Investors Should Be Hungry For Potbelly IPO

| About: Potbelly Corporation (PBPB)

The Offering

Potbelly (NASDAQ:PBPB), a sandwich restaurant, is hitting the public market in a highly anticipated IPO. The regional chain is offering a total of 7.5 million shares, including 0.15 million from current shareholders. The offering also comes with a 1.13 million option for the underwriters. Original pricing for Potbelly shares was expected in a range of $9 to $11. The new range for shares is $12 to $13, with the possibility of shares actually pricing higher. After the IPO, there will be a total of 28,006,535 shares outstanding. It is important to point out that over 20 million shares will be available for sale after a 180 day lockup. The company will use proceeds to pay dividends on existing shares and repay several borrowings.


The founder of Potbelly created the concept after selling sandwiches out of a small antique store in 1977. Originally offered as a way to increase sales, the popularity of the sandwiches soon turned Potbelly into a brand of its own. Potbelly prides itself as being "The Best Place for Lunch" and "The Neighborhood Sandwich Shop". In the S1, Potbelly lists a total store count of 286 throughout 18 states and Washington D.C. The company has 6 franchised restaurants in the United States and another 12 in the Middle East. The international count is of particular note because expansion may speed up.

Potbelly's franchise agreement with Alshaya covers the Middle East. Alshaya has restaurants open in Kuwait, United Arab Emirates, and Bahrain. The company also has the rights to Egypt, Jordan, Lebanon, Oman, Qatar, and Saudi Arabia. With this agreement, Potbelly will likely see strong international growth going forward. Potbelly also recently expanded into the key areas of New York City, Seattle, Boston, Phoenix, Cleveland, Kansas City ((NYSE:MO)), and Portland (OTC:OR). In the first half of 2013, Potbelly has opened 17 locations. The chain plans on opening a total of 32 to 35 for the full year. Potbelly has its strongest presence in areas like Texas (42), Illinois (85), Washington D.C. (22), Michigan (17), Maryland (19), and Virginia (17).


From 2011 to 2012, Potbelly saw revenue increase 15.5%. Net income came in at $7.1 million. One of the key numbers for investors to consider is same store sales. This key figure used by restaurant chains represents the percentage increase of sales over the prior year at locations open over a certain period of time (15 months in Potbelly's case). Potbelly has seen positive same store sales growth in 12 of the last 13 quarters. Another key figure is Potbelly's shop level profit margins which top 20%. This is high for the industry Potbelly competes in and remains one of the key goals for the sandwich shop.

Here is a look at key revenue figures:

Revenue ($ millions)

Fiscal 2010


Fiscal 2011


Fiscal 2012


First Half 2012


First Half 2013



From the S1, Potbelly lists the following as strengths:

· Simple, made-to-order food

· Differentiated customer experience that delivers a neighborhood feel

· Attractive shop economics

· Management team with substantial operating experience

· Distinct, deep-rooted culture: The Potbelly Advantage


· Run great shops

· Find and build great shops

· Achieve high margins and returns

· Become a global iconic brand

· Be a great franchisor

The Next Noodles?

To me the Potbelly IPO seems eerily similar to Noodles (NASDAQ:NDLS). I wrote about that company prior to the IPO and told investors that they should consider getting in on the public offering. Noodles shares saw a strong debut of $36.75 and shot up to $43.15 in the first day of trading. Noodles also raised its offering price to a range of $15 to $17, which is similar to what Potbelly just did. Also look at these comparisons:



Number Stores

295 (as of September 23)


Franchised Stores

19 (12 international)


Company Owned Stores



Year Started Franchising



Opened Year Before IPO


45 (39 company, 6 franchised)

Opening Year of IPO


38-42 company, 6-8 franchised

2012 Revenue

$274.9 million

$300.4 million

2012 Net Income

$7.1 million

$5.2 million

Noodles set a lofty goal of 2500 locations during its IPO run. Potbelly has not issued a long term target, but it could see faster growth. Potbelly only began franchising locations in 2010, as opposed to Noodles who got a head start in 2004. Potbelly is also bringing more money to the bottom line with better operating margins, which could mean a better, healthier, fast growing restaurant company.


As a sandwich shop and quick casual dining restaurant, Potbelly has many competitors. The company's main competitors are Subway, Panera (NASDAQ:PNRA), Jimmy John's, and Chipotle Mexican Grill (NYSE:CMG). Here is a look at the store counts for competitors:

· Jimmy John's: 1600+

· Subway: 35,000+

· Chipotle: 900+

· Panera: 1708

Panera and Chipotle are both publicly traded and offer a glimpse into what the future might hold for Potbelly. Panera has expanded its store count and seen its shares increase 300% in the last five years. Chipotle has also seen shares shoot up over 750% in the last five years. Noodles' goal of 2500 locations may have sent shares higher in their debut. Potbelly doesn't need to give a target goal because the competition speaks for the opportunities in the sector.


Potbelly's raised pricing range already shows the high demand in the company. As the recent example of Noodles shows, investors are hungry for a regional restaurant chain that can expand nationally. Investors are eager to see the returns others enjoyed with the likes of Chipotle and Panera. Investors should get behind this strong regional brand and enjoy the future growth of national expansion, international expansion, and franchising. Consider buying shares of Potbelly under $20, if they ever see that low on the public market.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PBPB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.