Q2 2022 Potbelly Corp Earnings Call
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Good afternoon everyone and welcome to Potbelly Corporation's second quarter 2022 earnings conference call.
All participants will be in listen only mode.
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I would now like to turn the call over to MS adia Dixon pop belly, Senior Vice President and Chief legal Officer. Please go ahead.
Good afternoon everyone and welcome to our second quarter 2022 earnings call. Our presenters today are Bob Wright, our President and Chief Executive Officer, and Steve servirlist, 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 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 the remainder of 2000 and twentyety-two or any other future period, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of one thousand nine hundred and ninety-five.
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 of the forward-looking statements and other information that will be given today can be found in our Form 10-K under the headings risk factor and DNA and in our subsequent filings with the Securities and Exchange Commission, which are available at SEC outgo.
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, GI. 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 Investor's PAB of our website.
I'll now turn the call over to Bob.
Thank you, ada. Good afternoon all and thank you for joining us today. I'd like to be in our call today by thanking our popbly employees for their continued hard work and commitment to our company. Our people are the heart of our brand. It is their positivity, diligence and strong work, I think, that allows popbelly to operate as the top quality food brand we promise our customers.
I'm incredibly proud of our team and look forward to seeing what we accomplished together as we continue growing.
Of course, we know our customers are navigating an ever-changing economy filled with challenges and we are very happy to continue providing an unparalleled customer experience and value for their money.
We'll begin with Slide 3, which provides a high-level summary of the quarter's results and our views on the broader operating environment.
We continue to view our five -pillar strategy as our road map to success.
Our strategy leverages superior quality food at an excellent value while elevating our associate experience to set us apart for everyone that visits.
Providing bring you back customer experiences.
Building brand leadership in all our digital channels.
And accelerating growth through franchising and refranchising efforts.
The five pillar strategy has been the backbone of popularly story from the beginning in the pandemic, through the company's recovery and now growth.
We've driven significant revenue and profitability improvement, as well as record as in the quarter, by executing against this strategy.
Additionally, our business has proven flexible and resilient in the face of broader macro environmental challenges.
We see notable improvement in staffing trends, maintain disciplined spending and continue to drive strong top line growth and expansion in shop-level margins.
Looking forward, we are highly encouraged by our ability to continue delivering value to our customers and we remain on a positive trajectory to achieve our long-term growth objectives.
Slide four headlines are financial achievements. That Steve will cover in detail later in our call, but I'm proud to share we had a very strong quarter.
We drove revenues of $116 million in the quarter and achieved record auvs of nearly $23 thousand per week.
Grew same-store sales by 17% in the quarter, continued our strength digital business at 36% of sales and I'm very proud to share that. We drove positive net income of $6 thousand and adjusted EBITDA of $5.8 million.
We've been clear and consistent about our focused strategy. Today, I'm excited to highlight with additional clarity how the fundamental growth engines of operations, marketing and development are leading us to achieve such strong performance and why I have confidence that it will continue.
To this point, and turning to Slide 5, I'd like to highlight our recent marketing activities in the quarter that have become an integral part of our business strategy.
These efforts, always maintained, focus on the elements that differentiate our unique brands, starting with our food. Our customers loved our innovative ltos, including the successful rollout of coal brew shake, cbano sandwich and lemon cheesecake cookie, which have contributed to increased sales and daily transactions. Importantly, we maintained our investments in digital marketing and paid social campaigns as the primary means of marketing not only our ltos, but broader brand awareness and traffic driving advertising.
In addition to traditional brand awareness and traffic driving methods, we also accelerated targeted digital-only promotions like our one day only, buy 1, get one free, or bogo offers, which resulted in increased perks and downloads perks engagement, as well as incremental perks, revenue dollars and daily transactions.
Lastly, I'm very excited to announce we recently launched updated branding with a refreshed appearance that better reflects the uniqueness of popmeling.
This includes returning to our heritage as pot belly sandwich works.
You can already see our updated logo and colors on our website, at popbelly com and, of course, in today's presentation.
Our online creative work will begin incorporating these updated branding later in Q3. The results of our marketing programs and initiatives are highly encouraging and we have confidence they will be growth drivers into the future.
Moving to Slide 6, I'd like to discuss our progress on our franchise growth acceleration initiative. We are extremely pleased with the pace and quantity of our refranchising and new shop development discussions, as well as the state of our current pipeline.
To support our pipeline and deal progression. We've held two discovery days so far this year, the most recent to having taken place just a few weeks ago.
These events allowed a number of experienced potential multi-unit franchise owners to have individualized time with the management team and learn about the unique opportunities here at pot belly. Alongside our discovery days, our dedicated franchise team is proactively researching and identifying attractive areas for pot belly's continued development and market penetration through sdas or shop development areas ready for sale to our franchisees.
Additionally, we are continuing to expand our marketing and sales tactics, supported by the integration of franchising tools and systems.
Our franchis-oriented goals remain our top priority and we look forward to sharing specific refranchising and franchising deal activity as we sign and close those deals.
Turning to operations, highlights on Slide seven.
Operations focus is not an area we've previously highlighted in great detail, but we think it's important to discuss the innovative momentum we believe we've established in our ongoing quest for streamlining and improving efficiencies. We view it as a vital part of driving company growth.
We're making in-shop investments with the intention of enhancing customer satisfaction through optimized workflows.
We've also implemented internal control measures, including new shop-level financial reporting systems.
And improved hours-based labor guide and customer satisfaction monitoring, which allow for improvements to financials as well as the experience we offer our employees and our customers.
We're making further improvements to our technology systems and tools to best support the customer experience, driving higher operational standards for the company too.
Additionally, we've begun testing a new in-shop tech platform through what we're calling our pop-belly digital kitchen.
We believe this project has great potential to build on the customer-facing digital investments we've made over the last 18 months.
Pot belly digital kitchen is designed to make processing our digital orders more efficient, while also improving our traditional in-shop visits.
Bring improved customer experiences, better speed of service and on-time orders.
Increased throughinput, improved accuracy and better food quality.
Lastly, we are increasingly aligning our corporate staffing structure to support our franchise-oriented business model.
These operational investments not only help us operate our own shops better and more profitably, but they also drive predictability of operational success and consistency, which is critical as we become a franchise growth company.
I will now turn the call over to Steve, to detail our financial performance in the second quarter Steve.
Thank you Bob, and good afternoon everyone.
Please turn to Slide eight of the.
presentationwhere we outlline the progression of every unit volume, or a U, B.
As well as same-store sales throughout the second quarter 2022 and the month of July .
We have continued to achieve substantive same-store sales growth.
Delivering an increase of seventeen.
2% versus the second quarter of 2021 .
This growth was supported by the continuing recovery of our CBD and airport shops.
As Bob mentioned, we are pleased to highlight record AUS of approximately $23 thousand in the quarter.
July auv. Moderated slightvery.
But this is solid performance, as it included a traditionally lower traffic. July fourth holiday period.
As you've heard from other restaurant concepts, there is some uncertainty about how customers will react to the dynamics of the economy.
So far, our customers have demonstrated that potbelure remains a strong part of their eating out routine.
Turning to Slide 9, I'll walk you through our income statement and specific financial performance for the second quarter of 2022 compared to the second quarter of 2021.
During the second quarter, total revenues were 116 million, an increase of 19% compared to 97.5 million in the prior year quarter.
This was driven by a number of factors.
Including our strong same-store sales increases.
Successful digital advertising and promotion.
ltto, marketing efforts and strategic pricing increases.
Additionally, the continued recovery of our CBD and airport shop supported our top line expansion.
Alongside healthy performance in our other shop types.
We reported a positive net income of zpoint $6 million and a meaningful increase compared to a net loss of three point nine million in the prior year period.
This is our first positive net income quarter since the first quarter of 2017, demonstrating the impact of our five pillar strategy and strength of execution.
Our adjusted net income was one point five million, compared with a net loss of two point nine million in the second quarter of 2021.
Our adjusted EBITDA was five point eight million.
Over three times the one point nine million a year ago period.
This notable step-up in adjusted EBITDA was driven by a combination of strong top line performance.
Expanding shop level margins and disciplined cost management.
Dna cost in the second quarter were eight point eight million, or 8% of total revenues, compared to eight point seven million, or 9% of total revenue in the second quarter of 2021.
The decrease on a percentage basis was primarily the result of top line leverage.
Food beverage and packaging costs, or F P.
Were 32.8 million were 28% of shop sales.
Versus 26.3 million or 27% of shop sales in the year ago period.
The increase in fnp on an absolute basis was due to higher volumes as well as higher input costs.
Specifically proteins, packaging and paper products and bread.
Managing the impact of persistently higher input costs remains a priority, and we are committed to protecting our margins and bottom line while providing value for our customers.
For the full year we expect to see up to 18% fnp inflation.
Primarily driven by protein.
It was higher than that in the second quarter and we expect it to be at similar levels in Q3 and eventually moderate Q4.
Labor expenses were a 36.1 million, or 31% of sales, compared to 32 million, or 33% of shop sales in the year ago period.
The increase on an absolute basis is a result of wage increases in line with that of the broader industry over the trailing 12 months.
Despite the higher wage environment, we have been able to decrease labor expenses on a percentage basis by 160 basis points.
Due to top line performance and the positive impacts from our labor-related initiatives, such as referral bonuses, the tipping initiative we implemented last quarter and our hours-based labor guide.
As we look forward, we anticipate moderating labor inflation rates across food and beverage, as well as packaging.
We continue to be encouraged with our ability to efficiently staff our shops in order to meet demand in the midst of a challenging operating landscape.
Other operating expenses were 19.1 million were 17% of sales, compared with sixteen point million were 16% of sales in the year ago period, largely driven by expenses that scale proportional to revenuees, such as third-party delivery fees, as well as inflation in some fixed expenses like utilities and repairs and maintenance.
Before discussing shop level margins, I would like to remind everyone that, beginning in Q1 2022, we elected to adjust and reclassify our margins to now carry certain advertising and marketing expense.
Based on a percentage of sales aligning with the reporting structure of franchise-oriented organization.
Shock global margins were 11%.
Exceeding our guidance range of 9% to 11%.
This was a meaningful improvement compared to 10% in a year ago period.
Driven by top line growth, the continued recovery of CBD and airport shops and improved operational efficiencies.
Our liquidity position at the end of the second quarter was 26.9 million, consisting of 14.7 million of cash on hand plus 12.2 million available on our existing credit facility.
Slide 10 highlights how our channel mix has evolved over the past year.
We are pleased to see the percentage of sales attributed to our digital channels has remained relatively stable and ended the second quarter at 36%.
This consistently strong digital contribution reinforces the positive response and customer engagement we have enjoyed as a result of our enhanced textstact, individualized perks loyalty program and perch-focused marketing deals, such as our digital and perchase targeted bogo promotion.
Additionally, in-shop dinings found an increase of four percentage points sequentially as weather conditions improved and more customers return to our shops.
This was in line with expectations.
As mentioned earlier, we are excited to highlight our strong AUS in the second quarter.
As a significant achievement as we look out to our 2024 objectives.
I'll conclude on Slide 11 to discuss our 2022 priorities and guidance.
In 2022. We remain focused on executing against our five pillar strategy.
Which we view as a foundation to continue delivering business expansion.
Additionally, we continue to prioritize and strengthen our menu innovation digital marketing activity to drive awareness and traffic throughout the brand.
We believe our digital marketing platform allows pot belly to enjoy greater guest acquisition rates, as well as established deeper brand loyalty with its patron.
These priorities will drive our path to achieving our 2024 long-term growth objectives.
Additionally, we remain on track to deliver our previously provided 2022 guidance of record auvs, double-digit growth in same-store sales and shop level margin in the low double-digit range.
For the third quarter 2022, we are expecting total revenues of between 113 million to 118 million and shop level margins of between 9% and 12%.
Note our guidance does not take into account the potential impact of refranchising opportunities that could occur during the quarter. Additionally, subsequent to quarter-end, we received forgiveness for our $1 million PP loan, which will impact our third quarter 2022 financials.
With that, I'll pass the call back over to Bob.
Thank you, Steve. Turning to Slide 12, I'd like to remind you of the 2024 growth targets we unveiled back in March. First auvs of $1.3 million.
Which we've seen meaningful progress towards through our improving performance rooted in our commitment to enhancing the customer experience. Investment in technology, operational systems integration.
Strategic marketing and our differentiated menu.
Additionally, we continue to enjoy recovery across our full shop portfolio, particularly that of CBDs, while maintaining strength in our digital mix of business.
Second shop level margins of greater than 16%.
I'm pleased with the progress and I'm confident we can continue our March towards this goal with heightened sales leverage, careful management of supply chain and food costs.
And stronger in-shop efficiency, driving lower labor costs, including many of the systems I mentioned earlier in the call.
Thirdly, refranchising approximately 25% of our company-owned shops by the end of 2024. We've made significant progress towards this goal and, as I mentioned earlier, we will provide specifics around deals once they are signed and closed.
And finally, we are working to achieve a franchise unit growth rate of at least 10% through our shop development area agreements, supporting our shift to a primarily franchise-oriented organization.
We view our long-term U's shop total to reach 2000 units and at least an 85% franchise system, which we believe we will achieve through the attraction of high-quality franchisees interested in Potbelly's strong competitive advantage in the fast casual space.
With that. I will now turn the call back over to the operator to address your questions operator.
We will now begin the question-and answer session.
To ask a question. You may press star, then one on your telephone key pad.
If you are using a speaker phone, Please pick up your handset before pressing the keys.
To withdraw your question, please press star than two at this time. We will pause momentarily to assemble our roster.
Our first question is from Matt Curtis with William Blair. Please go ahead.
Thanks very much, afteron.
I guess. So for question on your extension or targeted digital offers during the quarter would seem to go fairly well. I was just wondering- I mean you in the past- about leveraging the detailed check data you've been collecting from your new tech stack to deliver a more personalized offers for perks numbers. I mean, is there any data you can share around? Perhaps the sales lift? What are the percentage of offers that result in a transaction? I'm just trying to get some context around what the impact is.
Yeah thanks, Matt. Yeah, we appreciate it. We have enjoyed some, some extended success with some of this digital targeted offers and, as you mentioned, many of them have been targeted towards everyone in the digital world, both web and app. We've narrowed that through the quarter, occasionally to app and perks only- I should say perks only- which is going really well for us, and we have continued this segmentation of our offers for our perks members based on their check level data and their frequency, and that we won't share for competitive reasons, exactly how those levers are working force, but what I can say is we've grown our perks population- over two point two million perks memers- and across the all the fronts that would matter in terms of outcome- the mix of our sales that is, perks driven sales, the frequency of those perks transactions compared to non perks transactions, the average check that we get on perks versus non perks orders, and our ability to improve the frequency of the perks members within that environment- is all improving because of these results and candidly, we still think we've got a lot of dry powder here, where we're a full quarter now into this segmented offers and the, the check level data and segmentation that we get out of that. We're learning about what works in terms of promotional activity and the algorithms that we use to target those consumers are learning with us, which is a great benefit.
So we think there's a lot more we can do there. We're looking forward to not only growing just total perks members, but the contribution to the business.
Okay great, glad to hear it. It just shifting to your promotions. I mean you brought back the cubano L, which seem to go well. I wondering if you could talk about how often you plan to run these in the future. I mean I know in years past it used to be more of a seasonal sign and then relatedly, what price points they're expected to be at. I know historically the L seem to be a little bit more premium price. The cubano seemed to be more in the kind of need to price, didn't premium price range. So wondering if that's kind of the target going forward or maybe if you consider doing a more value Orient LTO given the inflationary environment.
Yes great question. First of all, we've enjoyed bring food innovation back and, you're right, we've gone back to the pantry on a couple of products that have worked well for pop belly years ago. Even those though, have some improved and slightly different ingredients and, if you think about them across the menu, what I think you see us doing is offering our customers are sandwiches in an LTO format. We've done the cookies as well, and we've now done the- the chips are sorry, the shapkes. We have done some things with meal deals, but on a little more subtle basis.
The the thing that we're learning is that each of these behaveved differently. So sandwiches provide a clear quality lift to the brand and kona did that. kon P performed really well. We tune the price So that it fit the ladtering and teering that we did with the three size menu last year. We don't want to create value disparity across the the menu, even when we do in L? o. we priced up the euro a little bit- the one that we've run more recently- because it has some higher input costs and we see those providing lift with a little bit of mix but also with some of that check growth. Now cookies behave differently, very differently. You know customers are adding our cookies is add on and we really like the add on incidents that comes with them. We're getting a whole lot of love on social media for the various llaabvors we've introduced and how much people are creating videos about how much they like our cookies, and the L? T O cookies are no exception. We're seeing similar behavior with the shakes. So I think what what you're going to see with us is a continued pulsing of L os.
So long as they benefit the customer, they don't disrupt the operations and they bring positive advantage to the financials all across the Board.
Pick withshifing to be digital kitchen platform that you're testing. I mean, you seem to be testing a variety of technology is designed to improve operations as well as, I would imagine, improve the employee experience as well. I'm wondering if you could do little more specific about what kinds of things are being tested as well, when you think they might be ready to be broadly deployed in the stores.
Yes be delighted. That's part of the reason we added that to our prepared remarks. A lot of what we've talked about in the last year is what we've done with the textstack, and most of the tetechstack work was consumer facing app, the web and even the integration layers for perks and for all of our digital orders.
We had always seen this down the pipeline. We were working on a little more quietly, but we also know that in the shops there's an opportunity for additional technology investments, whether there're through software enhancements that allow us to manage the business better. Like I mentioned some with our labor guide and the financial performance metrics that we have, the operation standards evaluations tools that we use, but specifically with poplly digital kitchen, what we've done is taken the advantage of poplly already had by having two make lines. We've talked about that a lot over the last couple of years.
And digitizing both of those lines So that we can be even better at delivering the customers' expectations when the order digitally, and even more successful with throughput and with customer quality when someone comes in the front door and goes through the front line. So our ability to receive process, sort those orders, present them to the, to our associates, So that they can, they can coordinate the orders, they can make sure that the orders already on time. We get the advantage of monitoring all of our shops that have those systems in place So that we can troubleshoot and coach where there may be gaps and we can also use that data to continue to do the, the labor guide and enhance the system itself. So we're excited to be at that point where we're doing some more digitization in the shop. We have T in more than a handful of shops now and we're pleased with the results so far. We've got some additional testing to do, but we're at the point where we're going to be contemplating what the investment costs would be for a broader rollout and and be in a position in the future to talk about why we believe that investment makes sense.
Okay great, I guess, shifting over to pricing in the commodity environment, do you expect to take more price in the balance of the year at this point, and maybe you could also just remind us what your keyulative price benefit is right now? And then I guess third part of that question, sorry- is you could maybe remind us how much of your commodity basket has locked in for the balance of the year as of right now.
Sure I'll let Steve help us with some of the pricing discussion because, like like everybody in this space, we're all watching it very closely. We've tried to manage the balance on the commodity side really closely about. If you look at third quarter, about 85% of our basket is locked and it drops to about 60 when you get the fourth quarter. You would, you know, normal times you'd expect more of that to be the case but, like a lot of brands, I think we're expecting some moderation in those supply chain pressures, in those cost. So we want to make sure we've got the flexibility to take advantage of that. What it happens- and you know, we have taken two pricing raises so far this year and we're prepared and flexible for for one more. But you know, in total, so far we're.
Just just just go ahead, Steve your speakers ded to help me out here.
Yes yes, I think it bears repeating. Our pricing posture is really specifically designed to try to offset inflationarymade pressures on our input and we've we've been kind of moving along at that. At a similar pace, I think we expect with our actions to be roughly margin neutral. After we're done, obvious ly- we have one more pricing increase of contemplated.
umand our. Our inflation is.
Inflation we feel on on the commodity side has has hit its peak. Right know- you probably heard that from other folks as well- the expectation that the Q3 is still going to be pretty high but that we're going to start to come down more meaningfully in Q4 and with labor. We've seen labor certainly still high but a little lower than what we expected, and mentioned some of the things that we're doing on that side, our tipping program in particular, as I think help helped us moderate those wage, those wage increases. But that right ly. We took a pricing action in P, in P 6, and we've got one more that that's expected. So wewere're, we haven't, we haven't seen demand fall off as a result of the price increase.
You've probably heard from others, there's some some softening out there in environment, but for us we've been really careful about the way that we've thought about moving price to keep pace with inflation and balance that with customer value and demand. And so far we've been- we've been pretty happy with the way we've to be able to work that balancing.
Okay it's not understood. I guess, to touch on your restaurant level margin guidance for the third quarter from that 9%, twelven percent a ssmidgewater than it was last quarter when her was 9% to 11%. I M just wondering why it is. I mean, is that of's more uncertainty around inflation in the back half, or is it because you're less contracted in the fourth quarter or or something else? You you could help us with that?
It's both of those honestly there's. We were, we're pretty excited about expand ING our margins year over year to where we got them to 11.4 And as we look into the next quarter, like I said, we're still to have high, high inflation on the commodity side hopefully, where it come out a bit later in the quarter towards four So we wantjust want to make sure that we've got the right kind of range in place So that if we start to see things change from where we expect them to be, that we've got room. But you know we we fully intend on continuing to work and all the things that will help us expand the margin. And certainly top line helps us right and we see demand continuing to be strong and you know our ops am work chhard on the labor side and we've been able to manage that as well as well. Well with other costs that are, you know, in the system in terms of other operating expenses. So the're working toward the and we always will work toward the high end of that range and we'all work to beat it. But we wanted to make sure we had a realistic, realistic range for everyone to look at us through.
Okay just said, and then I guess maybe if I can finish up with just the broader question on the state of the consumer right now. I mean we've seen a lot of restaurant concepts talked about some demand impact from higher gas prices and it seems like this has really been in concentrated around weakening demand from lower income consumers particularly. I'm just curious to see if you guys have seen any of that in your sales trends in a few car comment.
Yeah Mat the, you're right, I mean lessen one must conclude: the consumer and the customers are under pressure. Broad based inflation that their Re experiencing is is coming out them from all directions. We have some advantag though and, as we've said, you know, our our two pricing increases so far have certainly been pricing increases we've been able to take and haven't seen those directly impact the, the demand from our customers. In particular. The question really, I think that you're getting at is kind of who is experiencing that pressure the most and how are they reacting to the pressure? You know that the jobs market is is to their advantage, the savings that they had going into this inflation as to their advantage, and for many of the available credit that they had is to their advantage. Now, for us in the fast casual space, and a pop blly in particular, it's important for us to you know, note that when you're earning 75 to one hundred thousand dollars a year or more, where the fast casual consumer really really sets're just in a better position to with span the pressure. We have another advantage: that food at home inflation is still out, pacing food away from home inflation. So those are all kind of the macro external things that were processingit end of the day, I think we all have to be ready for the, the pressure, to be something it's, it's kind of ever present for the consumer, at least in the near term. So then you turn internally and you know we we focus on the things that we control. We're really happy that we installed the new menu that we did last year, that is, a that had the effect of installing a value layer into our menu that didn't exist before. And we see some very subtle movement with in the be, the many patterns that suggest that people are still using pop belly, but maybe adjusting. You know very small amounts, but you can see a little more uptake on skinny and and that's great because that means that that men is working hard for us. We've we've intended to have that craable quality in that great value. Throughout the menu we added some expansion to our meal bals. So if, if you do have an extra few pennies dollar in your cket, you want to get a chips in a botle drink when you're ordering digally but you rather get the ountain drink whenyou're in the shop, you know you can take advantage of that. You can up great also to a shake if want to do that. So there's a flexibility in those value meals. And then the promotional activity that we've put forth throughout the quarter. Certainly you should see that is a reflectionofour desire to make sure we're given their customers and much values possible, pecially those digital and perks consumerers, and they responded really well. I just would like to add to- and I know we've emphasized this and past quarters- the brand has typically significantly under spent our competitors in this space when it comes to marketing investments and because we have to- sorry, we have during that periodof the time and we've started to learn of ways that that we can promote our brand with out doing the discounting think we've got a lot of dry powder. These digital promotions are working really well.
Okay greatig. Well, Thanks very much and congratulations on the continued improvement.
Thank you.
Thanks smatt.
Thank you. We will now pass the call over to Lisa Fortune from Investor Relations.
Thank you, operator. This quarter we are testing a new approach to complement the great questions that William Blair offers by taking questions from our investors.
To collect these questions. The IR team reached out several of our topholders this week and pulled together about four questions.
Moving forward. Any of our investors are encouraged to submit questions prior to our calls in the future.
Our first question.
Is related to the recent' 13 D. So the question being: do you have any comment on the recent 13 D filed by D three funds?
Yeah Thank you, Lisa. First of all, you know we we won't comment on on quite a bit of it, but what I what I would like to say is we really appreciate D three in their support for the stock. They've not been in the stock for a long period of time but are are now a very significant holder of the stock and we've included them in our Investor Communications from time to time since they entered the stock. We have great respect for their insights and again, very much appreciate their support and they've been buyers here for a while. As you mentioned, they just filed a couple of weeks ago and and everyone can find their their 13 D on our website or, if you you know, get it directly through the's C C. that's fine. If you haven't read it, I encourage it to read it because I, you know, I personally- we as a team, appreciate the way they're looking at the near term and the long term value in the company.
And we view their stated focus as something that's really well align with management's focus in our current strategy. So you know we look forward to working with them and, like all of our investors, maintaining an open and positive Communications relationship with them over time. So Yeah, happy to happy to see what they're writing about us, for sure.
Thank you. The next question is related to franchising. We've seen one franchise deal, even if you CAn't name the partner named. Yet where are you in the process? What does the pipeline look like and where are you with regard to timeline to beginning to execute on the long-term strategy?
We appreciate this question to we as we mentioned in our prepared remarks. There's a tremendous amount of activity in franchising far beyond the notion of trying to get to and consumate a deal. These and yet I recognize that for investors you're looking for something with more definity and finality when it comes down to those deals because for a brand that really hasn't been.
A significant franchise growth brand. That ultimately, is that you know. The proof is in those numbers. What I can say and reiterate what I said in a prepared remarks is that we are in very active discussions, with a very healthy pace, of a number of franchise candidates and candidly, at every stage of the franchiseising process, from initial lead and E mail communications with our sales teams all the way through to quite detailed and specific deal terms on on various deals that we're working on.
Ultimately. Frankly, I understand the question is coming from you: how, how can we really accelerate that and are we going to be able to- we're going to be able to meet our near term and long-term goals of this level of franchise growth? I will tell you, with all the internal insight that I have, I could feel quite confident that that's the case.
There are a number of reasons too. I just would like to say there are of reasons that we really CAn't talk about the deals until they're signed and closed. In some of them are internal decisions we have. You know, we have people working for us in these refranchise potential markets and we want to take care of them in the right way at out that transition. In some cases some of the refranchise deals could be in competitive bids and we need to make sure that we maintain all the right confidentiality around that and the coursewe. We wouldn't want to publish anything until we know we've got it signed and closed, because we don't want to be know we can. Negotiating position soi'll add to this too, just in terms of sort of brea breathing some confidence.
The activity of this, of this franching effort, is geographically disperse. It includes refranchising deals as well as new development deal work. It includes various sizes of potential franchise candidates as well as various sizes of franchise deals and, as I already said, it is at all stages of the process in in all variations of these deals. So we very much look forward to our announcements and I'll make this crystal clear to Lisa that when we have signed deals that are closed, we will announce them in due course and not save those all up for the next earnings cycle.
Thank you. Next question: can you provide more color on the reef partnership and how it fits into the 2000 unit goals?
Yeah happy to. As I think most of our investors know, reef is essentially a ghost kitchen food truck operating as a franchisee of the brand and and, on a Handan, of their model. I think it's. You know, there's a reason that they've been able to grow, that they the way they have, and when you look at the white space that we have a pop belly, there's also a reason to believe they can be a great partner for us, because the model can grow quickly when successful with a brand. We, you know. We hope that we can see some of that success to where we are, specifically as we're finalizing the menu and the equipment package that allows them to prove out the proof of concept in the first couple test locations. Once those steps are complete, getting those first couple vessels- they call them- up and running does not take very long at all.
And I'm optimistic that we can- you know we can get to those unserved customers. I'd like to address a part of the the 2000 unit goal though, So specifically with regards to that 2000 goal. We develop that goal with an understanding of what market holding capacity was for traditional pot belly units across the country and I think that's really important for investors. As you think about you know what are the volumes of our 2000 units expected to be? What's the contribution from franchise Royal is expected to be and a nontraditional development like reeef bef and other solutions. This's going to be great for us to help serve our customers and fill in the gaps also. But I wanted everybody and understand that the 2000 units are are really built on a traditional development model.
And then our final question is: B to yourself in a favorable position, operating in the fast casual segment as consumers start to watch their wallex, or are you noticing some pressure?
From the kintma.
Yeah a good question, kind of builds off matts question, I think, and you know we are seeing consuers, you know, just try to manage their wallet. But, like I said, we're not seeing it in our sale and we're certainly not seeing the reaction that that some have seen in sales decline. So we're we're pleased with where we're's, we're pleased with the typical income of the average fast casual consumers as well as the poppelly consumer and, as I mentioned, we've been able to outpace the, the food at home inflation rates here in the restaurant space, which really helps us. You know, the momentum in the business is is strong, our ability to grow the business is strong and you know specifically categorically, I think, there's something really really special about the fast casual business and I would compare not only to Q's or, like you asked about your question, but casual dining as well.
The gap in average check for fast casual is much larger when you compare to casual dining than when you compare to QSR.
The gap to Q's R is not nearly as large. In terms of average check, the data that we've seen suggests that we operate a fast casual average check that's actually below fast casual averages, which makes us all the more competitive to casual dining and especially for those Q's R experienceences where they want to have a nicer experience but don't want to step all the way to casual. So we believe we can catch the business on the way down when people are trading out of casual and we believe we operate credible value upgrade from Q's rthe business really sets in a great place for us and we think it's a competitive advantage.
At this time. There are no other questions in queq. I'll now turn the call back to Bob right for any closing remarks.
Thank you, and thank you all again for your time today. We're pleased to have delivered a notably strong performance this quarter and we remain highly confident in our business and growth momentum as we continue to navigate today onuncertain times.
Pop bellyes in the midst of its next phase of growth and we're excited to continue progressing towards unlocking the brand's fullest potential.
And just thank you all for your interest in Potbelly. We appreciate your support. Have a great night.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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