About Potbelly
We like to view Potbelly as not only a mildly illustrative term to describe Santa Claus but also as a restaurant brand that doesn’t get much attention from The Street.
Potbelly is a speciality sandwich shop that has a tasty looking array of classics, such as their “A Wreck” or maybe you’re feeling so adventurous as to get a mouthful of their surprisingly delicious looking “Pizza Melt” (I know, right!) or maybe you’re just finding that you’re in the mood for their “Tuna Salad.”
We don’t judge tuna salad people.
To each his or her own.
In efforts to steer away from making ourselves hungry to the point of actually trying out one of these sandwiches, let’s get a little more familiar with the company’s business itself.
With nearly 400 corporate-owned stores across the United States as well as 46 franchise locations (according to TD Ameritrade’s platform), Potbelly has you covered all the way from Arkansas and Illinois to South Dakota, Texas, Virginia, including many other states as well.
As with most restaurant concept business models, the way in which Potbelly makes money is fairly easy to understand. Specifically, the company does what is needed for any business to stay afloat; it sells products or services (products in this case) at a higher price than it costs to produce or make them.
Although the business is somewhat simple, it surely doesn’t negate the fact that the restaurant industry, as alluded to in previous stock analysis articles, is viciously complex and competitive, to say the least, which is likely one of the main reasons the company doesn’t currently offer its shareholders an annual dividend at the moment.
In the restaurant business especially, you need to do everything in your power to keep cash on hand and retain capital of all forms in order to merely stay relevant, or in business for that matter.
With all of the scaled sandwich specialized competitors such as Jersey Mike’s, Jimmy John’s, Which Wich, Subway, Panera Bread, Capriotti’s, Schlotzsky’s among many, many others, including local chains that undoubtedly take some regional business away from the larger aforementioned players in the space, Potbelly and its executive team certainly has its work cut out for itself.
Now that aspects relating to the competitive landscape and Potbelly’s business model itself have been addressed, in custom MacroHint fashion let’s get down to the numbers behind this company and its stock and try to ultimately figure out whether or not this company’s stock is worth considering buying and holding for the long haul.
Potbelly’s stock financials
To get things kicked off, it certainly isn’t a major initial negative sign that Potbelly’s stock (NASDAQ: PBPB) is apparently quite inexpensive for today’s average retail investor, as it currently trades at around $7 per share of stock.
You could either buy a share of the company’s stock or a sandwich with that kind of money!
However, we still need to try to verify whether or not there is sufficient intrinsic value behind this $7 share price, however, this is rather difficult to evaluate when the company’s stock doesn’t currently have a listed price-to-earnings (P/E) ratio.
This could be for a few different reasons, one of which includes that the company isn’t yet profitable.
Without looking at any of the company’s profit margin-related financials, although we surely will, we highly doubt this is the case with Potbelly, as it has scaled well over time and has been around since 1977.
The more likely scenario is that the company has been reinvesting its retained earnings and thus has no earnings to report, therefore, no readily available price-to-earnings ratio to display.
At any rate, we’re not terribly concerned with Potbelly’s stock not having a P/E ratio displayed, as it can also be noted that the last few years have been rather strenuous for restaurants and the dining sector in general.
Since we’ll become a bit more intimate with Potbelly’s net profit margin later on in this article, let’s keep this train moving forward and transition over to the company’s balance sheet.
According to this financial statement, Potbelly’s executive team is responsible for tending to around $253.2 million in total assets as well as approximately $255.6 million in total liabilities.
Yes, we don’t mind giving Potbelly a pass on the fact that the restaurant sector is littered with expenses, short-term and long-term, which likely is the primary reason this company’s total liabilities are so high and presently outweigh the value of its total assets. Additionally, COVID-19 and associated challenges such as supply chain, labor and other compounded expenses have undoubtedly played a role in increasing this company’s amount of total liabilities, and others across the restaurant spectrum.
Nevertheless, Potbelly was stricken fairly hard with added debt and other liabilities as the amount of its total liabilities abruptly rose from $58 million in 2018 to $264 million the following year.
Yikes.
That is a lot of debt to tack on to an already debt sensitive business but it is nevertheless a reality of the restaurant industry and a harsh one that potential and current investors must learn to deal with if they are intent on investing in the dining sector.
Shifting gears over to the company’s income statement, Potbelly’s total revenue over the past five years has remained tucked between $291.2 million (2020) and $428.1 million (2017). 2020 was understandably not the best year for Potbelly or its restaurant counterparts, therefore, we aren’t gravely worried about the company’s ability to generate revenue in the coming years, especially as they have inked partnerships with third party delivery platforms such as DoorDash.
Onto Potbelly’s cash flow statement, its net income has been a lot less encouraging than we initially hoped it would be.
For example, the company’s net income over the last five years has been negative each year, some years, of course, worse than others.
We would’ve hoped that Potbelly would’ve already found its way out of the negative cash flow stage of its business, however, that simply isn’t the case, which does worry us. For a software start-up we would completely understand as many younger companies need to burn through a fair bit of cash just to get operations in a sustainable stage.
However, Potbelly isn’t a young, new business; it just seems like it’s losing money and enduring losses year after year.
Suffice it to say, regardless of reason, we are definitely not the biggest fans of established dining companies consistently reporting negative net income figures for prolonged periods of time.
Potbelly’s stock fundamentals
As we touched on the topic of profitability in paragraphs above, at this point in time Potbelly seems to be struggling.
For instance, the company’s trailing twelve month (TTM) net profit margin currently sits at -0.11% to the industry’s average of 6.5%.
This indicates that the company, overall, isn’t currently making enough profit from its products in order to cover its expenses, which is hardly ever a good sign, let alone for such an established company such as Potbelly.
One can also note that the way things are going in the current micro and macroeconomy, things are probably going to get a lot worse before they get better, which makes it all the more important for a company like Potbelly to already have the inherent ability to turn a positive net profit with relative ease, which it seemingly isn’t able to successfully do right now.
Piling on as more negative news, the company’s TTM returns on assets and investment are both substantially lower than that of the industry’s average as well. As an example, the company’s TTM return on assets is -0.19% to the industry’s average of 7.54%.
Should you buy Potbelly stock?
From our vantage point, there are a lot of dark clouds surrounding Potbelly and its stock.
Namely, combined with the current state of affairs in the global economy as well as in the restaurant space, given Potbelly’s negative (trailing twelve month) net profit margin, its lacking returns and its natural economic sensitivities, we’d focus on other industries or if one were intent on putting some investable capital into the dining space, we’d personally look elsewhere.
We give Potbelly’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.