Sandwich shop Potbelly (PBPB 10.70, -0.91) traded to two and
a half year lows this morning but has pared those losses in more recent action
after the company’s unimpressive third quarter print led to a full year 2018
Investors weren’t pleased with the company’s progress on its turnaround efforts, which have been aimed at achieving more profitable growth, as both the top and bottom lines in the third quarter missed market expectations. Specifically, Potbelly reported earnings per share of $0.09 on revenue growth of less than 1.0% to about $107.0 mln. The company pointed out specific strength in its Off-Premise business, in which the company was able to leverage catering and delivery to propel Off-Premise to 17% of total sales, a 130 basis point improvement year/year.
What’s more, company-operated comparable store sales came in worse than expected, down 0.2%. Comps were flat on a quarter/quarter basis, but management highlighted the company’s sustained improvement from the 3.6% comp decline in the first quarter.
Management also noted that the negative 0.3% Q3 traffic is the best traffic performance the company has achieved since Q4 of 2015 and marks an improvement of 850 basis points year/year. Management further pointed to the company’s traffic performance versus the industry. In fact, according to Potbelly, Q3 traffic outperformed the competition for the first time in more than two years.
Additionally, check growth remained positive at 0.1%, and the company reported shop level margins of 16% compared to 18% in the prior year. Cost of goods sold was 26.8% in Q3, a 20 basis point improvement from last year despite a 90 basis point increase in labor costs to 30.5%.
Turning to guidance, Potbelly management notes that based on performance through the first three quarters and the softer industry trends the company has seen at the end of Q3 and into Q4 to date, it may be prudent to revise full year guidance for same-store sales from expectations of flat to a new outlook for a decline in the range of 1.5-2%. Additionally, the company now anticipates that full year costs of goods sold will arrive near the high end of its previous stated range of 26-26.5% for 2018.
Further, Potbelly now anticipates that General and Administrative expense will be in the range of $42-43 mln, down from the previously stated $46.5-47.5 mln range. Based on these revisions, Potbelly now expects adjusted net income per diluted share in the range of $0.26-0.27, down from previous expectations of $0.37-0.39.
Potbelly expects to open 10-11 new company operated shops in 2018, and 8-10 new franchise shops. The company also expects to spend between $22-24 mln in capital expenditures in 2018, down from the prior $23-25 mln expectation.
While the stock is down by about 7.8% at this juncture on Friday, shares have pared today’s worst levels, which saw the stock down 13.9% at lows. Into the print shares were clinging to a 5.6% loss on the year as a rough patch in the middle of October sent shares into the red in 2018. The turnaround plan may bear fruit in 2019 as management makes more aggressive bets on the menu and turns up the franchise program, but at the moment, guidance is keeping a lid on things.
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