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  • 8/11/2019 Piper Jaffray on Potbelly

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    C O M PA N Y N O T EA u g u s t 1 4 , 2 0 1 4

    Potbelly Corporation (PBPB) OverweightRebalancing Act: Tweaking Earnings and Price Target

    PRICE: US$12.32

    TARGET: US$13.00 51x FY15E EPS (=~10x ev/EBTIDA)

    Nicole Miller ReganSr Research Analyst, Piper Jaffray & Co.612 303-6637, [email protected] C. Long, CFAResearch Analyst, Piper Jaffray & Co.612 303-6928, [email protected]

    Changes Previous CurrentRating OverweightPrice Tgt US$14.00 US$13.00FY14E Rev (mil) US$323.8FY15E Rev (mil) US$357.6 US$350.4

    FY14E EPS US$0.19 US$0.18FY15E EPS US$0.26 US$0.25

    52-Week High / Low US$33.90 / US$10.91Shares Out (mil) 30.5Market Cap. (mil) US$375.8Avg Daily Vol (000) 670Book Value/Share US$5.24Net Cash Per Share US$2.32Debt to Total Capital 0%Div (ann) NAFiscal Year End Dec

    Price Performance - 1 Year

    Oc t- 13 D ec -1 3 Fe b- 14 A pr -1 4 J un -1 4 A ug -14

    35

    30

    25

    20

    15

    10

    USD

    Source: Bloomberg

    CONCLUSION

    While we thematically believe the broader restaurant space remains relevant andinvestable du ring the remainder of this favorable cycle, we ho ld no expectation thatall operators and therefore stocks within the industry should benefit equally. Specificto PBPB shares, we are adjusting our model to reflect more muted expectations,specifically as it relates to same-store sales. We are also lowering our price target to$13 vs. $14 prior, while maintaining our OW rating. Our target is based on 51x (vs.55x prior) our FY15E earnings estimate, which equates to ~10x EV/EBITDA. Thesemultiples better reflect associated risks with current top line trends, the scarcity value of growth restaurant concepts, and more specifically Potbelly's long-term pipeline of newrestaurant development which we believe remains intact.

    Rebalancing Act. While we continue to view the restaurant industry as investable weare revisiting our ratings on a number of covered companies today in an effort tore-align and rebalance expectations across our coverage universe. Specific to PBPBshares, we are adjusting our model to reflect more muted expectations, specificallyas it relates to same-store sales. We are also lowering our price target to $13 vs. $14prior, while maintaining our OW rating. Our target is based on 51x (vs. 55x prior) ourFY15E earnings estimate; this multiple equates to ~10x EV/EBITDA. We believe thesemultiples better reflect risks associated with current top line trends, the scarcity valueof growth restaurant concepts, and more specifically Potbelly's long-term pipeline of new restaurant development which we believe remains intact.

    Modest Earnings Adjustments. We have adjusted our top line drivers in an effort tofind a more realistic base earnings projection. Our FY14 earnings estimate now sitsat $0.18 (the low end of the guided range) vs. $0.19 prior. We are lowering our FY15EPS estimate to $0.25 vs. $0.26 prior reflecting more muted top line assumptions of flat comps now compared to +1.0% prior. While we continue to believe the company'slong-term unit growth story remains intact, our updated estimates reflect our concernregarding short-term, top-line drivers.

    Restaurant Industry Remains Investable. While we thematically believe the broaderrestaurant space remains relevant and investable during the remainder of this favorablecycle, we hold no expectation that all operators and therefore stocks within theindustry should benefit equally. Specific to PBPB shares, self-funded unit growth of +10% solidifies Potbelly's reputation as a growth restaurant company and despitemuted top-line projections, our model still predicts 20%+ earnings growth.

    RISKS TO ACHIEVEMENT OF PRI CE TARGETRisks include regional and supplier concentration as well as its "growth" valuation.

    COMPANY DESCRIPTIONPotbelly owns/operates/franchises its namesake neighborhood sandwich shop concept.

    YEAR

    2013A

    2014E2015E

    REVENUE (US$ m)Mar Jun Sep Dec FY FY RM

    68.7 78.2 78.0 74.8 299.7 1.3x

    73.9A 83.6A 84.1 82.1 323.8 1.2x

    80.2 89.6 90.5 90.2 350.4 1.1x

    EARNINGS PER SHARE (US$)Mar Jun Sep Dec FY FY P/E

    0.00 0.14 0.15 0.06 0.34 36.2x

    0.01A 0.07A 0.05 0.06 0.18 68.4x

    0.04 0.08 0.06 0.07 0.25 49.3x

    Page 1 of 4Potbelly Corporation

    Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as

    only a single factor in making their investment decisions. This report should be read in conjunction with important disclosureinformation, including an attestation under Regulatio n Analyst certification, found on pages 3 - 4 of this report or at the followingsite: http://www.piperjaffray.com/researchdisclosures .

    http://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosuresmailto:[email protected]:[email protected]
  • 8/11/2019 Piper Jaffray on Potbelly

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    otbelly Corporationarn ngs o e c ua s ma e s ma e sca ear n e ecem er scal Year Ended December 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2012 2013 2014E 2015Eevised 08/14/14 ( millions) 03/29/13 06/28/13 09/28/13 12/29/13 03/30/14 06/29/14 09/28/14 12/29/14 03/29/15 06/28/15 09/28/15 12/29/15 53-wks 52-wks 52-wks 52-wksystem-Wide Same-Store Sales (0.3%) +3.0% +2.5% +0.7% (2.2%) (1.6%) (1.0%) +1.0% +0.0% +0.0% +0.0% +0.0% +3.5% +1.5% (1.0%) +0.

    INCOME STATEMENTompany Revenues 68.5$ 77.9$ 77.7$ 74.4$ 73.5$ 83.3$ 83.7$ 81.6$ 79.7$ 89.2$ 89.9$ 89.5$ 274.1$ 298.6$ 322.1$ 34$anchise Royalties and Fees 0.2 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.4 0.4 0.6 0.6 0.8 1.1 1.6

    Total Revenues 68.7$ 78.2$ 78.0$ 74.8$ 73.9$ 83.6$ 84.1$ 82.1$ 80.2$ 89.6$ 90.5$ 90.2$ 274.9 299.7 323.8$ 35$ost of Sales 20.0 22.8 23.0 21.6 21.1 23.9 24.7 23.7 22.7 25.9 26.6 26.0 79.8 87.4 93.5 1 abor 19.8 21.2 21.2 21.4 21.5 23.4 23.9 23.7 23.2 25.0 25.7 25.6 77.5 83.6 92.4 ccupancy 8.7 8.8 9.3 9.6 10.0 10.2 10.9 10.2 10.6 11.1 11.3 11.2 32.0 36.4 41.2 her Operating Expenses 7.2 7.9 7.9 7.7 8.2 8.7 9.2 9.0 8.8 9.4 9.5 9.4 28.1 30.8 35.0 Restaurant Profit 12.8 17.3 16.3 14.1 12.8 17.1 15.1 15.0 14.4 17.8 16.9 17.4 56.6 60.4 60.0

    eneral & Administrative 8.1 7.7 7.4 6.5 7.8 8.9 8.0 8.0 8.0 9.0 9.1 9.1 29.6 29.6 32.6 epreciation & Amortization 4.4 4.4 4.5 4.6 4.7 4.8 4.4 4.4 4.4 4.9 5.0 5.0 16.2 17.9 18.3 e-Opening Costs 0.3 0.4 0.4 0.4 0.3 0.3 0.5 0.2 0.3 0.4 0.4 0.4 2.1 1.4 1.2

    mpairment and Disposal 0.0 0.1 0.3 0.0 0.0 0.0 - - - - - - 0.1 0.3 0.0 Operating Income 0.2 4.9 4.1 3.1 0.4 3.5 2.6 3.0 2.1 4.0 3.1 3.6 9.5 12.3 9.4

    terest Expense\(Income), net 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.4 0.1 her Expense\(Income), net - - - - - - - - - - - - 0.0 - - Pre-Tax Income 0.1 4.8 4.0 3.0 0.3 3.4 2.5 3.0 2.1 4.0 3.1 3.6 8.9 11.9 9.3

    come Taxes 0.1 1.9 0.8 1.2 0.1 1.4 1.0 1.2 0.8 1.6 1.2 1.4 1.0 3.9 3.7 Operating Net Income 0.1 2.8 3.2 1.9 0.2 2.0 1.5 1.8 1.2 2.4 1.9 2.2 8.0 8.0 5.6

    on-Operating Items 0.1 0.1 1.1 5.7 0.5 0.0 - - - - - - (16.0) 6.9 0.5 Reported Net Income 0.0 2.8 2.2 (3.8) (0.3) 2.0 1.5 1.8 1.2 2.4 1.9 2.2 24.0 1.1 5.1

    hares Outstanding--Diluted 21.1 21.1 21.1 30.6 29.2 30.5 30.8 31.1 31.1 31.1 31.1 31.1 20.7 23.5 30.4 31

    BITDA 4.6 9.3 8.5 7.7 5.1 8.2 6.9 7.4 6.5 8.9 8.1 8.6 25.7 30.2 27.7 PS--Operating 0.00$ 0.14$ 0.15$ 0.06$ 0.01$ 0.07$ 0.05$ 0.06$ 0.04$ 0.08$ 0.06$ 0.07$ 0.38$ 0.34$ 0.18$ $PS--Extraordinary 0.00$ 0.00$ 0.05$ 0.19$ 0.02$ 0.00$ -$ -$ -$ -$ -$ -$ (0.77)$ 0.29$ 0.02$ $PS--Reported 0.00$ 0.13$ 0.10$ (0.13)$ (0.01)$ 0.07$ 0.05$ 0.06$ 0.04$ 0.08$ 0.06$ 0.07$ 1.16$ 0.05$ 0.17$ $

    MARGIN ANALYSISompany Revenues 99.7% 99.7% 99.6% 99.5% 99.5% 99.6% 99.5% 99.3% 99.4% 99.5% 99.3% 99.3% 99.7% 99.6% 99.5% 99.4%anchise Royalties and Fees 0.3% 0.3% 0.4% 0.5% 0.5% 0.4% 0.5% 0.7% 0.6% 0.5% 0.7% 0.7% 0.3% 0.4% 0.5% 0.6%

    Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%ost of Sales 29.2% 29.2% 29.6% 29.1% 28.7% 28.7% 29.5% 29.1% 28.5% 29.0% 29.5% 29.0% 29.1% 29.3% 29.0% 29.0abor 28.9% 27.2% 27.3% 28.7% 29.2% 28.1% 28.5% 29.0% 29.0% 28.0% 28.5% 28.5% 28.3% 28.0% 28.7% 28.5ccupancy 12.7% 11.3% 12.0% 12.9% 13.6% 12.2% 13.0% 12.5% 13.3% 12.5% 12.5% 12.5% 11.7% 12.2% 12.8% 12.7ther Operating Expenses 10.5% 10.1% 10.2% 10.4% 11.1% 10.4% 11.0% 11.0% 11.0% 10.5% 10.5% 10.5% 10.3% 10.3% 10.9% 10.6

    Restaurant Profit 18.7% 22.1% 20.9% 19.0% 17.5% 20.5% 18.0% 18.4% 18.1% 20.0% 18.8% 19.4% 20.7% 20.2% 18.6% 19.1%eneral & Administrative 11.8% 9.8% 9.5% 8.6% 10.6% 10.6% 9.5% 9.7% 10.0% 10.0% 10.0% 10.0% 10.8% 9.9% 10.1% 10.0epreciation & Amortization 6.4% 5.7% 5.7% 6.1% 6.4% 5.7% 5.2% 5.4% 5.5% 5.5% 5.5% 5.5% 5.9% 6.0% 5.7% 5.e-Opening Costs 0.4% 0.5% 0.5% 0.5% 0.3% 0.3% 0.7% 0.2% 0.4% 0.4% 0.4% 0.4% 0.7% 0.5% 0.4% 0.

    mpairment and Disposal 0.0% 0.1% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.0% 0.

    Operating Income 0.3% 6.3% 5.2% 4.1% 0.5% 4.1% 3.0% 3.6% 2.6% 4.4% 3.4% 4.0% 3.4% 4.1% 2.9% 3.6%terest Income (Expense), net 0.2% 0.2% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.2% 0.1% 0.0% 0.ther Income (Expense), net 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.

    Pre-Tax Income 0.2% 6.1% 5.1% 4.0% 0.5% 4.1% 3.0% 3.6% 2.6% 4.4% 3.4% 4.0% 3.3% 4.0% 2.9% 3.6%come Taxes 43.9% 40.3% 19.1% 38.6% 39.4% 40.6% 39.0% 39.0% 39.5% 39.5% 39.5% 39.5% 10.7% 32.8% 39.6% 39.5

    Operating Net Income 0.1% 3.6% 4.1% 2.5% 0.3% 2.4% 1.8% 2.2% 1.6% 2.7% 2.1% 2.4% 2.9% 2.7% 1.7% 2.2%BITDA 6.7% 11.9% 11.0% 10.3% 6.9% 9.9% 8.2% 9.0% 8.1% 9.9% 8.9% 9.5% 9.3% 10.1% 8.6% 9.1%

    YEAR-OVER-YEAR % C HANGEompany Revenues 10.2% 13.0% 11.6% 1.6% 7.3% 6.9% 7.7% 9.7% 8.4% 7.1% 7.4% 9.7% 15.4% 8.9% 7.9% 8.1%anchise Royalties and Fees 20.8% 49.0% 30.4% 37.8% 76.0% 35.6% 45.4% 33.3% 25.7% 22.7% 48.9% 15.5% 67.9% 34.9% 44.4% 27.3%

    Total Revenues 10.2% 13.1% 11.7% 1.7% 7.5% 7.0% 7.8% 9.9% 8.5% 7.1% 7.6% 9.8% 15.5% 9.0% 8.0% 8.2%et Income (94.3%) 65.1% 26.5% (24.3%) 194.7% (28.8%) (52.0%) (2.3%) 489.1% 18.2% 20.6% 19.7% 11.4% 0.3% (30.1%) 37.2%PS (94.4%) 62.2% 24.1% (48.5%) 113.3% (50.8%) (67.1%) (4.1%) 451.8% 15.9% 19.4% 19.7% 10.8% (11.4%) (46.0%) 34.0%BITDA (14.9%) 54.6% 23.9% 4.5% 10.6% (11.8%) (18.9%) (3.2%) 27.1% 8.2% 16.6% 15.4% 11.6% 17.4% (8.2%) 15.7%ompany-Owned Shops 12.1% 12.9% 12.1% 12.1% 13.4% 11.4% 10.1% 10.8% 9.2% 8.3% 11.4% 12.2% 12.8% 12.1% 10.8% 12.2%anchise Shops 50.0% 50.0% 46.2% 53.3% 66.7% 44.4% 42.1% 34.8% 28.0% 26.9% 33.3% 25.8% 87.5% 53.3% 34.8% 25.8%

    Total Shops 13.6% 14.6% 13.7% 14.3% 16.2% 13.4% 12.1% 12.5% 10.6% 9.8% 13.1% 13.4% 15.3% 14.3% 12.5% 13.4%UNIT DATA

    ompany-Owned Shops 269 280 288 296 305 312 317 328 333 338 353 368 264 296 328 anchise Shops 15 18 19 23 25 26 27 31 32 33 36 39 15 23 31

    Total Shops 284 298 307 319 330 338 344 359 365 371 389 407 279 319 359 ource: Company reports and Piper Jaffray & Co. estimates. Nicole Miller Regan, 612-303-6637urrent disclosure information for this company is located at: http://www.piperjaffray.com/researchdisclosures

    Page 2 of Potbelly Corporation

    http://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosureshttp://www.piperjaffray.com/researchdisclosures
  • 8/11/2019 Piper Jaffray on Potbelly

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    C O M PA N Y N O T EA u g u s t 1 4 , 2 0 1 4

    IMPORTANT RESEARCH DISCLOSURES

    Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Eachbox represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note

    written during the past three years.

    Legend:I: Initiating CoverageR: Resuming CoverageT: Transferring CoverageD: Discontinuing CoverageS: Suspending CoverageOW: OverweightN: NeutralUW: UnderweightNA: Not AvailableUR: Under Review

    Distribution of Ratings/IB ServicesPiper Jaffray

    IB Serv./Past 12 Mos.

    Rating Count Percent Count Percent

    BUY [OW] 362 61.56 94 25.97

    HOLD [N] 215 36.56 22 10.23

    SELL [UW] 11 1.87 0 0.00

    Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliatesreceived compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closelycorrespond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead representrecommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. SeeStock Rating definitions below.

    Analyst Certification Nicole Miller Regan, Sr Research AnalystAnalyst Certification Joshua C. Long, CFA, Research AnalystThe views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

    Page 3 of 4Potbelly Corporation

  • 8/11/2019 Piper Jaffray on Potbelly

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    C O M PA N Y N O T EA u g u s t 1 4 , 2 0 1 4

    Research DisclosuresPiper Jaffray was making a market in the securities of Potbelly Corporation at the time this research report was published. Piper Jaffray will buy andsell Potbelly Corporation securities on a principal basis.

    Piper Jaffray has received compensation for investment banking services from or has had a client relationship with Potbelly Corporation within thepast 12 months.

    Within the past 12 months Piper Jaffray was a managing underwriter of a public offering of, or dealer manager of a tender offer for, the securities

    of Potbelly Corporation or the securities of an affiliate.Within the past 3 years Piper Jaffray participated in a public offering of, or acted as a dealer manager for, Potbelly Corporation securities.

    Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues.

    Rating DefinitionsStock Ratings: Piper Jaffray ratings are indicators of expected total return (price appreciation plus dividend) within the next 12 months. At timesanalysts may specify a different investment horizon or may include additional investment time horizons for specific stocks. Stock performanceis measured relative to the group of stocks covered by each analyst. Lists of the stocks covered by each are available at www.piperjaffray.com/researchdisclosures. Stock ratings and/or stock coverage may be suspended from time to time in the event that there is no active analyst opinionor analyst coverage, but the opinion or coverage is expected to resume. Research reports and ratings should not be relied upon as individualinvestment advice. As always, an investors decision to buy or sell a security must depend on individual circumstances, including existing holdings,time horizons and risk tolerance. Piper Jaffray sales and trading personnel may provide written or oral commentary, trade ideas, or otherinformation about a particular stock to clients or internal trading desks reflecting different opinions than those expressed by the researchanalyst. In addition, Piper Jaffray technical research products are based on different methodologies and may contradict the opinions containedin fundamental research reports. Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst. Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst. Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst.

    Other Important InformationThe material regarding the subject company is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy anddoes not purport to be complete. This report is solely for informational purposes and is not intended to be used as the primary basis of investmentdecisions. Piper Jaffray has not assessed the suitability of the subject company for any person. Because of individual client requirements, it is not, andit should not be construed as, advice designed to meet the particular investment needs of any investor. This report is not an offer or the solicitationof an offer to sell or buy any security. Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of the

    end of the prior business day. Piper Jaffray does not maintain a predetermined schedule for publication of research and will not necessarily updatethis report. Piper Jaffray policy generally prohibits research analysts from sending draft research reports to subject companies; however, it should bepresumed that the analyst(s) who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication,and has had assistance from the company in conducting diligence, including visits to company sites and meetings with company management andother representatives.

    Notice to customers: This material is not directed to, or intended for distribution to or use by, any person or entity if Piper Jaffray is prohibited orrestricted by any legislation or regulation in any jurisdiction from making it available to such person or entity. Customers in any of the jurisdictionswhere Piper Jaffray and its affiliates do business who wish to effect a transaction in the securities discussed in this report should contact their localPiper Jaffray representative. Europe: This material is for the use of intended recipients only and only for distribution to professional and institutionalinvestors, i.e. persons who are authorised persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the United Kingdom, or persons who have been categorised by Piper Jaffray Ltd. as professional clients under the rules of the Financial ConductAuthority. United States: This report is distributed in the United States by Piper Jaffray & Co., member SIPC, FINRA and NYSE, Inc., which acceptsresponsibility for its contents. The securities described in this report may not have been registered under the U.S. Securities Act of 1933 and, in suchcase, may not be offered or sold in the United States or to U.S. persons unless they have been so registered, or an exemption from the registrationrequirements is available.

    This report is produced for the use of Piper Jaffray customers and may not be reproduced, re-distributed or passed to any other person or publishedin whole or in part for any purpose without the prior consent of Piper Jaffray & Co. Additional information is available upon request.

    Copyright 2014 Piper Jaffray. All rights reserved.

    Page 4 of 4Potbelly Corporation