News

Potbelly shifting business strategy after disappointing Q2

August 7, 2017

Potbelly is reevaluating its business strategy, said Mike Coyne, CFO and interim CEO, during last week’s investor’s call. Coyne, who replaced former CEO and Chairman Aylwin earlier this year, said that although total revenues were up 3 percent to $108.1 million for the second fiscal quarter ended June 25, 2017, company-operated comparable store sales decreased 4.9 percent in Q2.

"We are testing a number of targeted initiatives to further build our brand and improve our traffic trends," he said in a company press release, which included analyzing its capital structure and allocation, returns on invested capital, operational productivity, marketing strategy, the pace of company-owned unit growth, capital expenditures, and potential ways to accelerate franchising.

"While disappointed with our top-line performance, we are encouraged by our ability to manage costs, drive solid flow-through delivering shop-level profit margin of 19.2 percent, and generate adjusted EBITDA of $11.8 million," Coyne said.

The company has hired J.P. Morgan Securities to be its financial advisor to assist with this review.

Key highlights included:

• Sixteen shops opened, including three franchised shops and thirteen company-operated shops.
• GAAP net loss attributable to Potbelly Corporation was $0.1 million, inclusive of a $3.3 million impairment charge, compared to net income of $3.4 million, inclusive of a $1.0 million impairment charge.
• GAAP diluted loss per share was $0.01 compared to diluted EPS of $0.13.
• Adjusted net income attributable to Potbelly Corporation decreased 31.6 percent to $2.7 million from adjusted net income of $4.0 million. Adjusted diluted EPS decreased 26.7 percent to $0.11 from $0.15.
• EBITDA decreased 41.3 percent to $6.5 million from $11.1 million.
• Adjusted EBITDA decreased 8.7 percent to $11.8 million from $12.9 million.

Coyne said while the overall restaurant operating environment remains challenging and he doesn’t contemplate an improvement in industry trends in our outlook for 2017, he is confident in the strength of the brand but "remains open to all strategic options that would potentially significantly enhance shareholder value over the long-term."

2017 outlook

For the full fiscal year of 2017, management currently expects:

• 45-50 total new shop openings, including 30-35 company-operated shop openings.
• A mid-single digit decrease in company-operated comparable store sales.
• An effective tax rate to range from 36 percent to 38 percent, excluding the discrete tax benefit or deficiency of ASU 2016-09, which could significantly impact 2017 tax rate.
• Full year adjusted diluted earnings per share of $0.30 to $0.33.