Potbelly IPO

Welcome to Potbelly. May I take your order? Would you like some company shares with that?

With a number of quick-food restaurant chains going public lately, Chicago-based Potbelly Sandwich Shop is looking for a toasty reception when it goes public on the NASDAQ exchange under the ticker PBPB, the date not yet specified.

Yet after a number of other fast food IPOs over the past few months, is the market really that hungry for another stock offering in that space? David Epstein, a principal at investment bank J. H. Chapman Group, certainly expects so. “I think there is a good following for this,” he expressed his confidence to Crain’s Chicago Business. “The market likes restaurant chains it can identify with.”

And the company has gone to great lengths ensuring that very thing: a friendly neighborhood feel its patrons can relate to. Investors should likewise feel cozy and warm with its soon-to-be public stock.

Get a Slice of This Success

With 286 shops in 18 U.S. states and Washington D.C., plus another 12 locales throughout the Middle East, Potbelly Sandwich Shop has sliced, spread, and stacked together a multi-million dollar enterprise, serving up $290 million in revenues over the past 12 months, with almost $24 million of that in net income.

Contrary to the better-known quick-food chains which are heavily focused on franchising, Potbelly follows a mostly company-run model similar to Chipotle Mexican Grill (NYSE: CMG). Of Potbelly’s 298 shops, only 18 are franchised, which includes six U.S. locations and the twelve abroad.

Why so little franchising? Quite simply, the company finds it more profitable, with company-owned stores generating some 20% in net profits, while franchises deliver just 5 or 6% in royalties.

To help finance its expansion, the company plans to raise $75 million from its offering, with $50 million of that going to existing investors in dividends and the remainder going toward opening new shops.

For 2013 alone, the company expects to have opened some 32 to 35 new company-run shops, plus another 7 to 10 new franchises, increasing its total number of shops by 14%. It expects future expansion to maintain a steady pace at around 10% per year.

Proceeds from the offering will also be invested in technology, such as the handheld order-taking tablet system already in use at 44% of its locations. “In addition, we are expanding our backline businesses, including catering, delivery and online ordering, which we view as additional growth drivers,” Nation’s Restaurant News quotes the company.

Tough Market, But Good Timing

Perhaps owing a little to Chicago’s declining population, the past five years of tight consumer budgets, and an increasingly overcrowded fast-food sector, Potbelly has had some difficulty expanding on profits alone. Hence the IPO.

Another Chicago-based competitor – Cosi Inc. (NASDAQ: COSI), which went public back in 2002 – lost some $2.1 million in its second quarter and is in jeopardy of losing its NASDAQ listing, which is trading at only slightly above $2 a share.

But the market seems to be liking the fast food space, so why argue with investors waving bills in their hands?

Noodles & Company (NASDAQ: NDLS) shares have already soared from June’s offering price of $18 to today’s $44.38. Chuy’s Holdings (NASDAQ: CHUY) has gained from its $13 initial offering 14 months ago to $35.97 today. Dunkin’ Brands (NASDAQ: DNKN) has climbed from its listing price of $19 two years ago to $43.00 now. And Potbelly’s closest counterpart, Chipotle Mexican Grill, skyrocketed from $40 to $160 during its first two public years, and it is now at a stunning $409.71.

Adding Personality to the Brand

Potbelly’s soon-to-be public stock could follow a similar upward trajectory, especially if it continues following Chipotle’s lead. Many of the key concepts that made Chipotle so successful, as noted by Quora.com, are also being employed at Potbelly’s:

• At Chipotle, “there is a dedication to high quality basic ingredients with no compromise on standards. When [the company created its] food concepts, there was a purposeful constriction on food choices.”

What Chipotle is to the burrito, Potbelly’s intends to be to the sandwich. “We choose high quality meats, cheeses and veggies, then slice, cut and chop them ourselves,” the sandwich company guarantees.

• Chipotle “created an iconic experience that encompasses the entire experience from food quality and presentation, store architecture / layout.”

Potbelly’s shops likewise have a unique look and atmosphere, with “vintage design elements and locally-themed décor inspired by the neighborhood that we believe create a lively atmosphere.” They even have an old-fashioned potbelly stove in every shop. “It’s a friendly oasis, a comfy hangout with local memorabilia, wooden tables and chairs. You can even catch a live musician playing good tunes,” the company invites.

• “Chipolte’s roots are built around the mission of ‘Food with Integrity’. This concept is quite honest and resonates with the direction most people are moving towards. Organic, non frozen food with a concern about the respect paid to the animals and the land.”

In similar fashion, Potbelly has undertaken three commendable approaches to building a respectable and personable brand, including:

– nutrition guides “to help you find the Potbelly meal that’s right for your health and nutritional needs”,

– green initiatives that “strive to make decisions that are respectful of our planet’s resources”, and

– neighborhood involvement “to help the people who live in our local communities”, with a “positive commitment and the desire to give back as much as possible.”

In the crowded and sometimes oversaturated market of convenient foods and quick restaurants, a newcomer needs something to stand out from the rest. To that end, Potbelly may have found the perfect combination of ingredients… not just in its foods, but also in its brand.

Joseph Cafariello

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