Restaurant name Potbelly Corp. (PBPB) has had a very interesting month.
In late April, the 473-location chain that has been in the red the past three fiscal years amid falling revenue gave back the $10 million Paycheck Protection Program (PPP) "loan" it received earlier in the month. It is unclear exactly why the struggling chain returned the funds, but a Potbelly press release stated: "We are returning the PPP loan after further clarification from the Treasury Department. We will continue to seek alternatives to help support our employees and enable them to return to work so they can serve our loyal customers."
Then, on Monday, Potbelly settled a face-off with activist investors, led by the Vann Avedisian Trust and including Intrinsic Investment Holdings and others, by adding two members to Potbelly's board of directors. In exchange, the activists will vote for Potbelly's board nominees at the annual meeting and will be reimbursed for expenses involved in the fight.
This was a fairly standard settlement with activists, but upon further examination came with a huge twist. Potbelly intends to reimburse the activists with 130,000 shares of stock and not cash. That may be a first and is evidence of the cash crunch Potbelly is facing.
On Tuesday, Potbelly announced first-quarter results that were worse than expected. A loss of 32 cents a share missed the 23-cent loss consensus, while revenue of $87.6 million was below the expected $89.6 million. Interestingly, Potbelly had been seeing some green shoots for much of the quarter as same-store sales rose 2.5% in January and 4.1% in February. The shutdown late in the quarter had a dramatic effect, and same-store sales ended the quarter down 10.1%.
One of the things Potbelly had going for it from a balance sheet perspective pre-pandemic is that it had no debt, exclusive of operating leases. However, Potbelly recently drew down its entire $40 million credit facility, so that is no longer true. In addition to cost-cutting measures, Potbelly announced that it is in negotiations with landlords to close up to 100 stores.
There were several restaurant chains in distress prior to the pandemic, including Potbelly. The economic shutdown ultimately may hasten some into bankruptcy.
The past two years Potbelly shares have fallen nearly 80%; in March, they hit the $1.50 level intraday, an all-time low, and have recovered a bit since, closing at $2.95 on Tuesday. But if Tuesday's post-market trading is an indication -- the shares were down 12% -- it could be a rough day for the stock.
As a consumer, I've been a big fan of the chain's sandwiches, but as an investor, it appears as though turnaround from here will be increasingly difficult.