Potbelly (NASDAQ:PBPB) Reports Sales Below Analyst Estimates In Q3 Earnings, But Stock Soars 5.69%

Max Juang /
2023/11/01 4:15 pm EDT

Casual sandwich chain Potbelly (NASDAQ:PBPB) fell short of analysts' expectations in Q3 FY2023, with revenue up 2.65% year on year to $120.8 million. Turning to EPS, Potbelly made a non-GAAP profit of $0.04 per share, down from its profit of $0.31 per share in the same quarter last year.

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Potbelly (PBPB) Q3 FY2023 Highlights:

  • Revenue: $120.8 million vs analyst estimates of $121.6 million (0.68% miss)
  • Gross Margin (GAAP): 34%, up from 28.3% in the same quarter last year
  • Same-Store Sales were up 8% year on year
  • Store Locations: 430 at quarter end, increasing by 30 over the last 12 months

Bob Wright, President and Chief Executive Officer of Potbelly Corporation, commented, “We delivered another excellent quarter for Potbelly, which represented the cumulative effect of our disciplined strategy and execution efforts over the past many quarters and years, further driving our confidence in the sustainability of the results we’ve achieved thus far. During the quarter, we grew same-store sales by 8% with traffic as a major driver; continued to take traffic share from the fast-casual category each week through the quarter and grew shop-level margins by 400 basis points. These results have allowed us to further amplify Potbelly’s attractive unit economic model for franchisees, and we are thrilled to have signed additional development deals, bringing our total shop commitments to 150 shops-to-date”.

With a unique origin story where the company actually started as an antique shop, Potbelly (NASDAQ:PBPB) today is a chain known for its toasty sandwiches.

Modern Fast Food

Modern fast food is a relatively newer category representing a middle ground between traditional fast food and sit-down restaurants. These establishments feature an expanded menu selection priced above traditional fast food options, often incorporating fresher and cleaner ingredients to serve customers prioritizing quality. These eateries are capitalizing on the perception that your drive-through burger and fries joint is detrimental to your health because of inferior ingredients.

Sales Growth

Potbelly is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.

As you can see below, the company's annualized revenue growth rate of 4.31% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre, but to its credit, it opened new restaurants and grew sales at existing, established dining locations.

Potbelly Total Revenue

This quarter, Potbelly's revenue grew 2.65% year on year to $120.8 million, falling short of Wall Street's estimates. Looking ahead, the Wall Street analysts covering the company expect revenue to remain flat over the next 12 months.

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Number of Stores

A restaurant chain's total number of dining locations often determines how much revenue it can generate.

When a chain like Potbelly is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Potbelly's restaurant count increased by 30, or 7.5%, over the last 12 months to 430 locations in the most recently reported quarter.

Potbelly Operating Retail Locations

Over the last two years, Potbelly has rapidly opened new restaurants, averaging 3.5% annual increases in new locations. This growth is among the fastest in the restaurant sector and gives Potbelly a chance to scale towards a mid-sized company over time. Analyzing a restaurant's location growth is important because expansion means Potbelly has more opportunities to feed customers and generate sales.

Same-Store Sales

Same-store sales growth is a key performance indicator used to measure organic growth and demand for restaurants.

Potbelly has been one of the most successful restaurants over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 19.1%. This performance suggests its steady rollout of new restaurants is beneficial for shareholders. When a chain has strong demand, more locations should help it reach more customers seeking its meals.

Potbelly Year On Year Same Store Sales Growth

In the latest quarter, Potbelly's same-store sales rose 8% year on year. This growth was a deceleration from the 15% year-on-year increase it posted 12 months ago, showing the business is still performing well but lost a bit of steam.

Key Takeaways from Potbelly's Q3 Results

With a market capitalization of $258.0 million and more than $31.7 million in cash on hand, Potbelly can continue prioritizing growth.

We were impressed by how significantly Potbelly blew past analysts' adjusted EBITDA and EPS expectations this quarter. That shows management has been disciplined with its expenses and really stood out as a positive in these results. On the other hand, its revenue missed Wall Street's estimates, driven by its underperformance in same-store sales. Overall, this was a mixed quarter for Potbelly, but the market is likely rewarding it for its profitability. The stock is up 5.69% after reporting and currently trades at $9.28 per share.

So should you invest in Potbelly right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here.

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The author has no position in any of the stocks mentioned in this report.