PBPB POTBELLY CORPORATION
Sector financial performance:
This company, who operates (primarily) and franchises sandwiches and salads restaurants, has been grouped into sandwich- quick service restaurants sector in foodservice industry.
It seems that the slowing down traffic was the major reason contributing to slowing down increase in comparable sales of fast-service restaurants between 2015 and 2017. Data indicates that the average increase in comparable sales all across this sector went down from around 5% of 2015 to around 1% of 2017 except the Mexican restaurants, which presents consistent 5-6% increase in comparable sales during this period. (Hamburger-QSR went down from 5% to 1%; chicken-QSR down from 4% to 2%; sandwich-QSR down from 4% to -2%; pizza-QSR down from 4% to 0%). Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015. For example, our data indicates that the average decrease in traffic of hamburger restaurants was 2% and 1% in 2016 and 2017.
Since 2017, it seems that traffic all across this industry has continued to decline but present signals of slowing down. Traffic in Mexican restaurant started to decrease in 2018 following the trend seen frequently in other types of QSR before 2017. Comps turned into negative range and were down largely in Pizza sector in 2018, which, with sandwich companies present the worst decline among QSR sector in the past two years. Comps in chicken related QSR restaurants seem least impacted by generally slowing down in traffic all across industry probably due to relatively stronger demand and thus the ability to raise price. Decreasing Hamburgers’ comps seem to be hitting the bottoms as traffic rebounds and price rises.
It seems that the impacts from decrease in traffic have been offset partially by raising menu price/products mix. This is probably why we are seeing positive growth in their comparable sales from many restaurants while decrease in traffic.
For under-performed companies in this industry, franchising their company-operated restaurants obviously has been a better business strategy in dealing with decreasing sales and cash flow. However, all industry has been suffering from general decline in sales. Data indicates that the average cash flow/share of companies in this sector has been declining since 2017.
Our data indicate that, while slowing down comparable sales, there are general improvements in companies’ gross margins in the past several years benefiting from shifting of revenue to re-franchising, rising menu price, and decreasing commodity costs.
Different types of food styles present different gross margins depending on how easy/difficult they can find franchisees for their restaurant concepts. It seems that chicken-QSR demonstrates the best abilities to franchise their concept and thus present the highest average sector gross margin (average 47%). Hamburger QSR then follows, which presents average 36% gross margin. The typical gross margin for Mexican and pizza QSR is around 17% with a low proportion of franchised revenue. Sandwich sector presents the lowest gross margin of about 13%.
Correspondingly, chicken-QSR presents, according our data, the highest operating margin of average 30% with a SG&A as percentage of sales of 16%. Hamburger-QSR has an average 22% operating margin with a SG&A as percentage of sales of 13%. Mexican and Pizza -QSR has an average 8-9% operating margin with a SG&A as percentage of sales of 8-9%.
It seems that the demand for service/products of this company has been declining since 2014 as indicated by decreasing customers’ traffic. Therefore, while offset by the increasing menu price and favourable product mix, the decreasing traffic dragged down sales. However, after entering the second half of 2017, the decrease in comps seems to be slowing down. Company continued to open and closed stores.
The traffic decreased in 2017 probably as a result of increased price. Companies continued to re-franchise its owned restaurants.
The first 26 weeks Fiscal 2018 compared with same period of 2017(ended 20180630)
Company comparable sales decreased by 1.8% due to decline in traffic offset by increase in price.
The Fiscal 2017 compared with 2016
Company comparable sales decreased by 2.4% due to decline in traffic offset by increase in price.
The first nine months in Fiscal 2017 compared with the same period of 2016
Company comparable sales decreased by 4.3% due to decline in traffic offset by increase in price.
Fiscal 2016 compared with 2015
Company comparable sales increased by about 1.4% due to increase in price and products mix.
Fiscal 2015 compared with 2014
Company comparable sales increased by about 4% due to by increase in price and products mix and as well traffic.
Its gross margin (including company-operating expenses, commodity, wages and rent) was basically flat at around 13% between 2015 and 2017 as a result of both increasing expenses and increasing menu price. Its SG&A as percentage of sales has been up slightly about 10% in 2017 and its operating margin went down slightly to about 3% in 2017. However, while gross margin changed little in 2018, operating margin has been down to about 1% as a result of increasing other expenses. Cash flow declined in the past two years as margin down.
This stock currently has an enterprise price/EBI ratio of 3491. We think that its stock is being relatively overvalued compared with peers and considering its low margin.
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