Q4 2019 Earnings Call
Greetings and welcome to the possibly corporation fourth quarter in full year 2019 earnings conference call at this time, because I'm trying to listen only mode.
Short answer session will follow the formal presentation.
What would require operator assistance during the conference. Please press Star Zero Wonder telephone keypad as a reminder, this conference is being recorded.
So my pleasure to introduce your host Matt Revord Potbellys Chief Legal Officer. Please go ahead Sir.
Good afternoon, everyone welcome to our fourth quarter earnings call.
We get started I'd like to note that certain comments made in this call will contain forward looking statements regarding future events, but future financial performance of the company.
Any such statements, including our outlook for 2020 or any other future periods should be considered forward looking statements in the meeting of the private Securities Litigation Reform Act 90 95.
These forward looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as any subsequent date.
Forward looking statements involve significant risks and uncertainties and events or results could differ materially those presented due to a number of risks and uncertainties.
Additional detailed information concerning these risks regarding our business the factors that could cause actual results could differ materially from the forward looking statements and other information they given today.
Can be found her most recent report on form 10-K, headings risk factors and Mdna and in our subsequent filings with the Securities and Exchange Commission was you're able actually to dot Gov.
Our presenters their Alan Johnson, our Chief Executive Officer will Lakins VP and controller.
After our prepared remarks, well open the call for your questions I'll now turn the call over down.
Thank you Matt.
Good afternoon, everyone and thank you for joining us today.
This afternoon I want to discuss the progress we made in 2019, particularly in the fourth quarter and how that momentum is carrying into the early part of Q1.
Additionally, I would like to provide the number of insights into the next phase of often around strategy, which is designed to complement and accelerate our hard work to date and.
And we look.
To build a sustainable platform for growth for 2020 and beyond.
The bottom line is our strategy is working.
And the if at all team put into transforming our company last year is showing up in the results.
Fourth quarter same store sales were nearly flat and 0.1% negative.
Driven by improved traffic trends in a menu optimization and off premise and digital efforts.
The fourth quarter marks all strongest same store sales comp in three is.
And represents the third consecutive quarter.
I have improved comps.
While traffic trends ultimately, we want them to be yet they are improving.
According to Black box, daughter, we outperformed all industry peers in both traffic and same store sales comps in seven of the lost eight weeks of the fourth quarter.
In fact, we have extended that trend to 11 of the lost 13 weeks to date.
Shifting holidays accounting for the only two misses.
Simply put we are gaining share.
It is critical to understand that we achieved this without low advertising spend and the lowest rate of discounting this year.
I'm also excited to report that this momentum has carried into the first quarter of 2020.
Hey, healthy majority of them off it's running at positive comps through the first half of Q1.
And we are confident that popped bedi will deliver the first positive quarterly same store sales comp in over three years.
For the first quarter.
Most importantly, we expect you to deliver positive same store sales comps in fiscal 2020 as well.
The first time in over three years.
2019 was an important here for plug Betty.
But spend a few minutes reviewing some of all successes during the.
First as a quick reminder, we rolled out our menu optimization initiative in February last year.
Which included pick you'll pay and meal deal options.
As of Q4 these options on now enjoyed by one in four customers.
Well the yet we grew our average check bought 410 basis points.
And we picked up momentum as the year progressed as the fourth quarter. So I 670 basis point increase compared to Q4 2018.
Based on a combination of pricing mix and significantly less discounting.
In early 2019.
We identified well for him as as an opportunity where we needed to significantly invest.
We substantially improved or delivery business by launching delivery partnerships with door dash and grabbed hub in the second half the year.
Q4 was the first quarter encompassing the impact of both partnerships.
At the beginning of 2019 some of our shops delivered some at the time.
Now all of our shops deliver all of the time.
To improve the custom experience for online order and pick up channel we invested in pick up.
Rex for all of those shops.
All of this culminated in record annual growth for off premise and digital channel.
Which moved from 19.4% to sales in Q4 2018.
To 24.4% in Q4 in 2019.
Additional investments we made you know digital assets also clearly paying off the potbelly. It is now one of the highest rated assets in all space at 4.8 stalls.
We refreshed all catering website, which also contributed to all premise growth if you fall.
Finally, our franchising business gained significant momentum throughout 2019, as we signed deals in the last 12 months for 42, new units nearly doubling all current number a franchise shops.
Which is expected to open in the next five to seven years.
Well the previously mentioned if it's helped establish the rocks victory.
We recognized that all types of change needed to intensify.
Beginning in the second half of the yet we challenge stop team to make a year's worth the progress in just a few months.
To complement our internal efforts, we brought in a top tier consulting for them in the quarter, who had helped many of our peers accelerate the turnarounds.
This from helped us build a set of powerful SEC based consumer insights.
Does insights revealed with potbelly is well equipped to win.
And provides a solid runway for organic growth.
It's critical for our investors to understand that this is not a radical departure from what makes potbelly sudden loved by our loyal customers.
We will leverage the call straight to the Potbelly brand along with building on what's already working you know business like many optimization off premise and digital.
The coldest if its project Aurora.
Well said includes several new initiatives. It is largely a complement to an extension of our existing strategy.
We firmly believe that it will help us accelerate the pace of up to an around.
We have acted with urgency.
And already begun deploying some of the railroads elements across all shopped base in the fourth quarter for example.
We changed our promotional message away from discounting towards talking more about a warm toasted sandwiches and focusing on getting credit for all high quality ingredients like all bacon and the freshly sliced avocado.
The current B L. T. <unk> is a perfect example of this change we know it's working we can see their numbers as the add on incidence of Bacon. For example is up noticeably since the introduction of the B L. T. A in this new approach.
The elements of Aurora will require additional testing.
Which we have been preparing for throughout the last few months.
And we'll be rolling them out next week.
The cross 52 shops in multiple markets.
First we will be building on our learnings from the 2019 many optimization initiatives.
Second we will continue to improve and build on the quality of our toasted sandwiches Chevron has looked at every recipe to see how we could make each component better.
Last week, we will be testing, some new awareness and strategic advertising focused on driving strong good traffic I say strategic as our overall edge advertising budget for the is still expected to be fairly flat against 2019.
To summarize these are only a handful of examples of things we'll be testing.
And while many of them seems somewhat modest individually.
Taken together, they will represent a meaningful alignment of our customers' needs.
We are making changes in multiple dimensions of the custom experience and expect the cumulative effect to have a substantial impact in a way that is not to capital intensive and in Texas the entire system.
These tests will last for a minimum of three months.
We have a discipline track record of test learn and rollout.
We will follow the same cadence yet analyzing every aspect we can.
And then using the daughter to inform on next steps.
As we said last call the first off to the yet you will be spent testing.
And in the second half, we will analyze and rolled out the successful components.
We expect that with the momentum we carrying into 2020, coupled with the insights we gained from our roar. It tests, we will produce sustainable positive comps.
We also expect to these efforts to continuously improve traffic trends and put us on a path to growth adjusted EBITDA in the not too distant future.
We're excited to launch these tests and look forward to updating everyone on our progress.
We are acting with urgency and have already implemented many of the strategic insights and they are beginning to show up in our results.
We believe the hard work that has already been done will serve as a perfect launching pad for project Aurora.
For competitive reasons and to ensure although rotisserie a position for success I'm not going to provide any further details on these initiatives.
With that I will now to end the pulled over to will who will walk us through our financial performance in the fourth quarter and food yet.
Thanks, Alan and good afternoon, everyone.
I will walk through our financial performance for the fourth quarter and full year.
All comparisons are versus the comparative prior year period, unless otherwise stated.
Starting with the topline total revenues decreased 0.6% to $101.8 million in the fourth quarter, driven driven predominantly by shop closures in 2019.
Company operated same store sales were nearly flat at minus 0.1% in the fourth quarter, which represented a 290 basis point improvement from the third quarter.
Breaking down same store sales our average check grew by 6.7% offset by a traffic decline of 6.4%.
For the full year total revenues decreased 3.1% to $409.7 million driven predominantly by a 3% decrease in company operated same store sales and shop closures.
Our average check grew by 4.1% offset by a traffic decline of 6.9%.
During the fourth quarter, we opened two new shops, including one company operated shop, and one franchise shop, and we did not close any.
In the year, we opened the nine new shops, including two company operated and seven franchise.
And we closed 21 shops, including 11 company operated shops to domestic franchise shops, and our eight remaining international franchise shops.
Our shop level profit margin for the fourth quarter was 15% of sandwich shop sales as compared to 15.7% in the prior year.
Cost of goods sold as a percentage of sandwich shop sales was 26.3% in the fourth quarter, a decrease of 60 basis points, driven primarily by a lower discount rate menu price increases and mix shifts.
For the quarter Labor was 31.5% an increase of roughly 40 basis points, driven by wage inflation and sales de leverage.
Our shop level profit margin for the year was 15% as compared to 16.7% in the prior year.
Cost of goods sold as a percentage of sandwich shop sales was 26.6% in the year, an increase of 10 basis points, driven primarily by product inflation, partially offset by menu price increases lower discounting and mix shifts.
For the year Labor was 31.6% an increase of roughly 110 basis points, driven by wage inflation and sales de leverage.
Occupancy expense was 14.4% in the fourth quarter, a decrease of 40 basis points due to favorable adjustments and occupancy accruals.
Other operating expenses were 12.8% in the quarter, an increase of 130 basis points due primarily to third party delivery fees.
For the year occupancy expense was 14.5% an increase of 20 basis points due to sales de leverage.
Other operating expenses were 12.3% for the year, an increase of 30 basis points due primarily to third party delivery fees.
Our general and administrative expenses were approximately $10.1 million in the fourth quarter or 10% of total revenue decrease of 90 basis points.
The decrease was primarily driven by a pullback in advertising spend.
For the full year, our general and administrative expenses were approximately $47.9 million or 11.7% of total revenue an increase of 60 basis points.
This increase was driven by $3.1 million of consulting fees related to project Aurora that we previously reported.
Offset by decreases in restructuring costs stock based compensation and performance based incentive compensation.
Adjusted DNA, which excludes store closure costs CEO transition costs restructuring costs proxy related costs and consulting fees for project Aurora and which we believe is the best indication of the core Gionee expenses in our business was $9.1 million in the fourth quarter or nine.
Percentof total revenue, which was down <unk> point $5 million in absolute dollars relative to last year, primarily due to the pullback in advertising.
For the full year, adjusted DNA was $40.2 million or 9.8% of total revenue.
Which was down <unk> point $3 million in absolute dollars relative to last year.
We continue to tightly manage and control our DNA expenses.
Adjusted EBITDA was $7 million for the fourth quarter compared to 7.2 million.
Adjusted EBITDA was $25.5 million for the year compared to $35 million and came in at the lower end of our guidance range as we forecasted last quarter.
The decline was driven by lower sales from company operated shops and inflation of cost of goods sold and labor.
During the quarter, we had income tax expense of point $3 million.
During the year, we had income tax expense of $14.2 million, which includes $13.6 million and tax valuation allowance charges that were recorded in the first half a year.
During 2019, we purchased approximately 648000 shares of Potbelly common stock in the open market for a total of roughly $4.2 million.
At the end of 2019, we had $37.9 million available from our board authorized program for repurchases.
We ended the fourth quarter with a cash balance of $18.8 million and zero debt.
We remain comfortable with our balance sheet and are focused on maintaining ample cash and liquidity to fund our strategic initiatives.
I'll close my prepared remarks today with a review of our outlook for 2020.
Well the full year, we currently expect a 0.5% to 2% increase in company operated same store sales with the momentum our strategic initiatives have shown through Q4 and into Q1, coupled with our project or efforts. We are confident to say, we expect comps to be positive for fiscal 2020.
Inherent in our guidance is an assumption that we can produce a low single digit increase in revenues, which allows for the investments we're making.
Adjusted EBITDA is expected to range between 20.5 million and $25.5 million.
The top end of our adjusted EBITDA range is flat to last year, but we're leaving in summary room in case, we decide to accelerate certain project Aurora elements, depending on results of the tests.
Cost of goods sold are projected to range between 26.7% and 27.3%, which is similar to last year.
We expect a slight uptick in our total cost of goods sold driven by the investments I mentioned earlier.
Additionally, we just renegotiated a new five year contract with our main food supplier and expect a slight increase in distribution costs.
However, you will notice that with the low single digit revenue growth, we are expecting the should keep our guidance on cost metrics similar to the guidance ranges, we gave last year.
Labor as a percentage of sales is expected to be between 31 at 32%.
We expect a slight increase in our labor costs as a result of wage inflation.
Adjusted DNA expense is expected to range between $44 million to $46 million.
Included in our adjusted DNA guidance is higher bonus and stock compensation.
Of note, we expect our advertising expense to be between three and $5 million, depending on certain elements of our or a tests specifically, we expect a sequential uptick in advertising spend in Q1 in Q2, but again I'd like to point out that this guidance is fairly in line with our spend last year, because we'll remain disciplined in our marketing approach.
We currently expect eight to 10 total shop closures, all of which our strategic closures of company operated shops.
We project 12 to 13 total shop openings, including four company operated shop openings.
The four company operated shop openings were a carryover from our 2019 shot plan three of which are already opened last one will be opened by the end of Q2.
As we said last quarter, we do not currently have plans to open any other company operated shops, unless the unique location like an airport becomes available.
And as previously discussed we remain open to refranchising opportunities in select markets.
Lastly, our capital expenditures are expected to be between 16 and $18 million.
I'll now turn the call back over to Alan for his closing remarks Alan.
Thanks will.
Before I turn the call over for questions I want to briefly update everyone. An a few other strategic initiatives as we look ahead to 2020.
Our first shop, the future opened in Chicago last October and the initial results of positive.
This is office shop, with the new design and like everything else in our business. We will continue to tweak and test you elements as part of our continuous improvement process.
We are conducting post opening consumer research to aid in these efforts and will likely incorporate learnings from Aurora into shopper the future along the way.
The learnings flow in both directions. For example, the consolidated menu being tested in a roller if it was first conceived and executed you know shopper the future.
The search process for our new Chief Financial Officer is underway and progressing as expected.
We will provide more updates on our search when necessary, but until then we'll end the team although strong finance organization are doing a great job keeping us on track.
In closing.
We entered 2020 with positive momentum and we're excited to get moving on the Aurora tests, which we expect will significantly accelerate our pace of change and become a multiplier on all strategic actions that we've already taken to date.
I think it is critical for our investors to understand that our plan is aggressive well informed and capital light.
Our confidence is bolstered by a very clear evidence that our strategy is working.
And the momentum we built in the fourth quarter has clearly carried over into Q1.
In 2020, we will post all first year of positive same store sales comps since 2016, starting with Q1.
We will significantly improve traffic trends and we will put the company on a sustainable Paul to long term growth that concludes our prepared remarks, and I will now turn the call over to the operator for Q Tonight.
Thank you will now be conducting a question answer session. If you like to be placing the question Q. Please press star one under telephone keypad.
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One moment, please well we poll for questions.
Our first question is coming from Joshua long from Piper Sandler Your line is now alive.
Great. Thank you for taking the question congratulations on the quarter and the momentum to date.
All very exciting when we think about the opportunity for positive comps in 2020.
Could you provide some context around the cadence that you're looking at looking at your performance on a two year basis, you've improved nicely here. It through Fourq you 19, if we assume that that were to continue here and it really 20 that shows some nicely positive comps in the low single digit.
So curious if you could either comment on that provide some color on where you're running here to date and or provide just send my first half second half commentary and what you're expecting that a in that momentum given that you have a lot of strategic and if the initiatives don't play.
Hey, Josh Thanks for the question.
Yes, So let me start with a Q4.
This comp in three is a at 0.1 negative.
That momentum has continued into 2020.
As I look at Q1 were seven eight weeks into it.
And I.
I feel very confident enough in telling you that this would be the fourth sequential quarter of improved comps.
So with that I believe that well get to the into the first quarter and report defected we delivered the first positive comp in over four years.
I think thats real progress.
It's being driven by a off premise, we had record growth record mix.
Some of the strategic decisions, we made a year ago in made big investments in off premise, whether that's upgrading the app, whether that's investing in the whipsawed, whether that's investing in the partners a lot of the growth has come from that but it's not the only place where we've seen growth menu optimization has been a huge success for us.
And then it's important as I look at the business.
We'll need to be this competent I need to see that most of the markets all showing positive comp and that is indeed, correct and then yes off an eye on what's happening in the market.
Black box, daughter would confirm that we oh.
Achieving market share.
And then all of this.
Is done through the presumable, so sort of spending less on discounting and.
Very modest advertising.
Sure we've got things to learn and that's why you know sit in the last earnings call. The first half would be fish testing and the second half would be spent analyzing and deciding what to roll and that's why the the Aurora test is very important and this team is acting with urgency.
No more urgent infected this <unk>.
The Aurora test launches next week.
And we're very excited and confident that this accelerates it builds on what is already working so I see it steady improvement throughout the.
In all metrics and we're off to a good start.
Great. Thank you for that and following up on your commentary, where you mentioned the majority of the markets were running positive. It's certainly exciting to here as you go through and think about the trends by market or by geography, However that stacks that what do you learning about those markets that are maybe still probably improving but maybe struggle.
And a little bit to get to that positive comp territories that a site selection.
Dynamic is that it maybe a vintage or <unk> or those more competitive trade areas anything you could share there would be helpful.
Yes.
I'm going to limit to how much detail I provide he suffice to say, it's broad and wide and when we look at 22 markets and the vast majority of them all positive and the great news is the handful that aren't over the course of the last several months have shown significant improvement in on the way.
Okay to positive.
So.
That's one of the reasons why we feel confident with all guidance for 2022 delivered the first.
Yeah, our same store sales comping over four years.
Great. Thank you and then following up on your commentary around the Potbelly App.
Well, how is that trending in terms of users overall and.
Now that's been in place for little while I imagine that you've had some opportunity to really dig in and get to know your gets better in terms of what they what resonates with them how to communicate them with better I imagine that you want to keep a lot of that into reps in the testing process, but well high level commentary could you share about what you've learned about your guess now how you're going to engage with them.
Versus prior periods.
Since joining the company.
Yeah.
The good news is we seen over the course of the last 12 months, just under 40% growth in the put membership.
Going.
Topping 1.7 million and it's now about.
17% about business, so seen dramatic growth there.
Yeah, We've also invested a lot of money in.
Not any.
Yeah, but the website and functionality that we've added which I think is also helping to drive but menu optimization and off premise. We've added functions like easy access to your cost orders a kick in pay.
Pickup in the shop, a delivery and we streamlined the whole order process. So I think that so does with good investments and paying a dividend also the checkout process now encourages you to add options you know if youve any added the sandridge anew, new and you've got to check out will remind you to Ed cookies.
And then the decision we made on on bundling I think has been a huge success not been a measurement then approximately one in four customers now enjoying.
Nick you'll pay and meal deal so that's.
The first of many.
What do we learnt from.
Oh perks members.
You will see a good senses that very shortly I mentioned.
In my last earnings call that we were going to launch a new perks program, which was still on track to do that that will be in the second half of the.
I'm not going to say too much about that but.
Suffice to say that it will be a simpler easier to understand have more stickiness.
And.
Focus very heavily on retention and frequency and we know that when we are focused on those things that will lead to positive comps.
Great. Thank you for that and one last housekeeping item before I pass along.
The average check was very strong in the quarter that that's great to see could you provide some context around with the price mix component, where there and what your outlook in terms of pricing would be for this year or do you expect that to kind of be a back half weighted decision based on what your tests and research show.
Yes.
So let's deal with the.
Q4 million limit my comments just to Q4.
[music].
Based comp in three years third sequential quarter.
You did see a 670 basis point increase in.
Average check the full big things, leading to that or bundling, which is the meal deal and.
And pick you'll pay one in four customers taking advantage of that the significant off premise growth remember the customary eases off premise spend significantly more and all three parts.
All that off premise business delivery pickup and catering all contributing towards that growth and materially. We did this with the lowest discount rate for the 3.7, which is significant there's lot of but flow through when you're not having to discount and then the menu pricing was simply in line with competition we.
We didn't take anymore than that so those are the key big drivers as far as traffic goes.
I will note. Despite the reports that we read about the fourth quarter being a very soft traffic comp quota, we improved our traffic comp a 190 basis points Q3 on Q4 with less advertising list discounting and beating Black box in the last.
Seven out of eight weeks of the quota. So I think those results all somebody to be proud of.
I would agree thank so much for the color.
Right.
Thank you. My next question is coming from Gregory Francfort from Bank of America. Your line is not alive.
Hey, this is actually John like on for Greg. Thanks for taking my question I was wondering if you could expand on that thinking behind.
Shifting marketing to more product focused <unk> away from discounting and is that related to also what you're seeing from competitors or Peter sort of eating offer the discounting or is it more sand.
Hey, Jon Michael Thanks for the question Yeah. So yes. This is a full for US. This is a big shift the focus is on warm tasty sandwiches and the quality ingredients and.
Yes, what we were testing a large part of.
The back end of 2018 and into 19 was.
Was there right.
Can you use promotion as a way to get the traffic moving into right direction and Ah, Yes, it's a neat.
Didnt work, particularly well in.
Q3.
But of last year, but sorry, 18, but it wasn't sustainable high discounting in high advertising at the same time.
What was that produced flat traffic it wasn't sustainable so no one of the things that we've learnt is well there's a lot there's a large and growing space yet that I think potbelly is well equipped to win and it's not a radical departure from what we've been doing before but in the messaging certainly is.
Got it thank you for that and then are.
Are there any more details you could provide omni four franchise deals that you find I know, it's a longer term, but they are these specific geography is that you're looking at and there's just anything around those deals would be helpful.
Sure with pleasure so that we did for deals for 42 shops, and Vegas, Tampa Carolina, and there was a few miscellaneous which had a four shops, but in total 42 shops nearly doubling the current footprint that we have been franchising.
Great. Thank you.
Later.
Thank you we reach of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Thank you guide for your time today and for your continued support 2020 is a critical year for potbelly.
Our strategy is working and we have plans to accelerate our progress and I. Thank you for your interest and look forward to updating you on the next earnings call.
I have a great evening.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.