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Potbelly says it won't be sold

The company said that its strategic review didn’t result in a viable offer, says RB’s The Bottom Line.

The Bottom Line

So much for the idea of a Potbelly sale.

After a lengthy strategic review, the Chicago-based sandwich chain has opted not to sell. Essentially, the company didn’t get an offer it considered good enough to cause it to pull the trigger.

“As part of our strategic review, we explored the potential sale of the company,” CEO Alan Johnson said on the company’s first quarter earnings call on Tuesday. “After a thorough and wide-ranging sales process, ultimately this effort did not result in a transaction that the Potbelly board determined to be viable or in the best interest of our company and our shareholders.”

Instead, Potbelly is buying back $65 million in shares and has changed its growth strategy, with less company growth and more franchisee growth. And potentially some refranchising.

The decision not to sell, while hardly a surprise, came despite urging from activist investors who had pressured the company to make significant changes or sell the company.

Ancora Advisors pushed the company last year. It then reached a settlement with Potbelly, getting a seat on its board of directors. In August, Potbelly initiated its strategic review, hiring J.P. Morgan.

And then another activist, Privet Fund, pushed Potbelly to explore a sale. In April, Privet also reached a settlement with Potbelly and got a seat on the chain’s board.

There were some indications of private-equity interest in the chain. Ultimately, however, there is only so much interest for a sandwich chain with consistently struggling sales.

Potbelly’s sales have struggled for some time, and the first quarter was no different. Same-store sales declined 3.6% in the first three months of the year ending March 26.

That 3.6% decline came despite an average check increase of 3.2%, meaning traffic at Potbelly declined 6.8%.

Those weak sales have kept the company’s stock at a steady level for the past four years. After exploding out of the gate during its 2013 IPO, more than doubling on the first day, and peaking at nearly $30 a share, Potbelly stock fell into the low teens. It has been there ever since.

Potbelly is now faced with fixing its sales in a market in which consumers are choosy, traffic is generally weak and there are more competitors and interesting concepts emerging all the time.

On the earnings call, Johnson mentioned some things he believes could improve Potbelly’s sales.

He said the company needs to engineer and redesign a menu that has grown complex. “We’ve got over 116 items at 66 unique price points,” Johnson said. “It’s very, very complicated. We don’t make it easy on our consumer.”

He also wants to “increase our focus and investment in customer-facing technology” to drive sales, such as with a mobile app and a loyalty program.

“When I first joined I was surprised that we know almost nothing about most of our customers,” Johnson said. The company is now working to survey more customers to get that information.

Potbelly is slowing development and has for the past couple of years. It expects 22 to 26 total openings this year, with a combination of franchise units and company locations. It is also still looking at potential unit closures at underperforming locations, though lease deals could prevent that from happening.

Slowing development is a key ingredient in any turnaround, but Johnson believes it will be temporary.

“The reason we’re slowing down is not to slow down forever,” he said. “It’s to slow down and speed up so we can be more thoughtful and strategic about that growth.”

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