Potbelly (PBPB)

Casual sandwich chain Potbelly (NASDAQ:PBPB) announced better-than-expected revenue in Q1 CY2025, with sales up 2.3% year on year to $113.7 million. Its non-GAAP loss of $0 per share was $0.02 above analysts’ consensus estimates.

Company Overview

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 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.

Competitors offering convenient and casual dining options include Chipotle (NYSE:CMG), Sweetgreen (NYSE:SG), and Shake Shack (NYSE:SHAK).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $465.1 million in revenue over the past 12 months, Potbelly is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.

As you can see below, Potbelly’s sales grew at a weak 1.8% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts), but to its credit, it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Potbelly reported modest year-on-year revenue growth of 2.3% but beat Wall Street’s estimates by 1.7%.

We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.

Number of Restaurants

A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.

Potbelly operated 440 locations in the latest quarter. It has opened new restaurants quickly over the last two years, averaging 2.3% annual growth, faster than the broader restaurant sector.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

A company's restaurant base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

Potbelly’s demand has been spectacular for a restaurant chain over the last two years. On average, the company has increased its same-store sales by an impressive 3.8% per year. This performance suggests its rollout of new restaurants is beneficial for shareholders. We like this backdrop because it gives Potbelly multiple ways to win: revenue growth can come from new restaurants or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Potbelly’s year on year same-store sales were flat. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if Potbelly can reaccelerate growth.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.

Potbelly has good unit economics for a restaurant company, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it averaged an impressive 34.9% gross margin over the last two years. Said differently, Potbelly paid its suppliers $65.09 for every $100 in revenue.

Potbelly’s gross profit margin came in at 35.3% this quarter, marking a 1.2 percentage point increase from 34.1% in the same quarter last year. Potbelly’s full-year margin has also been trending up over the past 12 months, increasing by 2.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Potbelly was profitable over the last two years but held back by its large cost base. Its average operating margin of 2.6% was weak for a restaurant business. This result is surprising given its high gross margin as a starting point.

Analyzing the trend in its profitability, Potbelly’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Potbelly’s breakeven margin was in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Potbelly has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.1%, lousy for a restaurant business.

Taking a step back, we can see that Potbelly failed to improve its margin over the last year. Its unexciting margin and trend likely have shareholders hoping for a change.

Potbelly’s free cash flow clocked in at $3.64 million in Q1, equivalent to a 3.2% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Potbelly historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.2%, somewhat low compared to the best restaurant companies that consistently pump out 15%+.

Potbelly reported $14.76 million of cash and $153.1 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $32.39 million of EBITDA over the last 12 months, we view Potbelly’s 4.3× net-debt-to-EBITDA ratio as safe. We also see its $465,000 of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Potbelly blew past analysts’ EPS and EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 5.7% to $9.02 immediately after reporting.

Updated: July 9, 2025 at 10:42 PM EDT

Before deciding whether to buy Potbelly or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We cheer for all companies serving everyday consumers, but in the case of Potbelly, we’ll be cheering from the sidelines. To begin with, its revenue growth was weak over the last six years. And while its new restaurant openings show it’s growing its brand, the downside is its brand caters to a niche market. On top of that, its projected EPS for the next year is lacking.

Potbelly’s EV-to-EBITDA ratio based on the next 12 months is 13x. This multiple tells us a lot of good news is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $17 on the company (compared to the current share price of $12.71).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.