Warm stove, cold stock at Potbelly
By Kate MacArthur
Potbelly Sandwich Works LLC is prepping to go public, but the throwback chain known for its namesake stove and toasted sandwiches could turn out to be the next Cosi instead of the next Chipotle if it doesn’t get its act together first.
The 35-year-old company founded in Chicago’s Lincoln Park and acquired by Chairman Bryant Keil in 1996 has achieved some proof points of its IPO readiness, including more than $200 million in annual revenue and a management team led by CEO Aylwin Lewis, a veteran retail operator. Yet it falls short on other fundamental benchmarks that would attract public investors and sustain expansion over time, industry watchers say.
Potbelly lags, too, when stacked up against other submarine sandwich sellers. Subway Restaurants, a unit of Doctor’s Associates Inc., now tops McDonald’s Corp. with the most locations in the world and is adding 165 outlets globally every month, on average. Champaign-based Jimmy John’s Franchise LLC is up to 1,329 sites in more than 40 states. Potbelly, meantime, has shrunk to 210 units from a peak of 223 in 2009, according to food industry tracker Technomic Inc.
Darren Tristano, an executive vice president at Chicago-based Technomic, draws comparisons between Cosi Inc. and Chipotle Mexican Grill Inc. When Deerfield-based Cosi went public in 2002, it was seen as a potential rival to Panera Bread Co. and Au Bon Pain Corp. in the higher-priced sandwich and salad segment. Since then, it has had only one profitable quarter and Nasdaq has twice threatened to delist its stock, which closed at $1.02 on March 9.
Denver-based Chipotle, at the other extreme, had set record sales and earnings year after year; its stock has rocketed eighteenfold since it went public six years ago.
Mr. Tristano sees more Cosi in Potbelly than Chipotle. “If you’re in the lead in a Nascar race, you don’t apply the brakes,” he says. “If growth isn’t happening, you have to question why.”
Messrs. Keil and Lewis, a former CEO of Sears Holdings Corp., decline to comment.
Potbelly, which began to franchise two years ago, made a boffo debut in June in New York, where it has five restaurants. The chain operates in 13 states and Washington, though more than a third of its locations are in Illinois. It recently has expanded its menu with a couple of chicken sandwiches and salads. Somewhat tardily, it also added a skinny sandwich version for calorie counters and a big version for the budget-minded. To get more from its real estate, the chain is offering breakfast at some sites. Live musicians still croon to noontime crowds.
Based on Technomic estimates, the average Potbelly generates $1.2 million in annual revenue. While that falls far short of the $2 million-plus-per-unit average at St. Louis-based Panera Bread and Chipotle, it’s twice the figure of Subway and Jimmy John’s.
But Potbelly’s startup costs are much higher than its sub sandwich rivals because its restaurants typically are larger and better furnished—they boast heavy wooden furniture and faux-antique décor versus Formica booths and fake brick wallpaper. Franchisee investments run as much as $767,700, excluding rent or mortgage payments, according to the Potbelly website. Milford, Conn.-based Subway says it charges franchisees $78,600 and up, plus royalties.
Potbelly also costs more to run. Because all its sandwiches are custom-made and toasted, each restaurant requires 16 to 20 workers during peak hours. Jimmy John’s gets by with as few as four or six, analysts say.
“They haven’t attracted franchisee investment and they haven’t put their own capital into new stores,” Mr. Tristano says. “They may be missing the boat.”
The bottom line is that Potbelly’s bottom line might be too thin for investors if the company goes ahead with an IPO by the end of next year, as it now plans, according to insiders.