Salami, Roast Beef,Turkey, Ham & Swiss Cheese is know as a
"Wreck" at Potbelly. Investors may be thinking that this
sandwhich is synominous with the stock.
Let's take a look at the recent developments at Potbelly (PBPB - Snapshot Report) and
then discuss the outlook for this and a few other Quick Service
Restaurant (QSR) names.
On July 9, Potbelly warned Wall Street that revenues for the
second fiscal quarter of 2014 would be about $83.6M. That is a
little below the $86.6M consensus estimate, but that might be the
least of the issues right now.
The company expects to report a decrease in company operated
comparable store sale of 1.6%. The second quarter will also see
an increase in advertising expense of about $0.4M due to the
launch of its new Flats platform.
Bonus For Missing?
The thing that stood out to me, and really made me not want to
eat at Potbelly's was the idea that management appears to have
given themselves a bonus of about $800,000 in the quarter.
The release noted that "public company related expenses are
expected to be $0.8 million higher for the quarter versus the
same period last year, driven primarily from non-cash stock-based
This increased expense along with higher advertising expenses
could be a hit of approximately $2M, or $0.06 per diluted share.
The company noted that they continue to expect to open "at least
one thousand domestic shops" and in the most recent quarter they
opened 7 company open shop and one franchise location.
PBPB also anticipates that they will open 40-48 new shops this
year with the balance coming mostly in the fourth quarter.
Despite all the new stores, guidance called for flat to negative
low single digit comparable same store sales. That means that
earnings are going to take a hit.
PBPB now projects that EPS will be between $0.18-$0.21, down from
The company is slated to report full results on August 5 after
the market closes.
PBPB is currrently a Zacks Rank #4 (Sell) and I am short via
Hungry For More
While one research report suggested that there might be some
company specific issues at PBPB, there has been other signals of
weakness for the QSR stocks.
A discussion we had on Zacks Real Time Insight the other week gave plenty of
insight into raw material costs. Cattle prices have done nothing
but move higher, while corn is looking at another bumper crop and
expected to move lower. Check the comments for more on Lean Hogs
In contrast to the recent performance of PBPB, Buffalo Wild Wings
(BWLD - Analyst Report)
has seen its shares rise in price lately. Some recent research
reports have noted that the World Cup has played a role in
drawing more customers into its locations. The chart below shows
the steady move higher shares of BWLD have seen over the last two
Still investors will want to look into the numbers behind most of
the QSR names.
Estimates for PBPB
Given the recent warnings, analysts have slashed numbers for this
year and next.
It is one thing to launch a new platform of sandwiches and see
less than spectacular results, its another thing to have your
earnings estimates cut over a period of two years based on that
small expense. Seems the analysts may be thinking that the worst
is yet to come.
Earnings are a big part of any valuation story, and with estimates dropping as much as they have you would think that PE multiples would have come down as well. I thought that, and I was wrong.
The trailing PE of PBPB for 35x is well ahead of the industry average of 20x, while the forward PE is even harder to swallow. The 66x forward multiple is astonishingly high compared to the 18x industry average. The price to book multiple of 2.3x shows PBPB trading at a slight discount to the industry average of 2.6x, but things get out of whack again when looking at price to sales. The company has a 1.5x PS multiple, while the rest of the industry trades at about 0.5x sales.
Zacks shows a forward PE of 31x for (BWLD - Analyst Report), 21x for (PNRA - Analyst Report) and 20x for (CAKE - Analyst Report), 24x for (RRGB - Analyst Report), and 62x for (NDLS - Snapshot Report).
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Brian Bolan is a Stock Strategist
Zacks.com. He is the Editor in charge of the Zacks Home Run Investor
service, a Buy and Hold service where he recommends the
stocks in the portfolio.