Potbelly Follows A Starbucks Like Strategy.

| About: Potbelly Corporation (PBPB)

Potbelly (NASDAQ:PBPB) and the selling shareholders are offering 7,500,000 shares of its common stock in the price range of $9.00 and $11.00 per share. The expected listing date is October 02, 2013 on Nasdaq Global Select Market (Source: IPO prospectus)

Company overview:

Potbelly is the chain of eateries that offers fresh, made to order, sandwiches, salads, hand-dipped milkshakes and cookies that are baked fresh each day and served to customers in a lively atmosphere. The decor of these eateries is based on vintage and local themes as the company intends to give a localized and personalized experience to its customers. It looks to establish its eateries as "The Best Place for Lunch".

The company believes its working culture, which provides a friendly, personalized and localized experience to its customer, is the key reason behind its present success as this allows it to build a devoted base of Potbelly fans. The success of this culture also reflects in the operating numbers of the company i.e.

  • The number of stores operated by the company had grown from 100 shops in 2005 to about 300 shops in 2013;
  • It had reported a positive comparable shop sales growth in twelve of the last thirteen quarters;
  • Its revenues had grown from about $207 millions in FY 2008 to about $275 millions in FY 2012;
  • The most important numbers, its operating margins, had grown from -10% in FY 2008 to above 3% for the 26 Weeks ended on June 30, 2013.


($ in thousands)

FY 2012

26 Weeks ended on June 30, 2013

Total Revenues



Income from Operations



Interest expense, net



Net Income



Basic earnings per share (pro forma)



* "The fiscal year ended December 30, 2012 included a $16.9 million tax benefit" (Source: IPO prospectus)

Balance sheet ($ in thousands) as on June 30, 2013



Total debt


Total Equity (deficit)


Weighted average shares outstanding (basic)

23,236,531 (pro forma)

Industry size and growth:

The company operates in the "Other Sandwich" category of the restaurant industry. This category is one of the fastest growing categories of the restaurant industry. According to Technomic "This category accounted for $21.9 billion of sales in 2012 by the Top 500 chains. Sales in this category increased 5.9% from 2011 to 2012." (Source: IPO prospectus).


Potbelly operates in a highly competitive and crowded industry, where it competes with the number of players like Chipotle (NYSE:CMG), Jimmy John's, Subway, McDonald's (NYSE:MCD), etc.


At $10 (mid range of offer price) the company is available at PE of about 40 (Annualizing H1 FY 13).


The company operates in one of the fastest growing categories of the restaurant industry. The company is growing on the all fronts; same store revenues are growing, the number of shops are growing, and the industry itself is growing at a healthy rate. In the long-term it plans to grow the number of shops by at least 10% annually. The ultimate goal of the company is to become a global iconic brand and grow through its own shops as also through the franchise operated shops.

Its global expansion is already underway with about 12 franchise operate shops in Kuwait, the United Arab Emirates and Bahrain. It follows a profitable growth strategy, which means the company is equally focused on the revenue and profit growth. The success of this strategy is evident from the rising margins along with the rising number of stores despite the rising capital expenditure (see the chart below). Its brand-building strategy is somewhat like Starbucks (NASDAQ:SBUX), which is focused on, to differentiate itself from its competitors through distinct culture, customer happiness and mouth publicity as also it is very active on the technological front and uses the technologies to improve the operational efficiency and the customer experience e.g. (as mentioned in the IPO prospectus)

"we have enhanced capabilities around in-line order-taking by using a proprietary tablet system in approximately 44% of our shops".

The company holds all the ingredients for a long-term growth story. Valuations are reasonable. Nowadays, these types of profitable growth stories generate a lot of enthusiasm among the investor-community and found a lot of favor among investors.

Data source: IPO prospectus.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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