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PBPB: Staying Short

We added PBPB to the Hedgeye Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, 2014 EPS estimates have been revised down from $0.39 to $0.18 and the stock has acted accordingly (down ~60%).  We remain short PBPB and continue to have concerns with the company’s aggressive growth strategy, particularly in the face of fundamentals that suggest the chain shouldn’t be growing at all.


Potbelly preannounced disappointing 2Q14 results yesterday, including revenues of $83.6m ($86.7m est.) and adjusted EPS of $0.06 ($0.12m est.).  In addition, same-store sales declined -1.6%, 240 bps below consensus estimates, and traffic declined for a sixth consecutive quarter.  Management guided down full-year adjusted EPS to the $0.18-$0.21 range ($0.34 est.) and full-year same-store sales to flat to negative low-single digits (+0.8% est.). 

 

Back in November, when we made our original short call, we wrote:

 

“At the heart of it, Potbelly is a single daypart, low margin, low return sub shop with declining traffic and little competitive advantage over its most basic competitors.”

 

Though this seemed harsh at the time, the company’s results as a public company have given us little reason to retract these words.

 

Management provided few details, but did note that they are maintaining their guidance for 40-48 new unit openings in 2014 – a foolhardy decision, in our view.  This range implies 12-15% unit growth for the full-year when, in fact, the chain hasn’t justified any form of expansion.  It is likely that we will continue to dislike the company until management pulls their foot off the accelerator.  PBPB currently trades at 50.05x P/E (FY14), a multiple that typically reflects a strong growth company.  Considering declining same-store sales, traffic, margins and a questionable growth strategy, we continue to view the stock as unattractive.

 

As it stands, we believe FY15 estimates are too aggressive and will be revised down over the coming weeks.  At that time, we will reassess our positioning.

 

PBPB will hold its 2Q14 earnings call on Tuesday, August 5th, 2014 at 5:00pm EST.

 

Research Recap:

Investment Ideas: Shorts (04/16/2014)

PBPB Lays an Egg (02/19/2014)

PBPB: Not Worth of the Multiple

Potbelly (PBPB): The Latest Restaurant IPO

 

 PBPB: Staying Short - chart1

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: What's In A Name?

 

 

Cartoon of the Day: What's In A Name? - Gold Bond cartoon 07.10.2014

 

In this case, it’s  two long ideas for investors. 

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Russell 2000: Levels Refreshed

Position: 11 Longs, 6 Shorts

 

Back on 7/1, with the index overbought and the setup for pro-growth exposure at the beginning of July beginning to look a lot like it did back in March, we issued a fresh Sell Signal at 1208 on the Russell. (Selling: Russell Levels, Refreshed)     

 

After a big drop Monday, the Russell tested its Intermediate-Term TREND line for two sessions before breaking through on the open.  

 

Looking across both sectors and asset classes, prices are telling a cohesive, slow-growth story:  

 

  • Bonds bid; yield-spread compression
  • Gold +1% (+1.7% on the week)
  • Consumer Discretionary (-0.6%)
  • Utilities (+0.8%)

 

REITs and Gold Miners outperforming vs. consumption driven sectors (consumer retail getting crushed) as our cyclical bearish call on U.S. consumption growth continues to unfold in sector divergences.

 

Tomorrow in our Q3 Macro Themes call (ping for access) we’ll outline our bearish thesis on the U.S. consumer into in the back half of the year. We continue to like Gold, Treasuries, and defensive sectors (XLU, REITs, XLE) in the face of further #Dollar Devaluation crushing already thin consumer margins. #Q3Slowing will be our first theme in the deck on tomorrow’s call.

 

Our core risk management levels on the RTY, with their respective durations, are as follows: 

  1. Intermediate-Term TREND Resistance = 1173
  2. Immediate-Term TRADE Oversold = 1154  

In other words, after an expedited -4% slide from the 1208 overbought signal, we got most of the correction we we’re looking for.  From here, we’ll remain better sellers of consumer centric, small-cap growth style factors on strength. 

 

Russell 2000: Levels Refreshed - Russell Levels 07.10.14


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Join Our Expert E-Cig "Speaker Series" - Are Vaporizers Stealing Share from Big Tobacco?

We look forward to continuing our Speaker Series on e-cigarettes and e-vapor with John J. Wiesehan, Jr., CEO of the Charlotte based company, Ballantyne Brands, LLC. The conference call will be held on Wednesday, July 16th at 11:00am EDT.

 

Ballantyne Brands is a leading private manufacturer with the third largest market share in the U.S. (xAOC channel) with such e-cig brands as Mistic and Neo and personal vaporizer Haus.

 

 

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  • Industry developments and trends
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LO, MO, PM, RAI, ECIG, VPCO, BTI

 

 

ABOUT JOHN J. WIESEHAN, JR.  

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CALL DETAILS

  • Toll Free Number:
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For more information please email



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