Potbelly stock plunged nearly 20% on Wednesday after the company reported disappointing first-quarter sales and earnings.
Same-store sales declined 4.7% in the quarter ended March 31 and the sandwich chain reported a $3 million adjusted net loss for the period.
The numbers disappointed investors, who sent the company’s stock falling below $7 a share, a record low for the Chicago-based company.
Speaking on the Potbelly’s first-quarter earnings call on Tuesday, company executives blamed the weather and a delayed menu revamp for part of the sales challenges. But they also acknowledged that turnarounds take time and that not every one of their efforts has worked to generate sales growth.
“The business does not get in the shape that it’s in with declining traffic overnight,” CEO Alan Johnson said. “Despite our recent efforts, it is clear that we will take some time to get the business back on track.”
Cold weather hit many of the chain’s Midwestern markets in the quarter. Johnson said the median temperature was 15% colder in the period, while Washington D.C., the chain’s second largest market, had three times more snow than it had the same period a year before.
Because of that cold weather, the company delayed marketing spending into the second quarter. It also rolled out a menu optimization effort in mid-February, leading to a “short-term lapse in pricing” that contributed to the weaker same-store sales.
Those issues hurt sales by 130 basis points, not enough to explain the full decline in the period. “Things often don’t follow a linear path” in a turnaround, Johnson said. “There are some things that work, and there will be some things that don’t.”
Potbelly nevertheless said that it expects same-store sales to be “flat to low-single-digit” negative for the full year of 2019.
Potbelly’s stock price is now down for the year and has fallen 46% over the past 52 weeks.
Johnson said that the menu simplification effort has yielded positive average check. The company added meal options and updated menu boards. The meal options now represent 24% of the chain’s entrée mix, and the new menu has led to a 460-basis-point increase in average check. Customers are buying more items when they come in.
“We want to build up check growth by encouraging our customers to buy more, versus growing the check by raising prices,” Johnson said.
He also said that off-premise business is increasing and is now up to 21% of comparable sales, from 17.5% a year ago. Delivery sales increased, and the company said it is investing in technology to improve that business.
The company also has a new loyalty program, with 1.3 million members that generated 18% of the chain’s sales in the period.
But the company slowed its advertising spending in the fourth quarter of last year and into the first quarter, which hurt traffic momentum so far this year. The company did launch a new brand campaign in April in three markets, but Johnson said the results “were not enough relative to the size of the investments we are making,” so the company is assessing its efforts around marketing.
Still, weakened sales and rising costs hurt the company’s profitability.
Restaurant-level margins declined to 13.1% of revenues in the quarter, from 16.4%. Labor costs increased 200 basis points to 32.9% of sales in the period. The company said lower sales and rising wages led to that increase.
Tom Fitzgerald, Potbelly’s CFO, said the company has a list of “the bottom 25 shops” that it is working to close. Yet those shops “skew newer” and would be too costly to shut down, he said. That’s a small percentage of the 481-unit chain, 431 of which are company operated.