Potbelly faces a shareholder ‘discord’

An activist says the company erred in hiring a new CEO during a strategic review.

An activist investor says that Potbelly should not have hired a new CEO while it was conducting a strategic review of its future operations, and suggests the company is facing “discord” among some of its largest shareholders.

In a filing this week, the activist investor Privet Fund, which owns just more than 5% of Potbelly shares, said the public discord could have limited the pool of CEOs available to the company.

Earlier this month, the Chicago-based sandwich chain named Alan Johnson its CEO—ultimately replacing Aylwin Lewis, who left the chain in March.

Potbelly is taking a hard look at its business amid persistently weak same-store sales. Potbelly is slowing its unit development and could close some locations or sell others to franchisees.

Potbelly said in its new CEO announcement that the strategic review with financial advisor J.P. Morgan is continuing, and the company is “committed to pursuing strategic options that would potentially enhance shareholder value.”

Potbelly had a surprisingly popular initial public offering in 2013. The company’s stock price more than doubled on its first day of trading, surging to well over $30 a share. But the stock quickly fell into the lower teens, where it’s been languishing ever since.

The company seemed to have picked up some sales steam in 2015 and 2016, with same-store sales growth in each quarter, but performance has deteriorated in 2017, including a same-store sales decline of 4.8% in the period ended Sept. 25.

That performance has lured multiple activist investors, including Privet Fund and GrizzlyRock Institutional Value Partners. In October, Potbelly reached a deal with another activist, Ancora Advisors, adding portfolio manager Joseph Boehm to its board.

Privet Fund is an investment firm that targets smaller and midsized companies, and in past years has targeted some restaurant chains, including J. Alexander’s before its sale to Fidelity in 2012, and the pizza concept Noble Roman’s.

Johnson, Potbelly’s new CEO, had been a consultant and previously worked with the beverage retailer BevMo. At one point he was an executive with Pizza Hut when it was still owned by PepsiCo.

Potbelly operates more than 450 locations and generates about $446 million in U.S. system sales a year, according to Technomic data.

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