A major Potbelly investor is urging the company to create more value for shareholders, including a possible sale.

Top 20 shareholder Immersion Investments said the market is undervaluing the brand’s stock, despite a major growth story and “readily obvious improvements” happening in recent years.

The firm said there’s “significant interest” from private equity to buy the sandwich chain. The investor added that a transaction would help Potbelly refranchise, a strategy that typically creates too much noise in publicly reported financial results and is hard to properly communicate to investors, leading to an underwhelming stock price.

Another option is aggressive share buybacks. Immersion Investments criticized the slow pace of share repurchases despite clear undervaluation. The investor said accelerating buybacks would increase shareholder value, improve stock liquidity, and help with market volatility. The third choice is cost control. The firm said Potbelly should slow internal investments, reduce operating expenses, and focus on improving profitability. It also noted, “continuing to spend money without a tangible and expedient ROI is unacceptable.”

Since revamping its franchise program a few years ago, Potbelly has landed 234 restaurant commitments. The chain hopes to reach 2,000 stores in the U.S. in the next decade-plus and become at least an 85 percent franchised system. In Q2, Potbelly expanded shop margins year-over-year for the 13th straight quarter. Shop-level margins were 15.7 percent, an increase of 130 basis points compared to the year-ago period. The digital business mixed 40 percent, which is an increase of 200 basis points year-over-year, thanks entirely to the growth of Potbelly’s first-party channels. The company also earned a $1.2 million AUV in the second quarter.

Considering the 234 committed restaurants, a $1.2 million AUV, and a 6 percent royalty rate, Immersion Investments calculated these stores could bring in about $17 million in high-margin franchise revenue. Given minimal operating expenses and an estimated 90 percent margin on this revenue, the firm said this would add around $15 million to Potbelly’s future EBITDA, or a 60 percent increase from the $28 million estimated for 2024. And this math is assuming no additional franchise commitments or further operational improvements, which is highly unlikely.

“We do not believe this is a ‘let the results speak for themselves’ situation,'” Immersion Investments said in an open letter. “Several years ago, the business was barely profitable, burning cash and had zero visible growth prospects. Today, we are profitable, generating cash, and have a franchise pipeline capable of delivering low-to-mid teens EBITDA growth for the next several years, yet the stock has been range-bound for nearly four years.”

Potbelly ended Q2 with 429 restaurants, 84 franchised and 345 company-owned. So far in 2024, the brand has opened nine stores and expects to reach 30 openings by the end of the year. The fast casual has inked 54 restaurant commitments year-to-date, including a deal that will bring Potbelly to Georgia for the first time.

The chain’s nearly flat comps in Q2 consisted of 4.3 percent pricing, lower traffic, and negative mix shift due in part to a highly popular $7.99 combo. However, the chain’s traffic outperformed the fast-casual segment.


Finance, Franchising, Growth, Sandwiches, Story, Potbelly