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We added Potbelly Corporation (PBPB) to our Best Ideas list on 11/19/2013 at $28.15/share.  Since this time, FY14 EPS estimates have been revised down from $0.39 to $0.19 and the share price has acted accordingly (down ~60%).  With this note we are removing short PBPB from our Best Ideas list.

PBPB still has issues that give us cause for concern, but we feel our short thesis is largely played out.  At 9.6x EV/EBITDA (NTM), the stock screens rather attractively relative to other restaurant companies and will begin rolling over some fairly easy comps following 3Q14.  We believe FY14 and FY15 EPS estimates of $0.19 and $0.25, respectively, are reasonable despite the fact that we are yet to see management deliver tangible same-store sales drivers.

Considering a more reasonable valuation, reset expectations, and high short interest (~34% of float), we believe the short setup is no longer favorable from a risk/reward perspective.   Our move to the sidelines, however, does not make us fans of the stock.  Declining same-store sales, traffic, margins and AUV's continue to be red flags.  Our biggest issue with the company, however, is its decision to relentlessly pursue a questionable growth strategy (12-15% unit growth in FY14) when the fundamentals suggest it shouldn't be growing at all.  The one scenario under which we'd expect to see notable downside from here is if management were to significantly slash projected new unit growth, and we've seen no signs of this happening.

We continue to believe 2016 EPS estimates of $0.60 are too aggressive, but that is much further out.  Staying short today at these levels is no longer compelling.

Research Recap:

PBPB: Staying Short (07/10/2014)

Investment Ideas: Shorts (04/16/2014)

PBPB Lays an Egg (02/19/2014)

PBPB: Not Worthy of the Multiple (11/19/2013)

Potbelly (PBPB): The Latest Restaurant IPO (09/19/2013)

PBPB: Closing Best Idea Short - 10 1 2014 10 26 35 AM

Howard Penney

Managing Director

Fred Masotta

Analyst