Potbelly, I'm Not Impressed

Potbelly, I'm Not Impressed

Shares of Potbelly soared 9% yesterday. Investors were clearly impressed by the sandwich shop's first quarterly report as a public company.

Adjusted earnings climbed 27% to $0.15 a share, well ahead of market expectations. Revenue climbed nearly 12% to $78 million, narrowly ahead of what the pros were projecting.

A beat on both ends of the income statement may typically warrant a stock's pop, but this is a stock that has doubled since going public at $14 last month. This is the kind of move that should accompany a blowout report, and this wasn't exactly a perfect quarter.

We saw fellow fast-casual rookie Noodles & Co.take a hit last week after it reported its first full quarter since going public this summer. It grew even faster than Potbelly, with revenue and adjusted earnings increasing 15% and 45%, respectively. The market wanted more. Why is it settling for less with Potbelly?

It's important to note that the growth at oven-heating Potbelly and pasta-boiling Noodles & Co. consisted largely of expansion efforts. Same-restaurant sales actually inched just 2.1% higher at Noodles & Co. in last week's report and 2.5% higher at Potbelly in yesterday's announcement.

Neither of these chains is the next Chipotle Mexican Grill . Noodles & Co. and Potbelly roared out of their debutante gates because of Chipotle's success. The market isn't interested in eating up fast-food chains or traditional casual-dining establishments. However, there's something appetizing about the "fast casual" niche that offers the best of both worlds, with table-service-quality eats served at the speed and convenience of fast food.

Chipotle showed us earlier this earnings season why fast casual matters. Despite being much larger -- it has five times as many restaurants as Potbelly -- Chipotle still managed to grow revenue and comps by 18% and 6.2%, respectively, during the same three months.

If it wasn't for Chipotle's success, the market wouldn't be eating up Noodles & Co. and Potbelly now. As refreshing as it was to see margin expansion on an adjusted basis at both chains, retail investors wouldn't have jumped on the IPOs if their same-store sales were barely keeping up with inflation. One can even argue that if larger sandwich shops were public -- and it's odd that Subway, Quiznos, and Jimmy John's are not -- the market wouldn't care about Potbelly unless it started sporting Chipotle-esque growth.

It is encouraging to see Potbelly exceed the low bar that analysts had set for the sandwich maker. You definitely don't want to fall short as a recent IPO, shredding credibility in your first chance to impress. However, when you're trading at 76 times next year's projected profitability, it's natural to hold out for a little more bread.

There's dough in more than just sandwich shops
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The article Potbelly, I'm Not Impressed originally appeared on Fool.com.

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published