Potbelly’s adjusted first-quarter EPS of $0.01 met our estimate and beat consensus of $0.00, inclusive of a roughly $0.02 penalty from adverse weather in the quarter. • Comps declined 2.2% against a -0.3% comparison, in line with our and consensus expectations, inclusive of an estimated 375-basis-point weather penalty, as nearly 80% of Potbelly’s locations were in areas affected by weather and roughly 40% of the days in the quarter were penalized by either extreme cold weather or extreme precipitation (with those days averaging a 7.7% comp decline).

The weather penalty lessened from 500 basis points in January and February to about 180 basis points in March, and management estimates underlying comp trends adjusting for weather and the Easter shift (which benefited the quarter by 70 basis points) were in the 1.5% to 2.0% range in February and March. • Given negative comps, restaurant contribution margin declined 120 basis points, to 17.5%, slightly better than our projection of 17.4%, as favorable food costs were offset by deleveraging on every other line item. Still, with leverage on G&A and slightly less in preopening expenses as a percentage of sales, operating margin rose 10 basis points, to 0.5%.

 Potbelly opened nine new company-owned locations in the quarter and two franchised sites, bringing the systemwide restaurant count to 330 locations (up 16%). Full-year development guidance was reiterated for 35 to 40 new company-owned locations (up 12% to 14%) and five to eight new franchised locations, yielding systemwide unit growth of 12.5% to 15.0%, with company-owned development skewed to the second half of the year. Management announced Potbelly will enter Denver this year with 3 to 5 locations, with the first opening this summer, in keeping with plans to open a new hub market every 18 to 24 months. • Management also reiterated all of the rest of its 2014 guidance, which should be a relief to investors, including comps in the low-single-digit range and net income growth of 25% to 35%, implying EPS of $0.33 to $0.35 versus our and the consensus estimates of $0.34. •

The company is introducing Flats—a thin multigrain sandwich with 90 fewer calories than Originals—into legacy markets this quarter (~90% of the restaurant base) at a $0.20 price point premium and better margin profile than Originals, with results in test showing encouraging results regarding customer frequency and driving new customer visits. Additionally, Potbelly recently added “Bigs” to the menu in New York City and Boston, which is expected to be an important sales driver in both developing markets.

May 06, 2014 Stock Rating: Outperform Company Profile: Aggressive Growth Symbol: PBPB (NASDAQ) Price: $16.51 (52-Wk.: $17-$34) Market Value (mil.): $498 Fiscal Year End: December Long-Term EPS Growth Rate: 23% Dividend/Yield: None 2013A 2014E 2015E Estimates EPS Q1 $0.00 A$0.01 NA Q2 $0.14 $0.12 NA Q3 $0.15 $0.13 NA Q4 $0.06 $0.08 NA FY $0.34 $0.34 $0.47 CY $0.34 $0.47 Sales (mil.) 300 328 363 Valuation FY P/E 48.6x 48.6x 35.1x CY P/E 48.6x 35.1x Trading Data (FactSet) Shares Outstanding (mil.) 28 Float (mil.) 11 Average Daily Volume 432,909 Financial Data (FactSet) Long-Term Debt/Total Capital (MRQ) 0.0 Book Value Per Share (MRQ) 5.3 Return on Equity (TTM) -45.3 Two-Year Price Performance Chart Sources: FactSet, William Blair & Company estimates 12/31/1212/31/13$0$5$10$15$20$25$30 Potbelly is a rapidly growing restaurant chain featuring craveable toasted sandwiches, signature

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