Why I'm Cautiously Optimistic about Potbelly’s IPO.
Chicago, Illinois based Potbelly Corporation has filed for a $75 million Initial Public Offering (IPO). The company is planning on listing its shares on the NASDAQ under the ticker symbol "PBPB." Unfortunately, since the company has not yet released details on how many shares will be open to purchase nor how much money each share will be priced, any valuation analysis that might come into play would be impossible to conjecture about at this point. But, the sandwich crafting enterprise has several good indicators for prospective investors, thus I believe that IPO investors should be cautiously optimistic about Potbelly's future prospects.
A very good sign for Potbelly is that the company has been able to clock increasingly impressive revenue growth. Individual store returns also offer up tantalizing returns. Potbelly locations have proven to be profitable in diverse environments and foster strong customer loyalty. Within two years of launch, a typical Potbelly location reaches profit margins of 25%+.
Investors also seem to be quite optimistic about the restaurant sector overall. Shares of Noodles and Company (NASDAQ:NDLS), which went public on July 1st, 2013 have rocketed upward as investors continue to buy in to Noodles' unique business model. Personally, I think that Noodles and Company's current valuation is unsustainable, but that's another issue for another post...) In the longer-term perspective, fast-casual restaurants Panera Bread (NASDAQ:PNRA) and Chipotle Mexican Grill (NYSE:CMG) have both done quite well. Potbelly's expansion efforts can be compared to Chipotles' and is ratcheting up competition in the sandwich segment.
The one main (but small) concern I have with Potbelly is the company's rate of growth and how they plan on increasing franchising. Oftentimes investors can get caught up in numbers like "increasing new store openings" and assume that is a good thing. But, some restaurants and chains can overexpand, spread their resources too thin, and actually suffer as a result of that (vis-a-vis Starbucks circa 2008). Personally, I think Potbelly's expectations are fairly reasonable. But the company has not outlined at what rate they will be able to franchise new Potbelly restaurants, which will help drive profitability for the company in the long term. If Potbelly keeps franchising rates at where they are now or not increasing fast enough, they will be missing out on some gains.
Overall, I think Potbelly will most likely serve investors growth in the coming years. But, I would caution against investing if Potbelly's growth strategy shows signs of overheating or if Potbelly's rate of franchising stores flatlines.