3 reasons not to worry about potbelly today

3 Reasons Not to Worry About Potbelly

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.

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.

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.

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.

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.

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.

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.

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