An activist takes Potbelly to task over its stock performance

180 Degree Capital called the company’s performance “unacceptable” even with the pandemic, says RB’s The Bottom Line.
Photograph: Shutterstock

180 Degree Capital on Monday noted that it is now the largest shareholder in Chicago-based sandwich chain Potbelly Sandwich Shop and marked the occasion by roasting the company’s long-term stock performance.

“180 understands the world is in a pandemic and the restaurant space, in particular, has been severely impacted during this period of time,” the firm said, according to a federal securities filing. “That said, [Potbelly’s] poor stock performance on a relative basis to its competitors has been dreadful.”

180 then lists a selection of mostly smaller companies that, indeed, looks rather unfavorable on a one-, two- and three-year basis, as well as the current year and current quarter to date.

As we wrote about earlier this month, the company is working to avoid a restructuring by trying to convince the landlords for a quarter of its corporate stores to buy out their leases—a tactic unusual in a normal environment, though this is anything but normal.

It’s also notable that the company has a “going concern” warning.

In that respect, it might be forgiven for its recent performance. The prospect of a bankruptcy filing tends to diminish investor enthusiasm for a stock, the weird situation with car rental company Hertz notwithstanding. And the pandemic put the company in a clear emergency position.

Yet it’s also difficult to disagree with the overall assessment from 180 Degree. Potbelly’s stock performance has been among the worst in the industry in recent years, pandemic or no pandemic.

Potbelly went public in 2014 and in the process ushered in a short but remarkable era in industry history in which investors poured money into anything that could conceivably be labeled “fast casual.”

The company’s stock price more than doubled on the first day of trading, nearing $28 a share at one point. It was an odd surge, given that Potbelly’s sales at the time were not particularly remarkable and that it operated in a challenging market filled with big chains (Subway, Jimmy John’s) and fast-growing concepts (Jersey Mike’s, Firehouse) that were all much bigger.

Indeed, almost immediately the company’s per-share price fell back to earth. It spent the next three years hovering between $10 and $15 per share, but since August 2018 its trajectory has mostly been down. The company has lost 83% of its valuation since.

Much of that has coincided with weak sales. Same-store sales declined for 11 straight quarters before the chain squeezed through a slightly positive number in the last three months of 2019.

The company was never that profitable. The weak sales made it even less so.

Potbelly’s EBITDA margin (earnings before interest, taxes, depreciation and amortization) was just under 9% in 2016, according to data from financial services site Sentieo. By last year, it was just over 3%. That was before the pandemic.

In 2017, the company explored a sale, only to find the market unreceptive. It instead opted for management changes and an effort to right the ship.

Potbelly might have been better off taking whatever price it could have gotten at the time. And now the pandemic has put the company’s future in doubt.

In its letter, 180 said that Potbelly’s stock performance “is unacceptable and clearly indicates new approaches are necessary.”

The investor supports the recent appointment of Joe Boehm as interim lead independent director and also backed the company’s recent naming of Steve Cirulis its chief financial officer and chief strategic officer.

The additions “should eliminate any future need for external consultants to tell the company how to run its business,” however, “180 encourages the board to execute on any and all steps that are necessary to enhance value for all shareholders.”

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