Editor's note: This is a brief excerpt taken from a research report released earlier this afternoon by Restaurants sector head Howard Penney.
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.