(Corrects paragraph 18 to show that Aaron Ryou buys lunch every
day in Potbelly's hometown)
By Lisa Baertlein
LOS ANGELES, July 15 Early investors in Potbelly
Corp have seen their shares in the toasted sandwich
chain go cold.
Expectations were high ahead of Potbelly's initial public
offering in October. The roughly 300-unit Chicago-based sandwich
chain was poised to grow, announcing plans to increase its
restaurant count by at least 10 percent per year. And it had
signed on Starbucks Corp Chief Executive Officer Howard
Schultz's Maveron venture capital firm as its biggest investor.
Shares more than doubled in their first trading session from
$14 to almost $31.
About nine months later, though, Potbelly's shares have shed
those gains, and then some. Shares tumbled 25 percent, to
$10.97, on July 10 after it warned of weak second-quarter sales,
causing some analysts to blame company-specific problems rather
than broader economic malaise. (The stock traded at $11.53 on
For growth-hungry investors seeking to replicate the success
of Chipotle Mexican Grill Inc and Starbucks, it's a
"Companies like Starbucks and Chipotle come around once in a
decade," William Blair restaurant analyst Sharon Zackfia said.
Such long odds have not deterred investor appetite for
restaurant IPOs, particularly those in the fast-casual category
Chipotle popularized. Results have been mixed.
Shares in Noodles & Co doubled in their June 2013
debut, to $36.75, almost 20 percent above their current price of
Mediterranean-inspired Zoe's Kitchen Inc's jumped
65 percent, to $24.72, in its first trading day in April. Its
shares also trade at around $29.
Even before Potbelly went public there were signs the chain,
which got its start as a food counter in an antique store in
Chicago's tony Lincoln Park neighborhood, might not be the
breakout hit investors hoped.
Sales at established restaurants, a benchmark of industry
performance, fell slightly in the first quarter of 2013, before
the IPO, and have been down in the last two quarters.
Returns on Potbelly restaurants are lower than at Chipotle
and Panera Bread Co, and the chain had "inconsistent
performance" in the critical New York City market, where it
built 16 units in 18 months, Baird Equity Research analyst David
Tarantino wrote in his first report on Potbelly in October 2013.
Chipotle and Starbucks are known among investors for their
ability to get more and more sales out of their shops, a skill
that underpins their enviable same-restaurant sales growth.
Panera was a top performer until late last year, when its
CEO said "operational friction" limited the ability of its
bakery-cafes to squeeze out higher sales.
(For graphic on restaurant IPOs: link.reuters.com/suq42w)
Potbelly boasts a "neighborhood feel" with homey decor,
fresh-baked cookies and live music.
Maveron remains Potbelly's largest shareholder, with 4.3
million shares as of May 15, according to the company. On Feb.
14, Maveron and related funds held 5.8 million shares, or a
stake of nearly 20 percent, according to the company's proxy.
Chicago software engineer Aaron Ryou, 33, buys lunch every
day in Potbelly's hometown and says its expansion has hurt its
"Now they're everywhere. It lost its luster," he said.
Potbelly also lags bigger rivals such as Firehouse Subs,
Jersey Mike's Subs and Jimmy John's Gourmet Sandwiches when it
comes to having the best-tasting sandwiches, according to
Consumer Reports surveys from 2011 and 2014. Privately held
Subway, the biggest U.S. sandwich chain with a market share of
roughly 60 percent, ranked lower than all of those chains.
The proliferation of Potbelly and its rivals has only
intensified what has long been a highly competitive business.
The fast-food sandwich category Subway dominates grew 10.5
percent from the fall of 2012 to the fall of 2013. Adding to the
pressure, fast-casual restaurant counts grew 5.9 percent during
the same period, according to a restaurant census conducted by
the NPD Group.
"It's a crowded space," said Bob Goldin, executive vice
president of Technomic.
Neither the disappointing results from Potbelly nor the
closure last week of cupcake purveyor Crumbs Bake Shop
appear to have cooled interest in restaurant IPOs.
Chicken chain El Pollo Loco on Monday announced plans to go
public. Other chains planning floats this year include The Habit
Burger Grill, a popular upscale burger joint, fast-food chain
Checkers Drive-In Restaurants Inc and arcade-eateries Dave &
(Editing by Douglas Royalty)