Summary
- Potbelly stock has surged close to 40% in 2023.
- Our investment in PBPB was originally a post-Covid recovery special situation.
- Our expectations are for high single-digit/low double-digit revenue growth for the next few years.
- The key to our thesis is we believe PBPB may add $10 to $50 more per share to the value of the company in addition to its ongoing business valuation.
The following segment was excerpted from this fund letter .
Potbelly ( PBPB )
Potbelly was flat in 2022 staying around the $5.60 price for most of the year, however, as the company pre-announced its 4 th quarter 2022 results ahead of guidance in early January, the stock has surged close to 40% in 2023.
Our investment in PBPB was originally a post-Covid recovery special situation with a substantial opportunity to change its business model from one of managing 400 specialty sandwich shop locations to one managing 2000+ franchises as the company hired a former Wendy’s COO, Robert Wright, to execute on the strategy.
We are pretty excited to report that our thesis so far is playing out just as we had hoped. For 2022 the company’s same-store sales are expected to come in at 18.5%, ahead of the 16-18% range provided by the company a year ago. Additionally, shop-level margins are expected to be 10.4%, ahead of the 10% forecasted range. The overall 2022 revenues should be above $450mm or 54% higher than year-end 2020 showing a substantial rebound from the uncertain times during the pandemic.
While 20% growth rates will be harder to come by going forward we believe with the franchising strategy discussed in the next paragraph, inflation sticking around for longer than expected and growth in volume should result in high single-digit/low double-digit revenue growth for the next few years, as well as hitting the 16% shop level margins goal, resulting in $50mm in EBITDA by year-end 2024/mid-2025 and using comparable teens multiples can result in a $20+ price target. This does not take into account the substantial optionality on the success of the re-franchising strategy.
The company currently has 429 locations including 45 franchises or about 10%. The near-term goal is for the current base to be at 25% franchised meaning there are approximately 60 currently owned locations that can be sold to franchisees at what we believe can be $500k to $1.5mm per location resulting $30mm to $90mm in cash inflow to this $215mm market cap company. Additionally, the company has a goal to grow to 2,000 shops, growing franchised locations at about 10% per year. To that end, the company has signed Shop Development Area Agreements for 51 future locations (which may take up to 7 years to open) in 2022.
We believe this pillar of the company’s strategy to be the most important one, and the key to our thesis as we believe it may add $10 to $50 more per share to the value of the company in addition to its ongoing business valuation. So far the strategy continues to be on track and we’re excited to be along for the ride.
Legal DisclosureThe Partnership’s performance is based on operations during a period of general market growth and extraordinary market volatility during part of the period, and is not necessarily indicative of results the Partnership may achieve in the future. In addition, the results are based on the periods as a whole, but results for individual months or quarters within each period have been more favorable or less favorable than the average, as the case may be. The foregoing data have been prepared by the General Partner and have not been compiled, reviewed or audited by an independent accountant and non-year end results are subject to adjustment. The results portrayed are for an investor since inception in the Partnership and the results reflect the reinvestment of dividends and other earnings and the deduction of costs, the management fees charged to the Partnership and a pro forma reduction of the General Partner’s special profit allocation, if applicable. The General Partner believes that the comparison of Partnership performance to any single market index is inappropriate. The Partnership’s portfolio may contain options and other derivative securities, fixed income investments, may include short sales of securities and margin trading and is not as diversified as the indices, shown. The Standard & Poor's 500 Index contains 500 industrial, transportation, utility and financial companies and is generally representative of the large capitalization US stock market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index and is generally representative of the small capitalization U.S. stock market. The Russell Microcap Index is comprised of the smallest 1,000 securities in the Russell 2000 Index plus the next 1,000 securities (traded on national exchanges). The Russell Microcap is generally representative of the microcap segment of the U.S. stock market. All of the indices are unmanaged, market weighted and reflect the reinvestment of dividends. Due to the differences among the Partnership’s portfolio and the performance of the equity market indices shown above, however, the General Partner cautions potential investors that no such index is directly comparable to the investment strategy of the Partnership. While the General Partner believes that to date the Partnership has been managed with an investment philosophy and methodology similar to that described in the Partnership’s Offering Circular and to that which will be used to manage the Partnership in the future, future investments will be made under different economic conditions and in different securities. Further, the performance discussed herein does not reflect the General Partner’s performance in all different economic cycles. It should not be assumed that investors will experience returns in the future, if any, comparable to those discussed above. The information given above is historic and should not be taken as any indication of future performance. It should not be assumed that recommendations made in the future will be profitable, or will equal, the performance of the securities discussed in this material. Upon request, the General Partner will provide to you a list of all the recommendations made by it within the past year. This document is not intended as and does not constitute an offer to sell any securities to any person or a solicitation of any person of any offer to purchase any securities. Such an offer or solicitation can only be made by the confidential Offering Circular of the Partnership. This information omits most of the information material to a decision whether to invest in the Partnership. No person should rely on any information in this document, but should rely exclusively on the Offering Circular in considering whether to invest in the Partnership. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Artko Capital - Potbelly: Thesis Playing Out Just As Hoped