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Potbelly Company’s (NASDAQ:PBPB) Q3 2023 earnings report confirms that its sequential gross sales progress is slowing. Adjusted for seasonality, Potbelly’s Q3 2023 gross sales have been much like its Q2 2023 gross sales, and its steering for This autumn 2023 signifies expectations for a comparable gross sales degree there too.
I might anticipate Potbelly to information to flat to low-single digits same-store gross sales progress in 2024, which nonetheless is not dangerous on condition that it ought to want lower than +1% progress to hit its 2024 gross sales goal (which it talked about in early 2022).
Potbelly nonetheless wants a little bit of enchancment to hit its 16% shop-level margin goal for 2024, though it’s getting fairly shut and I anticipate its shop-level margins to be round 14% to fifteen% in This autumn 2023.I had beforehand believed that there was a very good probability that Potbelly’s gross sales progress was plateauing, and thus Potbelly’s gross sales outcomes for Q3 2023 and its This autumn 2023 steering was in-line with my expectations. Potbelly’s shop-level margins are usually exceeding my expectations although. I had believed that Potbelly would find yourself with shop-level margins close to the high-end of its steering vary of 12% to 14% in This autumn 2023, however it delivered 14.6% in shop-level margins with out the advantage of gross sales outperformance.
The margin outperformance has contributed to my rising Potbelly’s estimated worth again as much as round $8 to $9 per share. It is a $0.50 per share improve in estimated worth on the midpoint of that vary.
Gross sales Progress Has Slowed
Potbelly reported +8.0% same-store gross sales progress in Q3 2023, in-line with its steering for +7% to +9% same-store gross sales progress for the quarter. Potbelly’s common weekly unit volumes went down by -3% in Q3 2023 in comparison with Q2 2023.
Potbelly is now guiding for +4% to +6% same-store gross sales progress in This autumn 2023, together with $24,250 to $24,750 in common weekly gross sales per retailer, which on the midpoint can be one other -3% decline in comparison with Q3 2023.
From taking a look at pre-pandemic information, it seems that Potbelly’s Q2 gross sales are usually a bit larger (equivalent to 2% to three%) larger than its Q3 gross sales, which in flip are barely (equivalent to 2% to three%) larger than its This autumn 2023 gross sales.
Adjusted for seasonality then, I might think about Potbelly’s sequential gross sales progress to be roughly flat from Q2 2023 onwards (based mostly on its Q3 2023 actuals and This autumn 2023 steering). Total this degree of gross sales efficiency is fairly strong given the detrimental influence of the coed debt forgiveness plan being struck down. A smaller quantity of scholar debt reduction has been going by means of.
Potbelly expects its AUV for the total yr to be round $1.29 million in 2023, so it wants lower than 1% progress in 2024 to hit its $1.3 million goal for that yr. I might anticipate Potbelly to information for flat to low-single digits same-store gross sales progress in 2024, permitting it to satisfy its gross sales goal.
Notes On Store-Stage Margins And EBITDA
Potbelly reported one other quarter of stronger than anticipated shop-level margins. It reported 14.6% shop-level margins in Q3 2023, in comparison with its steering for 12% to 14% shop-level margins in the course of the quarter. This margin outperformance got here regardless of its gross sales progress falling squarely inside its steering vary.
Potbelly’s robust shop-level margin efficiency (relative to steering) has allowed it to beat its EBITDA steering as effectively.
Potbelly expects 12.5% to 14.5% shop-level margins in This autumn 2023, though it has been persistently exceeding its steering round margins. Thus 14% to fifteen% shop-level margins in This autumn 2023 might be an affordable expectation, placing it in the direction of (or above) the high-end of its steering for the quarter.
This might put Potbelly close to 14% shop-level margins for the total yr of 2023. Potbelly’s 2023 outcomes have been negatively affected by Q1 2023 shop-level margins at 12%, so even with out additional sequential enchancment, Potbelly might most likely get round 14.5% for shop-level margins in 2024 presently. It nonetheless wants a little bit of enchancment to achieve its 2024 goal for 16% shop-level margins although.
With gross sales progress slowing, I believe 15% to fifteen.5% shop-level margins in 2024 could also be an honest expectation for Potbelly, though 16% could also be a stretch to get to with out improved gross sales progress/
Franchising
Potbelly has additionally made respectable progress in signing improvement offers for brand spanking new franchises. It talked about that it had 150 complete store commitments as of its Q3 2023 earnings report and subsequently introduced a 22 store deal involving 13 new items and the switch of possession of 9 present eating places.
In Q3 2023, 14% of Potbelly’s system-wide gross sales got here from franchise outlets, up from 10% in Q3 2022.
Estimated Valuation
I’ve bumped up Potbelly’s estimated worth again as much as $8 to $9 per share. I had lately trimmed its estimated worth to $8 per share based mostly on my perception that its sequential gross sales progress had largely stalled out. Potbelly’s Q3 2023 outcomes and its This autumn 2023 steering provides validity to that perception.
Nonetheless additionally it is monitoring a bit higher than I anticipated with respect to shop-level margins. Potbelly’s 16% shop-level margin goal for 2024 could also be considerably difficult to get to with out a lot in the best way of gross sales progress. I imagine that Potbelly can get to round 15% to fifteen.5% for 2024 although.
It is a slight improve from my earlier expectations and thus contributes to a modest $0.50 improve in estimated worth on the midpoint of my valuation vary.
Conclusion
Potbelly’s interval of robust gross sales progress seems to have come to an finish with its Q3 2023 gross sales across the identical as Q2 2023 after adjusting for seasonality. Potbelly’s steering for This autumn 2023 signifies expectations for the same degree of seasonally-adjusted gross sales as effectively. Regardless of this, Potbelly’s present gross sales ranges are already fairly near its 2024 targets, so it ought to have the ability to attain that with comparatively flat same-store gross sales progress in comparison with 2023.
Potbelly has been exceeding expectations for shop-level margins and will end the yr at near 14%. This included weaker Q1 2023 shop-level margins, so its shop-level margins from Q2 2023 to Q1 2024 ought to find yourself round 14.5%. Potbelly might fall a bit in need of its 2024 goal for 16% shop-level margins with out extra gross sales progress although.
I’ve elevated my estimate of Potbelly’s worth to $8 to $9 per share to replicate its stronger than anticipated shop-level margins and its continued flat sequential gross sales progress. At a bit over $9 per share, Potbelly’s inventory is barely on the pricier aspect based mostly on my 2024 expectations although, so it might want to ship barely higher gross sales progress and/or margin efficiency than what I’ve modeled.
