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Potbelly Corp reported a 28percent decline in net income due to labor costs although samestore sales and revenue both rose during the third quarter ended Sept 27 Andrew Burton/Getty Images

Potbelly puts business under microscope

Review aimed at all aspects of company, interim CEO says

Potbelly Corp. has hired J.P. Morgan Securities LLC as a financial adviser as it looks at all aspects of the sandwich chain’s business and works to improve negative traffic trends, the company said Friday. 

“While we expect 2017 to be a tough year due to the macro operating environment, we're very focused on strategies to mitigate the headwinds and improve traffic trends,” said Michael Coyne, the Potbelly chief financial officer who serves as interim CEO with the departure of Aylwin Lewis, in a second-quarter earnings call.  

J.P. Morgan will look at strategic business alternatives as the company analyzes its capital structure, operations, marketing, company-unit growth, capital expenditures and ways to increase franchising, Coyne said. 

Activist investor Ancora Advisors LLC has been urging slower unit development, smaller kiosk locations and the refranchising of restaurants.

Chicago-based Potbelly has experienced negative traffic trends since the end of the first quarter, Coyne said.

Second-quarter same-store sales declined 4.9 percent, the company said.

For the second quarter ended June 25, Potbelly swung to a loss of $138,000, or one cent a share, compared to a profit of $3.4 million in the same period last year. Revenues increase 3 percent, to $108.1 million from $105 million in the prior-year quarter.

Coyne said the company expects little change in the challenging restaurant sales environment for the remainder of 2017 and is lowering its sales forecast.

“Therefore, we have revised our comparable store sales guidance from a decline in the low-single digits to a decline in the mid-single digit range in 2017,” he told analysts.

Coyne said Potbelly is focused on increasing convenience and customer engagement with investments in technology, such as online ordering and the Potbelly Perks memberships, which is part of the brand’s smartphone app.

More catering

The brand is also looking to drive sales through catering, which requires less capital investment and makes up about 15 percent of sales, Coyne said.

“Our catering kitchens focus only on catering orders,” he said. “There is no frontline operation, which allows for both great execution and efficient deployment of labor. We currently have catering kitchens in Chicago and New York. We plan to add two more catering kitchens this year, and we'll continue to be opportunistic with investments in additional catering kitchens over time.”

As part of the company’s review, it is also looking at increasing franchising. Currently about 10 percent of the Potbelly system is franchised.

“We are looking at getting ourselves a lot smarter about the ways in which we can do that, the resources that we would need to be doing it and the role, if any, that refranchising would play,” Coyne said. “So that is certainly on the table for evaluation and exploration.”

As of June 25, Potbelly had 478 restaurants, with 54 of them franchised.

Contact Ron Ruggless at [email protected]

Follow him on Twitter: @RonRuggless

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