Yet Potbelly already has franchisees operating 12

stores in the Middle East. • The company began offering franchise opportunities

in 2010, and is now well positioned to grow through franchising going forward.

• Potbelly’s “neighborhood marketing approach” helps it connect with local markets.

Page 8: 3 Reasons Not To Worry About Potbelly Today

Food for thought

Shares of Potbelly are currently trading near the stock’s 52-week low at around $11 a share today.

However, I believe selling here would be shortsighted. Potbelly is a well-run company with

delicious food and a long runway of growth ahead. Most of Potbelly’s growth up to this point has come

from new company-owned stores. But there’s a clear opportunity for Potbelly to unlock even more growth

by franchising stores in the future.