Q4 2021 Potbelly Corp Earnings Call
Good morning, everyone and welcome to Potbelly Corporation's fourth quarter and full year 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your.
Some key pad.
As a reminder, this conference is being recorded I would now like to turn the call over to Mr. Dan Dickson Potbellies Chief Legal Officer. Please go ahead.
Good morning, everyone and welcome to our fourth quarter and full year 2021 earnings call.
Our presenters today are Bob Wright, our President and Chief Executive Officer, and Steve Sterling, Our senior Vice President and Chief Financial Officer.
Please note that we have prepared a set of Powerpoint slides that will accompany our prepared remarks.
May access these slides on the Investor Relations section of our website.
After our prepared remarks, well open the call for your questions.
I'd like to call your attention to our cautionary statements on slide two.
Note that certain comments made in this call will contain forward looking statements.
Regarding future events or the future financial performance of the company.
Any such statements, including our outlook and targets for 2022 or any other future periods.
It should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These forward looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date.
Forward looking statements involve significant risks and uncertainties and events or results could differ materially from those presented due to a number of risks and uncertainties.
Additional detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward looking statements and other information that will be giving today can.
It can be found in our Form 10-K , which will be filed later today.
Under the heading risk factors.
Management's discussion and analysis of financial condition and results of operations.
And in our subsequent filings with the Securities and Exchange Commission, which are available at SEC Dot Gov.
During the call. There will also be a discussion of financial metrics that do not conform to U S generally accepted accounting principles or GAAP.
Definitions and reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the Investor presentation and press release issued after the market closed yesterday.
Both of which are available in the investors tab of our website.
Now I'll turn the call over to Bob.
Thank you Dan Good morning, everyone and thank you for joining US today I Hope you and your families have remained safe and healthy since our last update I'd like to begin today's call by thanking our potbelly family for their continued dedication to our brand and their strong work ethic throughout 2021 and to date in 2022.
It remains our top priority to ensure our guests enjoy a safe and fun dining experience in our shops and your loyalty makes that possible.
2021 exceeded our expectations on a number of levels, including the most recent quarter and we're very excited about the future for our brand and company.
Before we get into the future, let's first review the highlights from the fourth quarter and full year 2020 one.
Beginning on slide three starting with the top line fourth quarter revenues totaled $102 $8 million, an increase of 37% compared to the same period in 2020 with same store sales increasing by roughly 34% as compared to Q4 2020.
For fiscal 2020 , one revenues of $380 million were up 30% compared to 2020 with same store sales up over 30%.
Our top line strength was driven by positive demand coming off the pandemic impacted 2020 as well as execution against our five pillar strategy that included numerous initiatives to drive traffic both in our shops and via digital channels.
While we still incurred a net loss it was significantly better than a year ago, both for the quarter and the year.
We reported positive adjusted EBITDA for the third consecutive quarter as well as positive shop level profitability in each of the four quarters last year also fiscal 2021 shop level margin expanded by 990 basis points compared to 2020.
Despite macroeconomic challenges related to labor and ongoing uncertainty regarding Covid. In addition to the inflationary headwinds our business has once again proven its resilience and ability to deliver growth and improved performance in.
In fact quarter over quarter, we expanded shop level margins by 140 basis points to 11, 2% for the quarter.
The recent margin momentum is extremely encouraging for us as we look forward to our next phase of growth, which I will detail later in our call today.
Our shop portfolio continues its path to recovery accelerating its pace in the fourth quarter demonstrated by the increase in same store sales. This was driven by robust demand levels combined with the successful implementation of our strategy, we achieved an annualized <unk> of $1.0 million to $5 million in the fourth quarter, our second sequential.
Quarter, achieving this level.
I'm also pleased to report that we experienced improvement across all our shop types versus the fourth quarter of 2020 with notable increases in airports CBD and University locations, which had previously been lagging in their recovery.
Particularly encouraging sign as we look to build further momentum.
Additionally, we saw improved volumes across each of our shop channels.
Which was once again led by in shop sales and supported by continued strength in digital channels digital accounted for approximately 36% of our total sales for the full year.
In dollar terms digital sales grew by approximately 11% year over year.
The durability of Potbellies digital channel is clear and we expect further success and growth in this important service mode in the future.
Turning to slide four I'd like to highlight a few significant achievements in 2021 from a strategic perspective.
We had a very busy and purposeful year, which include rolling out a new menu increased digital marketing success improvements to our tech stack.
And completing the build out of our senior leadership team.
Beginning with our newly updated menu we are incredibly pleased with the positive response, we've received from our customers. The new menu has both enhanced value for our guests as well as improved traffic and average check size.
We also saw a tremendous benefit from our improved tech stack as the revamp of our digital channels has delivered meaningful improvement to the customer experience, making for a much more streamlined and user friendly ordering system.
With the appointment of our CMO, David Daniels, we have sharpened our focus on investments in digital marketing to strengthen our presence with a balance of awareness traffic and sales to accelerate our current growth while at the same time nurturing our relationships with perks rewards customers.
And advancing our customer acquisition program.
As always we were continuously looking at ways to improve potbellies already iconic and highly reliable brand to better reach our target audience and achieve higher engagement levels with our already loyal customer base.
Lastly, I'd like to congratulate the potbelly team for their efforts in combating the broader macro headwinds of 2021, some of which were still facing today throughout 2021. The labor market was extremely tight this is true of the market broadly and more notably within our industry.
In fact, that's probably the tightest I've seen in my over 30 year history in the industry.
As a result, we implemented multiple programs to attract and retain employees such as competitive wages referral bonuses retention bonuses and programs to promote upward career potential which had been an integral part of our success. This year G&A discipline remains a key focus for Potbelly in addition to multiple actions across.
Cost and operational efficiencies to offset food and other cost pressures in the wake of this high inflationary environment.
We're extremely proud of our accomplishments in 2021, and we're ready for the next phase of opportunity and growth with that introduction I'll now turn the call over to Steve to provide more details on the fourth quarter and full year financials recent sales trends and a quick preview of our expectations for 2022, Steve.
Thanks, Bob and good morning, everyone. Please turn to slide five of the presentation, where we will discuss the progression of weekly average unit volume or a V and same store sales for 2021.
Looking back on trends in <unk> over the last few years on the left you can see that in 2020 , one we eclipsed 2019 levels approaching $19000 per shop for the full year.
What is more meaningful is the trend over the last two quarters of 2021, where we achieved a <unk> of over $20000 per shop again due to recovery in the overall demand environment and our potbelly specific action.
Company operated same store sales continued its trend of significant improvement compared to 2020 with fourth quarter same store sales, increasing by 33, 8% year over year with a healthy blend of check and traffic growth.
Turning to slide six I'll walk you through key areas of our income statement and other financial performance metrics for Q4.
During the fourth quarter total revenues of $102 $8 million increased 37% compared to the prior year period, driven by sustained recovery and strong demand in what is usually a seasonally weaker period due to winter holidays.
I'm pleased to report that we delivered our third consecutive quarter of positive adjusted EBITDA for the fourth quarter at $2 $6 million up significantly compared to adjusted EBITDA loss of $6 $9 million in the year ago period.
Though not shown on this slide I think it's important to note that on a sequential basis adjusted EBITDA was largely flat compared to the third quarter. Despite the significant wage and inflationary pressures that Bob already mentioned.
On a sharp level basis fourth quarter margins increased to 11, 2% compared to negative six tenths of 1% in Q4 last year and nine 8% and our most recent third quarter.
Our general and administrative G&A expenses were $9.0 million in the fourth quarter of 2021, or eight 8% of total revenue compared to $6 $7 million or eight 9% in the year ago period the.
The slight percentage decrease was driven by higher sales volume and our continued spending discipline.
G&A expense on a dollar basis increased due to higher bonus accruals and stock comp.
Food beverage and packaging costs F N P, which we previously referred to as cost of goods sold or Cogs were 29.0, a million dollars or 28, 4% of shop sales compared to $21 $2 million or <unk>.
28, 5% in the fourth quarter of 2020.
The increase in F. N P on an absolute basis was largely due to higher volumes, but also included higher input costs, primarily proteins and packaging.
On a percentage basis, our ongoing efforts to offset cost pressures allowed for a slight reduction year over year.
Labor and related expenses were $33 $4 million or 32, 8% of shop sales compared to $27 $2 million or 36, 5% of shop sales in the year ago period.
The year over year increase on an absolute dollar basis was driven by an increase in staffing to service higher volumes as well as labor inflation, which saw our average hourly wage increase 11, 1% in the quarter and seven 3% for fiscal 2021 .
As we said last quarter Potbelly is taking aggressive measures to recruit and retain associates and managers, including referral bonus programs pay band modifications, the introduction of tipping and investing in our applicant tracking system.
We are trending better than the industry, but the environment remains fluid.
As we continue to combat this challenging market dynamic we remain extremely proactive in our recruiting and staff retention efforts.
<unk> and related expenses on a percentage basis declined substantially largely due to topline leverage.
Other operating expenses were $14 $9 million or 14, 6% of shop sales compared to $13 $2 million or 17, 7%.
Sales in the fourth quarter of 2020.
The increase on an absolute basis is due to increased third party delivery fees and other expenses that move proportional to volume.
The decline on a percentage basis was driven by top line growth and some favorability on repairs and maintenance.
Turning to our balance sheet.
We ended the quarter with total liquidity of $28 $8 million.
<unk> $14.4 million of cash on hand, and $14 $4 million available on our credit facility.
Net cash increased by half a million dollars on a sequential basis, primarily due to increased sales leverage and expense discipline.
During the fourth quarter, the company paid approximately $3 $3 million of 'twenty 'twenty deferred cash expenses.
Our deferred severance and rent repayments are substantially complete.
And we will have one more $2.3 million deferred payroll tax payment in Q4 of 2022.
Turning to slide seven for.
For the full year 2021, our total revenues of $381 million represent an increase of 35% compared to 2020 driven.
Driven by the sustained recovery versus 2020, which was highly impacted by COVID-19 as well as successful execution against our five pillar strategy.
Same store sales increased 33% for the year and we delivered positive adjusted EBITDA for the year of $522000 an improvement of over $33 million versus last year.
In terms of the drivers of our annual cost comparisons to 2020. The drivers are generally the same as I. Just noted for the Q4 comparisons we attained solid leverage on a percentage of sales basis with higher volumes, we drove in 2021.
G&A was $33 $3 million for the year or eight 8% versus 34.0, a million dollars or 11, 7% in 2020.
The decrease on an absolute basis was due to realizing a full year of our restructuring work completed in 2020.
Food beverage and packaging costs for 'twenty, 'twenty, one or $105.0 million or 27, 8% of shop sales versus $82 $2 million or 28, 4% in 2020.
The increase in dollar terms was due to significant year over year cost inflation of 10.2% most acutely in proteins and packaging that accelerated in the back half of the year.
Labor and related costs for the year were $127 1 million or 33, 7% of shop sales versus $105 $2 million or 36, 4% in 2020.
The cost of labor increased on an absolute basis due to the aforementioned labor market headwinds.
Other operating expenses were $59 $3 million or 15, 7% of shop sales.
Paired to $49 $1 million or 17.0% of shop sales in 2020.
The increase in other expenses was due to increased third party delivery fees and other variable costs that remained high due to COVID-19 similar to the drivers in Q4.
We continue to see the ongoing benefits to our occupancy cost as a percent of sales from our lease optimization work completed in the latter half of 2020 and early 2021 .
Occupancy as a percent of sales improved 540 basis points in 2020 , one versus 'twenty 'twenty.
Turning to slide eight.
We continue to see continued recovery across each of our shop types compared to the year ago period.
Clearly the biggest increase was in the second quarter as Q2 of 2020 experienced the most dramatic impact from Covid related shutdowns.
You can also see that all shop types enjoyed solid same store sales increases for the year.
We are pleased to report continued strong improvement in our University airport and CBD locations.
Slide nine provides a closer look at our CBD locations, which have been disproportionately impacted by COVID-19 due to fluctuations in work from home and back office situations as we navigate the pandemic.
Most recently the effects of the Delta in Omicron variance.
Here, we show same store sales for the past five quarters.
During the peak of the Delta variant from August to October our CBD locations were taken off their same store sales recovery pace.
Led by a rebound in November and December .
I'm, a crown and severe weather in January delivered another brief setback during the month.
Fortunately the impact was short lived.
In February we have seen momentum in our CBD locations building toward levels, we enjoyed in the fourth quarter of 2021.
As vaccine and masked mandates are lifted across the U S and more businesses returned to their offices, we expect to see same store sales continue their upward trends as this important part of our portfolio continues to strengthen.
Slide 10 illustrates how our au vs and service mode mix evolved through 2021.
In the third quarter, we saw a strong increase in shop sales due to pent up demand from customers, who returned to dining rooms and that continued into Q4.
<unk> reached over $20000 in Q3, and we are pleased to sustain this demand momentum in the fourth quarter as you can see on the chart.
Additionally, we expanded digital sales by three percentage points in the fourth quarter driven by positive customer response to the new Tech stack, which has a more seamless online ordering process and benefits of the improved perks loyalty program.
The durability of our digital channel is clear and we expect continued strong contribution from this service mode, even as customers continued to return to in shop dining.
2021 also saw promising build in our catering business as customers increasingly found our platform compelling for both corporate and social catering occasion.
Before I turn the call back to Bob I'd like to turn to slide 11, where we discuss our priorities for 2022, and our first quarter and full year outlook.
As we look through our next phase of growth 2022 is a critical year in our priorities are quite simple.
One we are executing on multiple elements of our five pillar strategy to accelerate growth. These efforts remain focused on delivering traffic driven profitability as we build demand expand margins and catalyzed franchise unit growth.
Two.
We will continue to exercise cost discipline, while at the same time, making selective investments in G&A for our key growth enablers, including marketing development and operations.
Three.
We are committed to further strengthening our digital marketing presence, including driving improved E. Commerce results leveraging the capabilities of our new Tech stack driving new guest acquisition and loyalty through our perks loyalty program and enhancing our brand positioning to extend our differentiation in the category and further deepen our relationships with customers.
Four finally, we are initiating our long term growth plan, which Bob will cover shortly.
Turning to our full year 2022, and first quarter outlook.
Although there is uncertainty related to COVID-19 and ongoing inflationary pressures our outlook for 2022 is positive as we carry the momentum of the fourth quarter forward.
For the full year, we expect to deliver record aves are targeting double digit growth in same store sales and we expect to deliver shop level margins in the low double digit range.
Recognizing the first month of the quarter was negatively impacted by the effects of I'm, a crime and severe weather in our core markets. We are very encouraged with recent recovery to the momentum we experienced in the last quarter of 2021.
Putting this altogether, we expect Q1 sales of $95 million to $98 million and shop level margin of between three 5% and five 5%.
Expanding on our first quarter expectations and turning to slide 12.
I would like to briefly touch on weekly E V. So far this year.
As we previously noted January saw the biggest impact from the omicron variant and severe weather.
We believe our upward trajectory reestablished in February will continue throughout the year barring any unforeseen COVID-19 or other impacts.
While the March figure is only based off the first week of the month. We are optimistic that this is a positive indicator for the remainder of the quarter.
With that I'll now turn the call back to Bob to discuss our longer term growth objectives.
Thank you, Steve turning to slide 13, I'm excited to speak to our three year growth plan targets, but first I would like to remind everyone of our five pillar strategy, which laid the foundation for our turnaround and will continue to be key for our next phase of growth over the past year and a half we've tirelessly execute against this strategy.
We rounded out our management team with industry leaders in their respective fields launched our new simplified menu on a national basis launched a new tech stack and improved our perks loyalty program.
We've also taken a new more focused approach to digital marketing and branding.
As we enhance our strategic vision and develop our recipe for growth. We are now ready to activate additional growth and profitability levers that are core components of our five pillar strategy.
But before we get into specifics on slide 14, I think it's important to remind everyone of potbelly is unique and highly differentiated brand, which is driven by our unique combination of great food awesome people in a fun environment, it's because of our unique brand position that we believe potbelly is prime for expansion across the U S. We're excited to see.
The details of our next phase of growth with our three year growth plan.
This plan has two key components number one expanding our volume and profitability targets for our shops and.
And number two accelerating our growth through franchising for clarity the targets, we're referring to on this page generally refer to the run rates, we expect to achieve by the end of 2024.
Starting with our growth and profitability targets for 2024, we are targeting an <unk> of $1 $3 million with the expectation that will deliver volume growth across all shop types. This will be driven by continued recovery across our full shop portfolio, particularly within our CBD Airport University locations, which still have plenty of runway.
For continued and sustained recovery.
Technology plays a significant role in our sales growth expectations.
We will capitalize on the durability in increments of our digital business, which has previously mentioned accounted for 36% of our sales in 2021.
Additionally, we plan to expand in shop technology enhancements and operating systems to drive efficiency and throughput while improving the customer experience.
We'll increase marketing and high return advertising investments with the aim of enhanced customer acquisition, we plan to increase our engagement with our perks loyalty members further driving brand loyalty and shop traffic and.
We expect to meaningfully grow our catering business.
Additionally, we expect to bring food and beverage innovation and to leverage our customers love of our core menu, including some traffic driving limited time offers or L. T OS.
Along with ongoing enhancements across all menu categories, including sandwiches salads soups and desserts.
Second we are targeting shop level margins of greater than 16%, which will be achieved through a combination of actions sales leverage will be a significant driver of expanding margins, especially when considering the recent negative impact of portions of our portfolio.
On overall shop margin.
We will continue to evolve our tech stack marketing initiatives and value enhancing menu, where we expect substantial margin benefit.
Additionally, we will continue to strengthen and effectively manage our supply chain and food costs as we navigate this current environment and look towards the future.
Our key supply chain and food cost efficiency actions will ensure the best quality and value for our customers.
Potbelly offers a strong and differentiated employment experience that attracts top talent and we believe top talent is the secret to a great customer experience as much as it is profitability.
We will continue to leverage our shop level labor investments, where it matters most to our customers experiences.
While creating efficiencies elsewhere in shop labor.
And while it doesn't directly impact shop margins I want to reiterate we will continue to approach our G&A expenses with the same rigorous discipline that we did in 2020 and 2021 .
Finally, the key to our growth is our new franchise growth acceleration initiatives, where we are targeting at least 10% annual unit growth rate by 2024 with accelerated growth rates in the years beyond.
The objectives of our franchise growth acceleration initiatives include one better leverage of company capital and resources by focusing exclusively on franchise unit growth.
Two leveraging potbellies competitive advantages in brand strength ABB shop margin, an attractive operating model three.
Three accelerated market penetration with experienced Multiunit franchisees.
And for Catalyzing development deals by Refranchising select shops and markets.
Our F G. A initiative has already begun.
And we've now established shop development areas our S D as for all of our existing markets. These SDA, specifically outlined shop development potential and are critical to today's refranchising announcement.
We will re franchise approximately 25% of our company operated shops over the next three years to spur growth exclusively in deals that include S. D. A agreements for new development as well.
Additionally, we will be evaluating all existing development agreements, which may have been impacted by COVID-19, and ensure our current developing franchisees are well positioned for success. In addition.
Two expanding in our existing markets, we see great potential for new market entry as well.
We've concluded significant market research and we will also be developing S. D as for entry and identified new markets with a high propensity for market penetration as we expand with our new franchisees.
The combination of the S. T a agreements coupled with re franchising form the basis for our multi unit development deals with franchisees poised to grow with a brand is strongest potbelly <unk>.
The partnership between a powerful brand like potbelly in the right franchisees is the key to success.
We know we have the brand and our team has the experience to select welcome and support franchisees that will help us grow to be strong and successful together this.
This is an extremely exciting time for potbelly is growth and we're thrilled to be opening the entire United States to our new sales team effective immediately to support this initiative.
We see our long term U S potential to reach 2000 total units and at least an 85% franchise system.
This is an aggressive goal, but we believe it's within our reach and would estimate it will take roughly eight to 10 years.
We look forward to providing additional updates around these targets and our progress in upcoming quarters and years.
With that I will now turn the call back over to the operator, so we can address your questions operator.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the camp for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
Sarkis.
Our first question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.
Hi, good morning.
I have a few questions I guess.
The $1 3 million AED target you know I don't think.
Hop Valley has had that high of AED. It since it's been a public company at least.
And Bobby you listed off a lot of different initiatives to get there I guess could you kind of maybe rank order the top three priorities.
To get to that kind of a UV and within the kind of unpacking that and can you talk about how greater market penetration as you do this refranchising might help that acceleration.
Yeah. Thanks, Sharon you're right historically, the brand has hovered around or slightly eclipse about a million dollars vs and as you know, we're we're finishing the year in 2021.
On pace to beat those historical highs, but still with a significant drag on some of our shop types that are that are still underperforming coming out of COVID-19 .
So it really is a combination of those things one is the recovery in the rest of our shop types help.
Help drive the overall EV and we expect to see a lot of that here yet this year.
And you know you've heard me talk about the Incrementals of the of the digital business at 36% of our business. We certainly believe as durable as that it is and it has been the pandemic had the impact of accelerating the amount of digital business, we were able to capture.
And we think that that.
That is going to be a significant part of the overall EV growth and the one that we've talked about in the past as well as well as our prepared comments today has the the amount of leverage that we're using our new digital marketing campaigns and your advertising campaigns that we have as we've shared we've been very disciplined about the return on those invested dollars.
We continue to prove with any incremental investment that we can deliver.
Outsized top topline growth to more than offset the investment that we might put into marketing. So those are the biggest ones, but your point about penetration is as critical look any brand thrives as it grows and in the markets where we have.
Presence, but underpenetrated presence, we think that the refranchising work as well as the development work is going to be a significant part of that topline growth.
So those are you know those are the big buckets.
You can always look at our strategy and I, certainly don't mean to be.
Just referring to that is as it is an easy answer but the fact is this business is built on taking care of our customers delivering great food a great value.
Operating our shops at a level that they can drive that throughput and drive that efficiency.
We think that our we think we've got all of that potential to leverage those key items in and really grow that top line that one three and keep going from there past 2024.
And then.
Alright.
I'm, sorry, I, just want to add to Bob's comment really quickly.
What further gives us confidence in that.
And that long term goal of $1 3 million.
We've already we've.
We've already seen almost a quarter of our shops hit that level of <unk>, even in this kind of challenging environment. So.
In addition to all the strategic elements that we have kind of lined up to kind of push the entire system.
Having having a large group of shops that are already there.
It gives us that kind of further foundation for pushing it along.
Great.
It's actually a good segue because with the CBD units still lagging I believe I mean, how much of that kind of gap to 1.3 could you get just from CBD kind of retaining a historical level.
Yeah.
Yeah.
Certainly getting a lot of it from leverage.
What accelerates that leverages, if some of that CPD recovery and look we thought long and hard about how this how this plays out and we had we had a year of.
You know, it's fairly measured recovery in those shops, and so what we're not betting on is that those shops are you going to recover.
And in a at a pace that is.
Uncommonly fast we expect to see that kind of work through this year and into next year and so by by the time, we get through kind of 2024, we will have seen CBD.
Have come back to a level that.
Accelerates at $1 3 million and it certainly helps us as we move through them.
The quarter.
Coming up and the rest of the year. So it's a big part of that recovery, but it's not dependent on that recovery.
Great and maybe.
If you could help us in the near term as well on what your projections are for food and labor inflation for 'twenty, two and how much of your commodity basket you've locked and then I think you also took a pretty meaningful price increase at least in Chicago recently on top of that price increase you took in December if you can unpack for us kind of where your price.
That is running right now versus the fourth quarter and you know how the consumers responded to the price increases.
Sure I can start I can start with kind of how we are.
We're looking at the.
Inflation side of it.
Yeah, well look Cogs inflation really started to accelerate on us in the in the back half of the year and.
And we finished the year with 10 decided we finished it with almost 4% inflation.
Inflation.
What we're calling now S&P.
And seven 4% was a rate for <unk>.
For Q4, we expect that to be a big part of what happens here in the first quarter.
With with rates that are.
Even a little bit higher I should say that Q4 run rate on the on the on the.
F N P inflation and then when you add to that the wage inflation, which similarly pushed really high in the back half of last year and we finished we finished.
Q4, with over 11% kind of labor inflation and seven three for the full year and as we look into Q Q1, it's going to be kind of a similar story before we start to see that pace kind of pulled.
Pull back and we certainly did take price to.
To help mitigate some of that.
Some of that overall inflation, we took the pricing action and I think it was 11 11 of last year, we took a little bit in January of this year on the digital side and then we had a price increase.
Here, Justin and P to that.
And that helps us offset a big portion of the of those inflationary pressures and we have some potential pricing actions for later in the year, but we look at those as discretionary as we.
We're very careful that we want to make sure that we still continue to have that right kind of a value equation for the customer and it gives us somebody optionality as it relates to how we see commodities and labor move as we go forward.
And then just any any customer impact I mean, it doesn't look like it from your trends so far in February and March, but how has the customer responded to the price.
Yeah, so far the customer is.
It's still coming through our shops and numbers that were excited about it I.
I think it's a little choppy with with P. One as you've seen whether in omicron, so you're trying to sort of suss out how much of your your your traffic dynamics.
Dynamic as related to those elements.
<unk> plus price, but we certainly you know as we as we move price.
We often test.
Pretty hard in front of it so that we can understand if theres any change in.
And the way that customers might receive it but.
So far I think we've seen a lot of consistency with what we've expected in terms of customer reaction.
Is as they come to us in terms of our traffic numbers and qualitatively, we do customer surveys and those kind of things. We haven't we haven't had any net negative feedback I should say very little negative feedback on these pricing actions because I think customers.
Inflation is all around them.
It's impacting everyone. So it's something I think that they're just kind of managing through.
Okay, Great and last question for me on the M C.
<unk> thousand units go can you help us think about the composition of the CNS. I mean is it are we going to see a much greater percentage of drive throughs suburban just help us think about what that 2000 unit pie looks like in terms of.
Of shops versus what you have today and then also just on the proceeds from Refranchising in the what what are you earmarking that for.
Yeah.
Yes, sure and I I think your email, but look the brand just continues to thrive in all of our all of our shop types, but for the the pandemic impacted CBD locations.
But as you look at where our white space is we have done we've done the market holding capacity for the entire United States in preparation for this announcement.
And we looked at all 210 of those designated you know television markets across the U S and we see that holding capacity is as really the determinant behind our confidence in the 2000 unit goal that we're setting out.
A large majority of those are gonna be suburban and drive through locations are that's where the growth potential is that's where the white spaces are in and you know candidly, that's where the consumers are.
We will certainly build in our franchisees will certainly build CBD locations in those markets, but Oh, Yeah. Oh, you really have to do is kind of look at the largest city markets that we are we're currently in Washington, and Chicago and in New York.
And you know three of the most difficult CBD markets to penetrate and we've done it and done it successfully so the rest of our growth is across the rest of the U S. As we as we grow to penetrate the other ones so that ones.
I think that's where our franchisees are going to gravitate first we're gonna give them additional support in a targeted trade area mapping so that within the shop development agreements in areas that I spoke about in our prepared remarks, once a franchisee partners with us.
Certain S. D E will provide another layer of support that were literally target the trade areas, where they can they can build their locations with the highest propensity for predictability of success based on what we know about our existing portfolio.
So turning to your second half of your question about the proceeds this is.
You know a lot of companies who've gone through this so it's a it's a complex financial maneuver to re franchise.
And on the one hand on the earnings statement, if you will where we're obviously, giving up the EBITDA that we we enjoy off of whatever shops or markets that we re franchise.
But the the trade on the earnings of course is what we gain in the initial franchise fees for US. That's a 40000 dollar fee per location as well as the 6% royalties that we charge for being a potbelly franchisee.
And there depending on the market depending on the shops are we do expect that there'll be some games and you know that that has the benefit not only on the earnings statement put on our balance sheet as well.
A lot of cash are moving around in these refranchising deals as well because even though we have to amortize those iff's are we.
We were able to absorb all of that cash at watch and I think it's really important that and are any franchisees that were in discussions with understand this that that these re franchise deals only happen in partnership with a.
Development agreement and those development agreements have development area deposits that go with them as well.
So you know you spread that kind of evenly over the three years that we've we've discussed we plan to do this work there there definitely will be a cash benefit and earnings benefit that goes with it.
We still feel overall, our balance sheet is as really healthy coming out of the pandemic, but we would you know we'd like to use those proceeds to start by taking care of some of the desk that we have and then we can we can look at other areas to invest in our business. So that we can accelerate the growth to get to that 2000 and get it even faster.
Okay. Thank you very much.
Thank you.
Thank you, ladies and gentlemen, as a reminder, it is star one to ask a question, we'll pause a moment to allow for any others.
Yeah.
Thank you ladies and gentlemen, it seems there are no question no further questions at this time I'll turn the floor back to Mr. Wright for any final comments.
Well. Thank you again, everyone for your time today 2021 was a year of growth and success for potbelly are and as we enter 2022 I am so excited to execute against our growth oriented mindset that we have in place we have a clear vision to increase our shop count five fold over the long term and we have the right team right platform right.
Brand and the right plan to deliver that goal.
Potbelly brand is well positioned for tremendous success and we'll continue to focus on and deliver upon our objectives that we discussed here today and drive further value for our shareholders.
Thank you for your interest and your support and Potbelly Hope you all have a great day.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.