PBPB - Potbelly: Continued Excellent Business Performance

2023-06-11 04:04:25 ET

Summary

• Potbelly reported +14.4% same-store sales growth in the first two months of Q2 2023 despite tougher year-over-year comps.
• It looks capable of hitting +14% or better same-store sales growth over the full year, allowing it to reach its 2024 sales targets ahead of schedule.
• However, a Supreme Court decision on Biden's student loan forgiveness plan is expected within the next month.
• If that plan is struck down, Potbelly's 2H 2023 sales growth may take a noticeable hit.

Potbelly's ( PBPB ) strong business performance has continued well into 2023, with +22.2% same-store sales growth in Q1 2023, followed by +14.4% same-store sales growth in the first two months of Q2 2023 against tougher year-over-year comparisons.

This puts Potbelly on track to deliver +14% or better same-store sales growth in 2023, which would get it to a sales level that is already slightly above its 2024 targets. Potbelly's sales performance has been better than I expected , but there is an upcoming Supreme Court ruling on Biden's student debt forgiveness plan. If that plan is struck down, it may have a noticeable adverse impact on Potbelly's sales during the second half of 2023.

Thus I am maintaining Potbelly's estimated value at $8 to $9 despite its strong business performance during the first five months of 2023. If the student debt forgiveness plan is upheld, I'd bump Potbelly's estimated value up to the $9 to $10 range due to its sales performance tracking ahead of expectations.

Q1 2023 Results

After excellent results in 2022, Potbelly's business momentum continued into 2023. It ended up with +22.2% same-store sales growth in Q1 2023 , above its guidance for +18.5% to +20.5% same-store sales growth for the quarter.

Potbelly's margins were also stronger than expected, helped by the high level of store productivity. Potbelly's shop-level margins ended up at +12% for Q1 2023, above its guidance for 10% to 11.5% shop-level margins.

The combination of better than expected sales and higher than expected margins contributed to Potbelly generating $5.6 million in adjusted EBITDA in Q1 2023, above its $4 million to $5 million guidance range.

Momentum Continues In Q2 2023

Potbelly continued to deliver strong sales results in Q2 2023. It mentioned that preliminary same-store sales results for Q2 2023 that were up +14.4% for the period up to May 28, 2023 (covering around 64% of the quarter). Potbelly mentioned that its sales growth has been driven by increases across all store types. Potbelly's average weekly unit volumes went up to $26,160 during Q2 2023 QTD.

It appears likely that Potbelly will be able to exceed its sales guidance for Q2 2023. It previously believed that it could generate +10% to +12% same-store sales growth, but it now seems likely to end up at closer to +14% for the full quarter.

Potbelly hasn't provided more information about its Q2 2023 shop-level margins since its guidance in early May 2023. The guidance for 12.7% to 14.2% shop-level margins in Q2 2023 shows an expectation for continued improvement given that shop-level margins ended up at 12% in Q1 2023.

Full Year Expectations

Potbelly bumped up its full-year expectations for same-store sales growth to a high single-digit to low double-digits range (compared to just high single-digit growth initially). Based on how Potbelly has done over the first five months of the year, around +14% same-store sales growth for the full-year appears to be achievable even if weekly average unit volumes just stay around the $26,000 to $26,500 range. This would result in Potbelly already reaching (and slightly exceeding by a couple percent) its 2024 targets for AUVs.

Potbelly also continues to be on track to hit its guidance for low-teens shop-level margins in 2023.

There are risks from the Supreme Court's decision (expected in late June to early July) on President Biden's student loan forgiveness plan though. If the plan is struck down, it is expected that there would be a significant impact to 2H 2023 restaurant sales. Experts believe that the student loan forgiveness plan is most likely to be struck down by the Supreme Court.

If the student loan forgiveness plan is struck down, Potbelly should still be able to meet its revised full-year guidance of high single-digit to low double-digits same-store sales growth, but it would likely do worse than its current trajectory for +14% or better growth.

I am maintaining my valuation estimate for Potbelly at $8 to $9 per share due to the risks associated with the upcoming Supreme Court decision. If the Supreme Court upholds the student loan forgiveness plan, then I would bump up Potbelly's estimated value to a $9 to $10 range.

Conclusion

Potbelly's business results have continued to impress, with same-store sales growth up +14.4% during the first two months of Q2 2023 despite tougher year-over-years comps than Q1.

Potbelly looks to be currently on track to end 2023 with total sales that are higher than what it was previously aiming to get to by 2024.

However, Potbelly's growth could be noticeably affected if the Supreme Court strikes down the student loan forgiveness plan. Such a scenario would have a negative impact on discretionary spending for many younger people, and would likely reduce Potbelly's 2H 2023 same-store sales growth.

I'd still expect Potbelly to make its full-year guidance with a negative Supreme Court decision, but in that scenario it is doubtful that it would end up with the +14% or better growth for 2023 that it is currently tracking towards.

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