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Bear Of The Day: Potbelly (PBPB)

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Potbelly (PBPB - Free Report) investors have lost their appetite, with the stock tumbling 45% since the beginning of the year. Sales have been slowing down as the firm’s profitability flips negative. A substantial miss on both the top and bottom-line has sell-side analysts feeling very bearish about the future of Potbelly, dropping 2019 EPS estimates to negative and pushing this stock down to a Zacks Rank #5 (Strong Sell).

PBPB Q1 revenues fell 5% year-over-year with total income losses of more than $18 million, almost 9x larger than what they were in Q1 last year.

People have started to shy away from Potbelly sandwiches as the millennial generation shifts their consumer focus to healthier options. They have had to push deeper and deeper promotions to get people in the door, further pinching the already negative margins.

Potbelly has been using technology as well as menu innovations in an attempt to drive foot traffic, but this hasn’t seemed to work. Foot traffic has fallen 7% year-over-year.

For a firm of over 40 years to see slowing revenue and negative income this is a signal to investors that there are systemic issues within the company. Potbelly is attempting to adapt to the shifting consumer, but it is difficult to rebrand something that has been associated with fast food for as long as Potbelly’s has.

Profits have fallen consistently since the end of 2016, and the company was forced to shut down a net total of 14 shops (3%). Sales have fallen 8 out of the last 11 quarters year-over-year. I expect this to continue as demand falls for this archaic sandwich shop.

Short positions on PBPB have been mounting with close to 10% of shares outstanding at the end of June.

Take Away

I wouldn’t put a short position on this stomped on equity quite yet considering how far it has fallen already. Valuations are at an all-time low with investor’s swift evacuation out of PBPB. This does not mean that this stock is trading at a discount considering its negative growth. I would limit my exposure to Potbelly if you haven’t already liquidated your positions.

 

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