Perks Loyalty Program And Menu Expansion May Boost Revenue But Margins Could Shrink

Key Takeaways

• Expansion of digital promotions and loyalty programs aims to drive customer frequency and boost digital sales, potentially increasing overall revenue.
  
• Strategic focus on franchise expansion and menu innovations is expected to enhance brand presence and drive system-wide growth and revenue.
  
• Ongoing challenges in sales and growth, compounded by refranchising effects and external factors, indicate potential revenue pressures and marginal earnings growth for Potbelly.

Catalysts

Through its subsidiaries, owns, operates, and franchises Potbelly sandwich shops in the United States.

• The introduction of digital promotions and the expansion of Potbelly Perks loyalty program are expected to drive increased customer frequency and higher digital channel sales, potentially boosting overall revenue.
  
• The expansion and innovation in Potbelly’s menu, including new protein options and signature sauces, are aimed at attracting a broader customer base and increasing customer frequency, which may positively impact revenue.
  
• The strategic emphasis on franchise-focused development, with a significant increase in franchise shop commitments and openings, is likely to drive system-wide growth and revenue expansion while also enhancing brand presence.
  
• Improvements in shop profit margins through cost control in food, beverage, and packaging as well as disciplined G&A spend management could lead to enhanced net margins.
  
• The continued system-wide rollout of Potbelly Craft Refreshers and other product innovations aim to boost beverage incidence rates and average check size, potentially boosting revenue and earnings.

Potbelly Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Potbelly's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.1% today to 0.8% in 3 years time.
• Analysts expect earnings to reach $4.2 million (and earnings per share of $0.14) by about January 2028, down from $38.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 134.3x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.37%, as per the Simply Wall St company report.

Potbelly Future Earnings Per Share Growth

Risks

• Potbelly's same-store sales were down 1.8% in the third quarter, indicating potential challenges in maintaining customer traffic and revenue growth in a difficult consumer environment.
  
• The refranchising efforts resulted in lower company-operated shop revenue year-over-year, which could negatively affect overall revenue growth in the near term despite franchise revenue increases.
  
• Concerns over ongoing deflation in commodity prices may not always benefit margins long-term, particularly as Potbelly refrains from taking additional pricing action, which may impact future earnings.
  
• The guidance for negative to marginally negative same-store sales in Q4 and 2024 suggests potential revenue pressures could persist, reflecting difficulties in attracting more foot traffic or upselling customers.
  
• Delays in shop openings due to external factors like hurricanes could slow planned unit growth, which may impact future revenue projections and stall anticipated earnings expansion if such disruptions continue.

Valuation

• The analysts have a consensus price target of $15.33 for Potbelly based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $506.5 million, earnings will come to $4.2 million, and it would be trading on a PE ratio of 134.3x, assuming you use a discount rate of 8.4%.
• Given the current share price of $12.65, the analyst's price target of $15.33 is 17.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.