Why Potbelly Corporation and Lumber Liquidators Will Fall Tomorrow

After two straight down days, stocks headed higher today as investors responded bullishly to the minutes of the last Federal Reserve meeting. The Dow Jones Industrial Average  finished up 79 points, or 0.5%, while the S&P 500 added on the same percentage, and the Nasdaq gained 0.6%. 

In minutes released from the Federal Open Market Committee meeting held June 17-18, the central bankers agreed that it was best to end the stimulus program, which they've been tapering since last December, in October. Oddly, investors had feared the start of the taper last year but now seem to welcome the closing of the bond-buying program as a sign the Fed believes the economy is on its way toward full health. In addition, the Fed also seemed to come to agreement on a plan to raise interest rates in the future, though there was little evidence that that decision would come any sooner than the middle of next year. Also, the central bankers seemed optimistic that economic growth would continue, saying that it expected real GDP to expand faster over the second half of the year and the next two years than it did last year.

After hours today, Potbelly Corporation  plummeted, falling 17% after the sandwich chain gave an underwhelming outlook in a preliminary second-quarter report. Potbelly said it expected revenue to grow 6.9% to $83.6 million, below estimates of $86.7 million, and it saw a 1.6% decline in company-operated same-store sales. On the bottom line, the fast-casual chain expected a profit of $0.06 per share, much worse than the consensus at $0.12. CEO Aylwin Lewis called the results "disappointing," noting in particular the drop in same-store results. The poor results led the company to lower its full-year EPS guidance from a range of $0.43 to $0.46 all the way to $0.18-$0.21. Analysts had expected a full-year profit of $0.34. Shares of the company, which made their debut in October, reached an all-time low on the report as earlier enthusiasm for the stock seems to have been misguided. Bullish investors may have pegged Potbelly as the next Chipotle, but with single-digit revenue growth and declining comps, it's hard to justify a P/E over 50 based on this year's updated EPS guidance.

Elsewhere, Lumber Liquidators  shares got taken to the woodshed again, falling 19% after the flooring specialist cut its outlook in a preliminary report. The company said sales increased just 2.3% to $263.1 million as comps tumbled by 7.1%. Profits, meanwhile, fell from $0.73 a share a year ago to $0.59-$0.61 as SG&A costs rose 9%. Both results badly missed estimates as analysts had expected sales of $303.2 million and EPS of $0.90. CEO Robert Lynch said that "customer traffic was significantly weaker than expected" and noted that existing home sales, one of the business' key drivers, are lower than they were a year ago. Operational problems also dented profits as the company ran out of inventory on certain key items and had production delays at some of its mills, resulting in an $18 million sales shortfall. For the full year, management reduced its sales guidance from a range of $1.15 billion to $1.2 billion to a new range of $1.05 billion to $1.1 billion and sees flat same-store sales and an EPS of $2.65-$3.00, down from $3.25-$3.60. Both sales and profit figures were well below analyst estimates. While the company said it's corrected the operational issues for the third quarter, lower home sales may continue to weigh on its performance, pushing shares further down .