Q1 2022 Potbelly Corp Earnings Call
Good afternoon, everyone and welcome to Potbelly Corporation's first quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question Press Star then one on Hs Sunpower.
To withdraw yourself on a question you Press Star then two.
Please also note. This event is being recorded and I would now like to turn the conference over to Mr. Dan Dickson Potbellies Senior Vice President and Chief Legal Officer. Please go ahead.
Good afternoon, everyone and welcome to our first quarter 2022 earnings call.
Our presenters today are Bob Wright, our President and Chief Executive Officer.
Keith Lewis, our senior Vice President and Chief Financial Officer.
Please note that we have provided a set of Powerpoint slides that will accompany our prepared remarks you.
You may access these slides on the Investor Relations section of our website.
After our prepared remarks, we'll open the call for your questions.
I'd like to call your attention to our cautionary statements on slide two and 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 for 2022 or any other future periods 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 be found in our Form 10-K under the heading risk factors and MD&A and in our subsequent filings with the Securities and Exchange Commission.
Which are available at SEC Gov.
During the call. There will also be a discussion of some items that do not conform to U S generally accepted accounting principles or GAAP.
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 this afternoon.
Both of which are available in the investors tab of our website.
I'll now turn the call over to Bob.
Thank you Lydia and good afternoon all.
Thank you for joining us today as always I would like to begin today's call by thanking our employees for their continuous hard work and positive energy. Our people are the heartbeat of our brand and it is with their dedication that we continue to deliver our craveable quality food and goodbye and service to our loyal customers and a word we trust them.
And we know our customers do as well I'm, so proud of our associates and I'm grateful they choose potbelly is the place to grow their careers.
Now, let's begin on slide three where I'll provide a brief overview of the first quarter 2022.
Revenues of $98 $2 million increased by 25, 8% compared to the first quarter of 2021.
And same store sales increased by 24, 4% as compared to Q1 of 2021.
Following omicron and weather related headwinds early in the quarter same store sales gained momentum at an accelerated pace and we're extremely excited to have achieved record <unk> performance in the month of March.
This momentum was supported by notable success in our digital channels as well as significant recovery in our airport and CBD shop types.
In March CBD shops delivered their strongest volume at Navy <unk> performance since the onset of the pandemic.
We're particularly encouraged by the recovery of the shop types.
Our expectation is that they will serve as a tailwind supporting our broader portfolio as we continue along our path to growth.
Our adjusted EBITDA for the quarter was a loss of $2 $3 million, which although negative still represents a significant improvement compared to a loss of $6 $6 million for the first quarter 2021.
Turning to slide four I would like to highlight our strategic successes in the quarter. During the period, we renewed our focus on food innovation and food focused promotional initiatives, including the rollout of our seasonal red Velvet Cookie for Valentine's day, and buy one get one free promotion celebrating our 45th anniversary and national meat Ball day.
<unk>.
We've also seen strong improvements in our catering business following successful promotional activity, including a focus on social catering for occasions, such as the Super Bowl and March Madness.
Additionally, we have further invested in our digital marketing and paid social advertising campaigns, which have yielded sizable increases to sales dollars and daily transactions.
Following the rollout of our upgraded Tech stack. We also enjoyed continued positive response from our customers as well as increased enrollment and engagement in our perks loyalty program.
Not only have our digital platform investments enhanced customer value, but they've also driven topline performance through increased check traffic and accessibility to our shops with the various order and service channels that meet our customers' needs.
We are diligently aware of and focused on the macro environmental headwinds in our business today, especially the cost availability and quality of talent necessary to continue growing our brand.
We've implemented a number of new initiatives to strengthen the workplace environment for a dedicated associates, thus driving stronger employee satisfaction and retention.
Which have resulted in continued improvements in overall customer satisfaction.
For example, we've successfully rolled out our digital tipping in all of our shops are customers now have the ability to demonstrate their appreciation directly to our associates for delivering our special Goodbye service.
We've seen extremely encouraging results from this initiative, including better service for our customers and better pay for our associates.
We will continue to make enhancements in our workplace with balance goals of driving a positive employee environment and enhance customer satisfaction.
Lastly, we've been very active in executing against our franchise growth acceleration initiative announced last quarter.
We're building our pipeline of multi unit franchise candidates, we've enhanced our franchising and refranchising market planning as well as sales and marketing tactics.
We also continued to develop and implement internal control systems processes and tools that will strengthen potbelly as a franchise of choice. We look forward to building further relationships with potential franchisees as we move toward our goal of Refranchising approximately 25% of our company units over the next three years.
And signed deals for new shop development area agreements.
I'd also like to briefly highlight that we have aligned the company's internal controls and expenses with certain digital and marketing expenses now carried at the shop level as we shift to a more franchise focused organization.
Later in today's presentation as we discuss shop level margin, Steve will provide a more detailed explanation of this presentation change franchisees and franchise candidates are happy to see us align our shop p&l's to reflect their business model.
I will turn the call over to Steve to detail our financial performance in the first quarter Steve.
Thank you Bob and good afternoon, everyone. Please turn to slide five of the presentation, where we outlined the progression of average unit volume or <unk> as well as same store sales throughout the first quarter 2022, and the month of April .
As you can see we continue to report steady growth in same store sales in each period this year.
More important is the evolution of our <unk>.
We experienced a drop in <unk> in January from fourth quarter levels due to seasonality weather and omicron impact.
However, starting in February .
I'm in the business accelerated resulting in record au vs. In the month of March.
So far we are sustaining this momentum into the second quarter.
Turning to slide six I'll walk you through our income statement and specific financial performance for the first quarter of 2022 compared to the first quarter of 2021.
During the first quarter total revenues were $98 $2 million, an increase of 25, 8% compared to $78 $1 million in the prior year quarter.
This was driven by a combination of increased traffic improved staffing and customer service successful marketing and promotions or new menu launched last year and strategic price increases.
While all of our shop types performed well our previously lagging CBD in airport locations showed notable recovery.
We reported an adjusted EBITDA loss of $2 $3 million compared to a loss of $6 $6 million in the year ago period.
The previously mentioned headwinds and seasonality impacted sales early in the quarter, along with heightened inflation, which placed pressure on margins that said we are encouraged by recent trends.
Our G&A costs were $8 $5 million or eight 7% of total revenues compared to $7 $2 million or nine 2% of total revenues in the first quarter of 2021.
The decrease on a percentage basis was largely due to topline leverage.
The increase on a dollar basis was driven primarily by compensation as multiple senior leadership team.
<unk> were vacant in Q1, 2021 and our CEO is receiving a $1 salary in its first year.
As we turn the discussion to the components of shop margin I want to highlight the accounting reclassification Bob mentioned earlier.
As we continue to pivot our business towards being a franchise focused organization.
We have adjusted our shop level margin to better align with this shift.
Shops, now carry certain advertising and marketing expenses, including fees to support our scaled media spend based on a percentage of sales.
This realignment best allocate shop level costs.
To reflect this adjustment, we will be providing a reclassification of shop level margin for the past four quarters on our Investor relations website to support easier comparisons.
The shop margin components reflected here incorporate the reclassification and show up primarily in the other operating expenses line to.
To be clear we are undertaking these changes on a voluntary basis and they only involved the geography of the income statement to be more consistent with industry practice.
Food beverage and packaging costs are F N P.
Were $27 $3 million or 28.0% of shop sales versus $21 $5 million or 27, 7% of shop sales in the year ago period.
The increase in S&P on an absolute basis was due to higher volumes and higher input costs, primarily proteins and packaging.
As we've discussed previously we're working to mitigate the impact of increased input costs and optimize our cost saving actions to drive the greatest value for our customers.
While the inflationary environment is expected to persist.
We continue to prioritize our efforts to protect our margins and bottom line.
Our 5.4% pricing increase enacted in February help support those objectives.
Labor expenses were $33 $3 million or 34, 1% of shop sales compared to $28 $6 million or 36, 9% of shop sales in the year ago period.
The increased on an absolute basis is due to an increase in staffing to service higher volumes as well as continued wage increases in line with the broader industry.
During the quarter, we saw our average hourly wage increased 14% compared to the year ago period.
Despite these headwinds we drove labor more than 200 basis points lower year over year as a percentage of sales.
In an effort to recruit and retain our employees. We're proud to have implemented new recruiting measures referral programs and as Bob alluded to are tipping program.
This program has provided over $1 million of additional compensation directly to our employees.
Other operating expenses were $18 $1 million or 18, 6% of shop sales compared to $14.0 million or 18, 1% of shop sales in the year ago period, due mainly to the aforementioned increase in and reallocation of certain marketing and advertising expenses to align with the <unk>.
Two our franchise focused business as well as an increase in third party delivery fees.
We are pleased to see the percentage of sales attributed to our digital channels increased by 300 basis points in the quarter to 39%.
This reinforces the positive response, our customers have had to the functionality enabled by our upgraded tech stack, including App only promotions and our perks loyalty program.
Additionally, we saw a positive uptick in our catering performance driven by increases in both office and social catering occasions.
While in shop dining saw a slight step down in contribution sequentially, primarily due to weather and omicron related challenges.
We were pleased to see our dedicated customers continue to come into our shops at an elevated rate year over year.
<unk> for the quarter were slightly below $20000, which is attributable to the aforementioned challenges in the early parts of the quarter. However.
However, we saw a meaningful rebound in <unk> as the quarter advanced we are thrilled that momentum continues to build as we work towards our long term targets.
Before I pass the call back to Bob I'd like to turn to slide nine to discuss our 2022 priorities and guidance.
First we would like to reiterate our commitment to our 2022 priorities that we shared with you on our last earnings call.
We're making good progress the first few months of the year.
We are continuing to execute against our five pillar strategy and long term growth driving initiatives strengthening our market presence and making strategic disciplined investments and marketing development and operations.
Additionally, we remain on track to deliver our 2022 guidance of record Suvs double digit growth in same store sales and shop level margin in the low double digit range.
For the second quarter, we're expecting revenue of between $110 million and $116 million as well as shop level margins between 9.0% an 11.0 per cent a notable increase on a sequential basis.
With that I will pass things over back to Bob.
Yeah.
Thanks, Steve on Slide 10, I'd like to briefly remind everyone of our five pillar strategy, which continues to serve us well as the foundation for our three year strategic growth objectives, which we unveiled last quarter.
Since establishing our five pillar strategy, we have enjoyed great success on our path to growth most.
Most recently with strong receptivity to food innovation and promotions digital marketing engagement and ongoing improvements to our staffing and training programs.
You've seen and will continue to see our strategic initiatives ladder up to these five pillars supporting the achievement of our growth goals.
To wrap up my prepared comments on slide 11, I'd like to remind you of the 2024 growth targets, we unveiled last quarter number one <unk> of $1 3 million achieved through continued sharp recovery customer service and satisfaction and our targeted marketing efforts leveraging digital and our perks loyal.
T program number two shop level margins of greater than 16% supported by top line leverage and aggressive cost discipline, including labor as well as supply chain and food cost management number three refranchising approximately 25% of our company shops is significant as we move towards.
A franchise growth company.
And number four achieving franchise unit growth at a pace of at least 10% through our shop development area agreements or SDA as we have and continue to work diligently to expand our franchise marketing and sales tactics as well as the tools to develop our pipeline of multi unit franchise candidates, we look forward to building.
Upon the great momentum, we achieved in the first quarter as we progress towards our goals, we see our long term U S potential to reach 2000 units and at least 85% franchise system.
As I said last quarter, we have the team we have the brand and we have the strategy to deliver.
With that I will now turn the call back over to the operator, so we can address your questions operator.
Thank you well now begin the question and answer session.
To join the question queue Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing any keys.
And if you'd like to remove yourself from the question queue. Please press Star then two.
We will pause momentarily to assemble the roster.
The first question comes from Matt Curtis with William Blair. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
First one on pricing I understand from your comments and from the release you took.
Five 4% increase.
During the quarter in February .
But could you tell us what the cumulative price benefit was in the menu for the full first quarter.
Sure Matt.
We.
We spent some time as you can imagine like most do you thinking about the right way to.
Put pricing in place to accomplish a couple of things right. One is to make sure that we.
We continue to have a well balanced kind of price value equation for our customers, but also.
You have to offset some of the.
Inflationary headwinds that we had.
Coming our way.
<unk>.
We didn't quite outrun it completely in terms of the price increase we came pretty became pretty close.
We we look at our price increases.
Not flowing through at 100%, it's closer to about 80% flow through when we put a price increase in place we've been.
<unk> been consistent.
Not just this past price increase but with us.
With prior price increases that we've seen as well.
Okay.
So are you planning any additional price increases right now and basically how much the price benefit you expect in the menu going forward.
Yes.
<unk>.
Planning to more price increases through the year, but I would emphasize.
Similar to the thoughtfulness that we put into the past price increases there.
Discretionary to a certain extent right as we see the inflationary environment evolve as well as the consumer behavior environment involve evolve we want to make sure that we are flexible in determining what level we want to.
Adjust those prices I think based on the way we've thought about inflation evolving both on the wage side and on the on the S&P side the price increases that we've considered.
Should net us out pretty pretty close to even in terms of.
Net margin impact.
Inflation versus price increase so that's what we're looking at.
Okay, Yes, Matt if I can add to Steve's comments on the pricing.
And I think you hear a lot of this earning cycle just a lot of sensitivity to that.
The inflation on the one hand and consumer demand on the other hand in kind of threading that needle, we do see pricing as a necessary move.
<unk> talked about it very openly in first quarter.
Steve said, we've got those two discretionary price increases on our calendar for later this year.
We're going to be really careful about maintaining value. So we.
We're looking at a lot of things internally that that measure the customer's perception of value and how they are reacting to those price increases and ensuring that especially for our loyal customers. As you saw us do things like our Bogo offers.
Loyalty perks promotion activity and even where we're frankly, we're very excited to continue to see the value of our three size menu with those skinny sizes gives people are lower price point.
And the the pick your pair that they can use so our customer reaction to the price increases has been sure. Some have noticed it but where we're really pleased with the flow through and the persistent consumer demand.
And that's what's really kind of kind of govern our ability to to price out the inflation, while still holding on to the consumer demand, but we think we've got all of the right hydraulics and place to balance that out the rest of this year.
Okay understood. So just to kind of close the loop on the pricing discussion I guess.
And here.
Your full year restaurant level margin guidance as well as I guess the guidance for the second quarter. You provided does that include the impact of the two price increases you're planning or.
Not yet.
It includes the contemplation of those yes, it does but again measured in meters based on what we think is appropriate at the time I think it's also good to reiterate as Steve talked about it also includes.
The Ah <unk>.
The marketing funds that are now in the shop margin so.
And that's fully burdened the way that a lot of franchise P&L burden now.
Okay understood alright, shifting gears to our staffing and wages.
I guess first is the basic question what was your wage inflation in the quarter.
How much do you expect in wage inflation for the full year.
Are you planning any additional wage increases at this point.
So I guess, we'll start there.
Okay.
Yes, I think our go ahead Steve.
Oh, I'm, sorry, I didn't.
Or just to get to the numbers really quickly and we mentioned in the prepared remarks that we saw wage increases at about 14%.
And those are associated with sort of hourly wage increases for the.
For the quarter that's versus prior year.
And what we have I think seen a somewhat of a somewhat of a flattening of the acceleration that we saw kind of last end of last year into this year.
And that's helpful to us.
We mentioned.
Some things that we're doing to to remain competitive in the marketplace.
As it relates to some of our recruiting.
And as you heard in the prepared remarks suites, we've instituted tipping program, which has been.
Beneficial to not just recruitment, but retained many of our.
Our store level employees.
Okay.
Pacifically to your question about planned increases Matt.
We have.
We have budgeted.
Relative inflation in wages throughout the year.
We are finding that those those tips that we mentioned are able to to help us mitigate what we had thought we would need in terms of natural wage inflation and of course in those markets and there are fewer of those this year than last year, where there'll be legislated wage increases obviously, we'll comply with those but candidly in many cases, most cases were well ahead of those.
Legislated numbers anyway, because of the market drove the wages higher.
Okay.
I guess, just talking about staffing more generally.
How are your staffing levels right now either relative to 2019 or sort of what you would consider to be optimal levels in this environment.
And can you tell us so what hourly employee and shop manager turnover trends have been like recently.
Yes, we don't share those internal trends, but we we are excited to tell you that our R. Chop turnover numbers, both at the associate level and at the manager level are well below the numbers that we get for fast casual as an industry.
Of course fast casual runs a lot lower than Q <unk> are a lot lower than <unk>. So we're we're very pleased with our turnover numbers.
And overall staffing where I think we've talked a couple of quarters ago. It was probably one of the worst environments I've seen in over 30 years in the business. It has gotten better for US we are back to net.
Hiring so and we're retaining and hiring more associates and more managers than we're losing so we're growing our staffing as we head into the busiest season.
We can always use more high quality people, but we're not in crisis mode and certainly in much much better position than we were.
Even six months ago.
Our expectation is that many of the workplace things that we've been working on training and staffing and positioning guidelines and the labor guidelines. The management staffing that we've done all of that is beginning to bear more and more fruit for us it's not only showing up in our employee turnover numbers as those as I said.
Are proving to be very good we're also seeing our customer satisfaction scores.
Accelerating in a positive direction as well and that's always a reflection of how the staffing environment is growing so we're very pleased with where we are but not yet satisfied.
Okay got it.
I guess.
Just to talk about your franchising initiatives for a moment.
I know, it's still relatively early days, but.
What are you specifically working on right now to attract new franchisees.
The system. My name is it mainly just initial outreach efforts are you are you a little bit further along in the process, where we could potentially expect to hear about eight.
<unk> Sciences as soon as later this year early next year.
Yes.
We are much further along than initial outreach, we've got marketing campaigns outreach campaigns, we've got our digital marketing campaigns that are underway that debt.
Have begun to bear fruit for us.
As you as you suspect we look forward to making news on any deals that we sign and we will do that when we when we sign them much like we did last week when we issued.
We issued a press release for our reef partnership for our.
Mobile a ghost kitchen partnership that we have with <unk> as we have new deals, whether they're refranchising deals or new SDA a deals will make sure that you guys know about them.
In real time.
Suffice it to say, though that we have active dialogue with multiple candidates.
Not only for Refranchising some of the markets that we are refranchising, but for new territory in SBA as well.
So we are very comfortable.
Reiterating our three year goal of 25% of our shops, we still believe that that will come at a fairly even pace across those three years, including this year and.
And we were very pleased with the you know the interest and the response that we're getting from franchisees.
Okay, great to hear.
I look forward to hearing more about that.
The future of them.
I guess final question for me is on digital marketing, which is basic.
Based on my understanding one of the core components of Youre getting the system.
Two $1 $3 million over time.
It sounds like your efforts today are primarily focused around really driving engagement with the current core customer base.
Two things like leveraging potbelly perks loyalty and so on.
I was wondering if I could hear your thoughts on using digital marketing to maybe broaden your reach more to other demographic groups.
I'm thinking mainly about outreach to younger customers here.
Yes.
Yes, thanks for that.
Right, we talk a lot about our perks program because those those loyal customers are so important and so valuable to us.
But much of the spend that we're investing in that scale media is in fact in awareness building.
It's digital advertising placed and social arenas that that allows us to create an outreach campaign building the brand for people either have lapsed awareness or.
Have have limited awareness of the brand.
I think we are.
As we've shared before we hold ourselves to a very high standard for the returns on those investments. That's why we continue to talk about it in a scaled manner.
We what we look for is overall lift in sales in group of shops, where we make the additional investments.
And unlike a lot of a lot of e-commerce, where youre simply tracking the click throughs and the online purchases were actually measuring pre post net of controls sales lift overall salesman, because we recognize that much of our advertising drives foot traffic into the shops.
And it is that three to one expected return that allows us to continue to incrementally scale that media as we take each step we test it.
We prove that it works for US we're comfortable that the investment is delivering returns and then we take the next step to expand it a little further.
So in fact quite a bit of it is awareness building advertising and I'm very pleased with how it's working for us.
Okay sounds good guys.
Guys. Thanks, very much for the time and good luck with the rest of the quarter.
Thanks, Matt.
Thanks, Matt.
Okay.
We still have time for questions. So again, if you'd like to join the question queue Press Star then one.
Yeah.
Okay.
Okay.
Yeah.
Okay.
We have no further questions. So this concludes our question and answer session and I will turn the conference back over to management for any closing remarks.
Thank you operator, I know our call is crossing over with a lot of reporting today and.
So please know that we are looking forward to any follow up calls.
And plan to do a lot of those throughout the evening and tomorrow, but for today I just want to say. Thank you. Thank you for your time today. We're excited about how 2022 has begun and what is in store for the remainder of the year. We believe potbelly is at the forefront of growth and we look forward to unlocking the company's fullest potential. We appreciate your interest and support for.
Potbelly and we look forward to meeting many of you.
And many of our investors in the upcoming William Blair and B Riley conferences that Stephen I'll be attending so have a great night, everyone. Thanks for dialing in.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.