Potbelly Investors Can't Stomach the Truth
The news was even better on the bottom line, at least relative to expectations. Adjusted earnings clocked in flat at 6 cents a share, but that was double the profit that Wall Street pros were targeting.
Naturally, it's not a surprise to see a stock move higher after soundly surpassing analyst prognostications: That's Mr. Market's measuring stick. However, it's not as if investors can walk away feeling as if the fast-casual chain is doing great. It's not. The double-digit uptick in revenue is largely the result of the 46 locations that opened through 2014. Comparable-restaurant sales grew at a more realistic 3.7 percent clip.
We also can't forgive Potbelly's earnings performance. Adjusted net income declined 9 percent from a year earlier as food costs and labor expenses rose faster than the action at Potbelly's cash registers. Things are getting better on some fronts, but don't let anyone fool you into thinking that the stock moving higher is the sign of a blowout quarter during a corporate turnaround.
There are certainly a couple of encouraging signs in assessing the quarter's performance. Comps bouncing back is huge. Potbelly's comparable-restaurant sales were negative through the first half of the year, striking fear in investors that its popularity was peaking.
It's also great to see expansion accelerating. Potbelly expects to open as many as 55 new locations in 2015.
However, Potbelly is still trying to win back the market's respect. Even with the initial pop, the stock is still trading for roughly half of where it was when it closed above $30 on its first day of trading two summers ago.
Investors paying attention to other sandwich specialists may also be quick to note that it's not just Potbelly struggling with profitability. Shares of Panera Bread (PNRA) took a hit when it reported fresh financials last week, even though it also posted declining profitability on a slight uptick in revenue.
Then again, Panera took a hit mostly because of its outlook. It sees flattish earnings-per-share growth in 2015, and Potbelly is coming from a better place. It expects adjusted net income to grow by at least 20 percent. That may seem encouraging, but it's important to frame it appropriately. Potbelly's adjusted earnings slipped 16 percent in 2014. If it comes through with just 20 percent growth, we would be looking at less than $8.1 million in adjusted earnings, nearly flat with where it was in 2013. Potbelly may be growing -- the chain is now up to 334 company-owned stores and 29 franchisee-run locations -- but profitability is essentially where it was two years ago.
Potbelly will have to do more growing on both ends of the income statement if it wants to live up to this week's gains. It's taking steps in the right direction, but it still has a long way before investors can start celebrating a turnaround.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Panera Bread. Try any of our Foolish newsletter services free for 30 days. To feast on our favorite high-yielding dividend stock ideas for any investor, check out our free report.