Activist berates Potbelly on the performance of his actions


180 Degree Capital said on Monday that it is now the largest shareholder in Chicago-based Potbelly Sandwich Shop chain and marked the occasion by roasting the company’s long-term market performance.

“180 understands that the world is in a time of a pandemic and that the food court, in particular, has been severely affected during that time,” the company said, according to a federal securities file. “That said, [Potbelly’s] the poor performance of stocks on a relative basis compared to its competitors has been appalling.

180 then lists a selection of mostly smaller companies which indeed seem rather unfavorable on a one, two and three year basis, as well as the current year and current quarter to date.

As we wrote earlier this month, the company is working to avoid a restructuring by trying to convince the owners of a quarter of its corporate stores to buy back their leases – an unusual tactic in a normal environment, although it is anything but normal.

It should also be noted that the company has a “going concern” warning.

In this regard, he could be forgiven for his recent performances. The prospect of filing for bankruptcy tends to dampen investor enthusiasm for a stock, despite the odd situation at car rental company Hertz. And the pandemic has put the company in an obvious emergency position.

Still, it’s also hard to disagree with the overall 180 degree rating. Potbelly’s stock performance has been among the worst in the industry in recent years, pandemic or no pandemic.

Potbelly went public in 2014 and in doing so ushered in a short but remarkable era in the history of the industry in which investors poured money into anything that could be described as “quickly laid back”. .

The company’s stock price more than doubled on the first trading day, hitting nearly $ 28 a share at one point. This was an odd increase, considering Potbelly’s sales at the time weren’t particularly noticeable, and it operated in a tough market filled with big chains (Subway, Jimmy John’s) and fast-growing concepts ( Jersey Mike’s, Firehouse) which were all much bigger.

Indeed, almost immediately, the price per share of the company fell back to earth. It spent the next three years hovering between $ 10 and $ 15 per share, but since August 2018, its trajectory has been largely downward. The company has lost 83% of its valuation since.

Much of this coincided with low sales. Same-store sales declined for 11 straight quarters before the chain hit a slightly positive figure in the last three months of 2019.

The business has never been so profitable. Low sales made it even less.

Potbelly’s EBITDA margin (earnings before interest, taxes, depreciation and amortization) was just under 9% in 2016, according to data from financial services site Sentieo. Last year it was just over 3%. It was before the pandemic.

In 2017, the company explored a sale, only to find the market unresponsive. Instead, he opted for management changes and an effort to right the ship.

Potbelly might have done better to take the price he could have gotten at the time. And now the pandemic is casting doubt on the company’s future.

In its letter, 180 said that the performance of Potbelly’s shares “is unacceptable and clearly indicates that new approaches are needed”.

The investor supports the recent appointment of Joe Boehm as an interim independent lead director and also supported the recent appointment by the company of Steve Cirulis, its CFO and strategic director.

The additions “should eliminate any future need for outside consultants to tell the company how to run its affairs”, however, “180 encourages the board of directors to take all necessary steps to improve value for all shareholders.”

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