Q3 2022 Potbelly Corp Earnings Call
[music].
Good afternoon, everyone.
And welcome to the Potbelly Corporation third quarter 2020 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal our corporate specialists by pressing Star then there are after today's presentation there'll be an opportunity to ask questions.
To ask the question you May Press Star then one on your touch time fine.
To withdraw your question. Please press Star then two please.
Please not this event is being recorded.
Now I'd like to turn the call attitude its audio Pixar Potbelly, senior Vice President and Chief Legal Officer.
Please go ahead.
Good afternoon, everyone and welcome to our third quarter 2022 earnings call.
Our presenters today are Bob Wright, our President and Chief Executive Officer, and Steve <unk>, 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, well 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 2022 or any other future periods should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
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 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 yeah. Good afternoon, all and thank you for joining us today before we discuss the quarter I would like to begin by thanking the potbelly employees for their continued dedication and hard work. Our people continue to provide a warm welcoming an enjoyable experience for our customers.
Which has allowed the potbelly brand to deliver the goodbyes first class dives over 45 years I along with the entire leadership team I am extremely grateful for their efforts.
As the macro environment continues to evolve, we and our customers have been adapting along with it.
Valley, we continue to prioritize delivering value not only through our food, but our service experience and the goodbyes of our shops. Additionally, I think it is fitting we are discussing our business with you today. After all its national Sandwich day, our support center employees are in our shops today as the entire potbelly nation celebrates with her.
Customers.
I will begin today on slide three to discuss our key strategic achievements in the third quarter. Our five pillar strategy continues to serve as our framework for growth and has yielded meaningful results.
I am excited to report we achieved record <unk> for a second quarter in a row and significantly expanded our shop level margins on a year over year basis, despite challenging macroeconomic conditions and persistent inflationary headwinds, particularly within commodity costs.
This margin improvement was due to record top line expansion and increased operating leverage as we look to further strengthen our operations. We remain dedicated to the increased testing and implementation of our potbelly digital kitchen or PDK.
And both franchise and company owned shops, which is proving additive to operational efficiencies margins, our catering business and improvements in the digital and in shop customer experience CDK will allow for increased order accuracy better speed of service increase throughput improve customer experiences.
And better food quality, so far we're very pleased with the initial feedback.
Additionally, we continued to enjoy benefits from our enhanced marketing programs, including <unk> and special promotional offerings through our perks loyalty program.
These activities all contributed to our record top line results. This quarter also and that was announced during the quarter. We completed two franchising deals signing SDA as our shop development area agreements to bring a total of 19, new shops between the Tampa, Florida, and Central Illinois markets.
Since close in Q3, we signed a third deal for six shops in Orlando, Florida.
These deals Mark key milestones for our franchise growth acceleration initiatives. We're extremely excited by the current momentum in our business and improvements we've achieved despite uncertain economic conditions.
Slide four outlines our financial successes for the third quarter, which I will touch on briefly with Steve providing greater details later in the call.
Overall the quarter was another strong performance metrics included.
All time record revenue of $117 $6 million continue.
Continued strength in our digital business once again accounting for 36% of revenue.
10, 6% shop level margin expansion of 190 basis points year over year.
15% same store sales growth leading to another record weekly <unk> of $23383.
Net income of $9 million for the quarter and lastly, we reported an adjusted EBITDA of $4 $7 million up $2 million from the year ago period.
Turning to slide five I'd like to take you through our recent marketing initiatives and successes during the quarter.
We continued to prioritize targeted marketing initiatives and select digital advertising campaigns, which led to increased customer engagement from our perks loyalty members and contributed to meaningful topline expansion.
Our perks loyalty program continued to gain traction with 115000, new members added during the quarter.
An encouraging sign as we continue to expand our digital assets and programs. Additionally, our catering business positively impacted sales with continued growth in popularity across professional and social settings and across all shop types as well.
Okay.
We remain committed to menu innovation with L. T OS, including our Euro Sandwich, Smores, Cookie and pumpkin Spice shake, which drove revenue expansion during the quarter.
Also as we began to discuss last quarter, we launched our refreshed branding assets to better reflect the uniqueness and rich heritage of Potbelly Sandwich works ultimately our marketing initiatives are providing critical support and attracting and retaining potbelly customers driving traffic delivering strong branding and unrivaled value for.
Patrons with all this success and only an approximate 2% brand fund contribution as a percentage of system wide revenue, we remain optimistic in our ability to expand our investments in digital advertising and marketing as a core driver of continued topline sales growth.
With that I'll now turn the call over to Steve to detail our financial performance in the third quarter Steve.
Thank you Bob.
Good afternoon, and thank you for joining us today.
Let's turn to slide six of the presentation, where I will detail the progression of <unk> and same store sales over the previous three quarters and the month of October .
We are extremely pleased with the momentum in <unk> with two sequential record breaking quarters.
<unk> growth was primarily driven by sustained demand in general as well as continued improving performance from previously lagging CVD and airport shop types and a three 6% price increase in the quarter to mitigate the impact of input cost inflation.
As Bob mentioned, we continue to benefit from the effectiveness of our marketing initiatives and the progress under our five pillar strategy.
We are seeing very encouraging signs for the initial part of the fourth quarter with another record period for <unk> and same store sales metrics of $25244 and 23, 4% respectively for the month of October .
Turning to slide seven I'll walk you through our income statement and specific financial performance for the third quarter of 2022 compared to the third quarter of 2021.
Yeah.
During the third quarter total revenues were $117 $6 million, an increase of 15, 7% compared to $101 7 million in the prior year quarter.
This was driven by a number of factors, including strong same store sales successful digital marketing campaigns, including LTE OS record perks loyalty program engagement strategic price increases and an approximately 60% increase in same store catering sales.
Additionally, the continued recovery of our CBD and airport shops supported topline expansion alongside healthy performance in our other shop types.
We reported a positive net income of $9.0 million for the quarter compared to a net loss of $2 $9 million in the prior year period inclusive of the positive impact of PPP loan forgiveness of $10 $2 million.
Adjusted net income was zero point $3 billion.
Compared with an adjusted net loss of $1 $5 million in the third quarter of 2021.
Third quarter, adjusted EBITDA was $4 $7 million, representing a meaningful step up from the $2 $7 million in the year ago period.
This notable increase in adjusted EBITDA was primarily driven by significant topline growth. In addition to improved labor and occupancy leverage along with disciplined corporate spending.
Although challenging we were particularly pleased with the team's ability to mitigate inflationary challenges during the quarter and will remain diligent in our efforts going forward.
G&A costs in the third quarter were $9 6 million or eight 1% of total revenues compared to $7 3 million or seven 1% of total revenue in the third quarter of 2021.
The increase on both a dollar and percentage basis were attributable to payroll cost timing and bonus accrual expense.
Food beverage and packaging costs, or S&P were $34 $8 million or 29, 9% of shop sales versus $28 $2 million or 27, 9% of shop sales in the year ago period.
S&P increased on an absolute and percentage basis was due to higher volumes as well as meaningfully higher input costs, specifically proteins and bread.
Inflationary pressures were higher than expected in the earlier part of the quarter and have since trended lower.
That said managing the impact of higher input costs remains a top priority for potbelly.
We continue to proactively mitigate these headwinds through strategic price increases and through our continued partnership with our vendors, while delivering the value we promise to our loyal customers.
Labor expenses were 36.0, a million dollars or 39% of sales compared to $33 1 million or 32, 8% of shop sales in the year ago period.
On an absolute basis higher labor costs were due to higher volumes and increased wages.
On a percentage basis.
Labor expenses decreased by 190 basis points due to the positive impacts of our topline leverage as well as labor related initiatives, such as in shop, and digital tipping, which helps us attract and retain quality workers and reduce recruiting and training costs.
Additionally, we continue to benefit from our our state's labor guide, which ensures the optimal utilization of our in shop staff matching the proper level of staffing with the timing of peak business demand.
It also allows us to ensure we capture efficiencies associated with price increases and other labor saving initiatives.
Other operating expenses were $19 $7 million or 17.0% of sales compared to $17 5 million or 17, 3% of sales in the year ago period.
On an absolute basis expenses increased due to costs that are variable with sales such as third party delivery and credit card fees.
Increased marketing and advertising spend as well as inflation related to utilities.
And some other expenses.
Today is prepared remarks.
Notably we also saw seconds sequential uptick in on premise dining testing to our customers growing interests and enjoying the unique environment of our shops.
I'll conclude on slide nine before passing the call back to Bob by discussing our primary areas of focus for the fourth quarter, which provide confidence in our performance for the balance of 2022.
For the remainder of the year you look to continue our strong au b in sales momentum supported by leveraging in applying our learnings from accretive marketing initiatives expanding our catering business.
Prior engagement from perks loyalty members successful deal offerings, such as our Bogo promotions L T OS and targeted digital advertising campaigns.
As we enjoy top line strength, we are committed to continuing our margin expansion optimization of labor and management of input costs.
Also we are excited to expand our potbelly digital kitchen into new locations as it is shown the potential for increased operational and Labour efficiencies and then even better in shop experience for our customers and employees.
Lastly, we are pleased with the initial progress of our franchise growth acceleration initiatives by closing two deals during the third quarter and one more so far during the fourth quarter bobble speak to this in greater detail shortly.
We believe our strong performance will continue into Q4.
With the October sales momentum, we expect revenue of 114th of $119 million for the quarter.
And billing on my earlier comments about margin expansion. During September we now expect Q for shop margins between 10 and 13%.
We believe this performance trajectory allows us to communicate additional specificity regarding our 2022 fiscal year goals.
Happy to share expectations of achieving record aves of between $1.14 million and $116 million <unk>.
Same store sales of 16.0% to 18.0 per cent and shop level margins of approximately 10.0%.
With that I will pass the call back over to Bob.
Thank you Steve now on Slide 10, I'll provide an update on our franchise growth acceleration initiatives.
As I mentioned earlier during the quarter, we announced the signing of our first to S. D a or shop development area agreements, bringing a COVID-19 total shops to the Tampa, Florida in Central Illinois regions, Great start to our franchising push these transactions severe mark the beginning of our shift operating as a franchise focused organization.
<unk>.
As mentioned, we've already announced another S D. A a earlier during the fourth quarter or six more shops in Orlando, Florida.
We look forward to announcing additional franchise agreements as they are finalized.
As we look to build upon our initial deal momentum we will continue to fill our pipeline qualified franchise Z candidates.
We prioritize building relationships with our candidates my hosting or discovery days, having now hosted for events in total since launching the initiative.
These events provide prospective franchisees the opportunity to present their growth vision and plans gain a more detailed understanding of our business and the benefits of building their business with the pot belly brands.
They meet with me and our management team and begin the Connection's a strong relationship for the future.
I'm encouraged with the pace at which we are progressing and look forward to sharing more announcements as deals are sign.
I'll conclude today on slide 11 will remind you of our 2024 growth targets, which we unveiled at the beginning of this year.
Starting with <unk>, we are working towards our 1.3 million dollar goal on an annualized basis.
We're enthused with our progress towards this goal after all we've already achieved weekly a you vs that would translate to $1.3 million during the month of October .
As we continue to benefit from improving revenue trends across our diverse shop portfolio marketing initiatives success from our digital and perks loyalty program and operations in throughput improvements we remain highly confident in our ability to achieve this goal.
Second shop level margins are greater than 16% <unk>.
Here again, we continue to demonstrate our ability to maintain strong shop level margins and all operating conditions largely attributable to a.
A proactive approach and mitigating inflationary pressures improved labor leverage vendor and supply chain management and demand generation.
The third goal is to Refranchise approximately 25 per cent of our company owned shops by the end of 2024.
As I mentioned, we are encouraged by the pipeline of interest and activity from highly qualified franchise candidates even in this pressured macro economic time.
And we look forward to announcing deals as their side.
Finally, we're working to achieve a franchise unit growth rate of at least 10% through our shop development area agreements or S. D. A <unk> with a focus on shifting to a primarily franchise own system over the next eight to 10 years, we're aiming for 2000 total shops with at least 85% of those.
Owned by franchisees.
Review, the strength of our brand unit level economics, and underlying fundamental business to give us a meaningful competitive advantage towards achieving these goals Wheeler.
We look forward to announcing S. D. A deals as they are assigned as well.
With that I will now turn the call back over to the operator to address your questions operator.
Thank you will now begin the question and answer session.
To ask a question. Please press Star then one on your touch time fine if you're using a speaker phone. Please pick up your handset before pressing the case if it anytime your question has been addressed and you'd like to withdraw your question. Please <unk>.
At this time, we will pulls momentarily to assemble that roster.
[noise] Oh first question comes from <unk> from William Blair play.
Please go ahead.
Hi, Good afternoon, just wanted to start with a question on the October calm.
And I guess Relatedly average weekly sales, which seemed to accelerate pretty significantly from the third quarter that's about it.
It seems to go against what I would characterize as typical seasonality and the business, where you're kind of cheer a drop off in volumes. After the summer. So I'm just curious on your thoughts about what drove that <unk> would it be something like stronger office occupancy they might be playing a role or maybe more of a return to in class learning <unk>.
<unk>, just any thoughts would be helpful.
Yeah, My first of all great too great to hear from you and.
You're right seasonally you wouldn't expect a record level a visa in October .
We would attribute it to a combination of things. There's no question that the C. V. D business continues to recover for US we showed that last quarter that we saw it becoming a tailwind where for several quarters. It had been a headwind.
We're still not back to pre pandemic traffic levels and the C V D markets, but we're we're pleased with their contribution to growth and believe that they continue to be an overall contributor just to the health of the business. You you mentioned the university shops as well there's no question. There's some strength airport shops are doing really well.
Too so.
Think in general is strengthening of the portfolio.
We we do believe in addition to that so many of the prepared remarks talking about our operation strength that continued efforts with throughput capacity to handle the digital business on the back line more and more efficiently.
And really staffing efforts that our field team I put in a place made a big difference in our ability to to manage and handle our business in a in a more productive way.
And then we we just continue to be very enthusiastic about the success of our marketing efforts, especially in all those digital channels and how we keep finding ways to to bring perks to life with the promotions that we've done throughout the quarter. The L. T OS that we've done it and the linkage of the digital promotion in the L. T O as in in the <unk>.
Works activation of those L. T O. So we we we think we've got momentum on a number of fronts that are leading to those kind of sales volumes.
Okay. So that sounds good and then I guess looking towards the latter part was the fourth quarter. So November December .
You know I I.
I know the year ago period in October I think you've <unk> 27, and then the full quarter, calling from the fourth quarter last year or something like 33 or phone on the second so that's why I think that just the math implies comparisons do get more difficult I was wondering if you can speak to how much more difficult they they get and.
Out of those two months November December which month is the tougher comparison for Ya.
Sure I can take that Matt I think.
All the <unk> start to get tougher writers, we had we saw some acceleration in our business within.
Within Q4 I think.
You know that that's a welcome thing right Uhm as we as we had a pretty strong fourth quarter and then we got hit by a hammer crowds. The beginning of this year, but as it relates to the trajectory of the business I think we we actually had a a really really strong P. 12 last year, that's our last period within the quarter. So I think like the cops there might be the most.
[noise] challenging year over year, but.
We're looking at our business and I think it's it's implied I think within the the guidance that we provided for the fourth quarter now we we do expect to have a fairly robust finished the year across all fronts.
Okay got it.
I haven't been on pricing.
<unk> your comments on the 3.6 per cent increase that you put through so what what time the cumulative price benefits to that bring you to for before third quarter, and then I'm assuming no further price increases what kind of price benefits would you expect for the fourth quarter.
Sure you mean in terms of the impact on the margin.
No I just mean in terms of of a component of of the call.
Store sales growth you know what what is the price benefit.
Sort of average ticket.
Yeah My name <unk> go ahead <unk>.
No not finished balance okay.
I was just say the blended.
The blended impact of of the pricing that we've taken this year is about.
Over 9%.
And you know I think in terms of.
What we would see and carry over next year, obviously, we've we've taken those as we've announced a browser you're going back to P. Two so some of that starts to roll off next year, and we really got to watch inflation to see how much more of that continues to pass through the system.
Steve is shared in previous calls 20 gigabytes of 2021, and we shall 14 over 14% average wage inflation in 2021. That's continued in 22 Ah single digits high single digits, but still I.
And this has been the euro food cost inflation so.
A lot of the will manage the carryover is kind of a baseline and then really be watching food and labour inflation as we turned the corner into 2023 to make some decisions about what we need to do next year.
Yeah, and I would just add to that.
We we have increased prices bobsled sort of around that nine per cent right.
The demand. However has has remained strong even in the face of that and I think that's just a testament to the.
Activities, but I was talking about on the marketing front and on the operations front. We certainly continue to get the benefit I think I'm, having food at home still far outpacing food away from home inflation.
As well and and I think our our delta to fast casual in terms of our our average check makes us feel pretty horrible. So that's a support ticket to demand.
Even in the face of some of the pressures that the consumer is facing everywhere.
Okay, Great I guess shifting to another topic the catering business.
It sounds like the catering calm with a 60% last quarter, if I heard that correctly.
I guess that might also be related to or office occupancy levels versus last year, obviously, but I was just wondering as you go into the holiday period, what do you have in place in order to drive that business a little bit more since since this might be the first rella.
Totally normal holiday period that we've had in awhile.
Yeah, I think on the on the catering business first of all you heard as mentioned it a few times, we continued to be pleased we.
We are we are still expecting a lot more out of our catering business as it continues to return the thing that a couple of things that were Super pleased with Matt is number one it isn't just in the C. V. D locations as people are coming back into the office, we are seeing that for sure, but the way we shifted our presentation of our catering business when we rolled out or.
New Tech stack and how we've promoted catering a couple of times. This year will do some more of that as time goes on we've been more successful than traditional office catering and what we're calling socialist celebration occasions for catering in all of our shop types. We also have invested in some additional support in the <unk>.
Field and orcadian coordinators that are in the shops and in the regional areas that are driving that business.
We're re establishing relationships with companies big and small even retailers that are surrounding our suburban locations that.
And once had a relationship with us in catering and and doing very very well with that and frankly, the digital efforts that we're putting forth perks loyalty program and our digital advertising is bringing our brand back to top of mind awareness for these catering occasions, we did see last year.
<unk> some return as we started to push a catering a little bit more in the fourth quarter.
The the retail sector can be a good source of catering business for us we expect that that'll be significantly better. This year as we go back to that and the last thing I would add and you hear this this theme kind of throughout many of our successes our operations and training team basically refreshed.
All of the training materials and all of the support materials, including the menus and so on for catering program and then we re trained all of our managers and our shop leaders that are involved in catering, including our franchise groups.
Kind of going back to catering basics and all of the tips and all of the planning and all of the preparation that goes into handling those catering orders when they come in how we solicit them, how we follow up and the operational details that set potbelly apart and we've seen great success with that customer feedbacks coming back and that's what's.
Breeding more of the repeat business from those catering order. So we think it's a big part of our brand success in the future, but we're already seeing the benefits even in the most recent quarter.
Okay, great Uhm and on the franchise.
Franchising deals that you've reached <unk> first of all congratulations on getting the first couple of those under your belt.
But I was I was wondering if you're also working on a large potential signings or whether we should expect just a a very consistent flow of announcements sort sort of what we've heard recently kind of in about five to 10 minute range going forward.
I think it's a great question and it goes right to our strategy and we have no reason to believe that we we are anything but right on target with our strategy is we've shared before what we've done is taken every D. M. A in the country and broken it into these S. D. A new shop development areas now some D M a.
Some markets using mid size cities throughout the country.
Their entire DMA is one S D. A and it may be 10, 12, 17 shops to be developed in that market. There are other market's very large cities that were not present in we've broken nose into three or four S. D A's and so the the targeted size for the S D a as in that.
10 to 12 shop range because.
<unk> to develop for us as for every deal that we sign we've got an eight year clock starts ticking on that development.
So we we've seen other brands are brand has done this in the past signs very large development deals and you never really see those come to conclusion not in not in a reasonable enough time to reach penetration in the market.
There are larger more sophisticated experienced developers that can handle more than 10, or 12 or 15 units and when we when we entertain those and we are having a relationship development with those types of franchise candidates right now we will absolutely sign a larger deal, but it's it's a high hurdle.
Four of them operationally financially and their ability to develop the people and find the real estate to meet the goals and that abbreviated timeframe eight to 10 years. This is the most will tolerate for completing those developing deals.
So.
While you may like the amount and not you, but one may like to hear the announcement about the big deal ever.
Every one of these deals you can expect to deliver approximately one or more than one unit at year. So when it comes to real gross the the pacing of the deals the size is going to be much more accelerated growth.
With every year that continues that we we get them sign. So yeah. You you should expect them to be in this low double digit size on average.
Okay understood that that actually helps a lot to think about going forward, okay, well I'll stop there. Thanks very much to both of them have have the national sandwich there.
It has been a <unk> a great day for US we watch the sales on this day really closely so thanks for that man great talking to you. Thanks. Thanks.
Matt quicker.
Thank you, Matt from William Blessed with that I'd like to hand, Nicola to at least it will train out to put some follow up questions go ahead Lisa.
Oh, Thank you operator, uhm similar to last quarter, we're offering are investors the opportunity to complement Williams players very thoughtful questions.
Collect these questions a potbelly investor relations team reached out to several of our shareholders. This week and moving forward will welcome any questions in the future.
First question, Bob emptied is turning that kept food prices with supermarket prices and playing faster than restaurant in Q S or even faster than you know than the past casual space.
Think you're gaining any market share as a result.
Yeah. Thanks, Thanks, Lisa.
Yeah, I think that the the good news for US is we we have the ability to kind of track our our market share. We look at it on a weekly basis to look at it in terms of sales you look at it in terms of traffic I and and Q3 was a was a strong quarter for us in terms of share games in both of those are both of those areas certain.
<unk> same store sales, we've seen that happen consistently throughout the year, we've seen share gains and and as we look at traffic you know because with with the with the same store sales pricing certainly has an impact.
On how that improves.
Traffic is is in some ways a way to look at it even more deeply than we are we were pleased to see that every single period of the quarter, we expanded our our traffic sure as well and so I think this goes back to you I've got a consumer who's facing inflation and they they do their own.
Calculus in terms of what they want to enjoying what they can afford and and what they think they're going to you know where they're gonna get the most value for their money and and we're pleased to see that they're choosing us editing at at a rate that's increasingly more so than our fast casual competitors.
Alright. The next two questions I really am the franchising topic, one the recent announcement in Florida.
That that franchise. He already has two potbelly shop. So how are those performing in terms of construction cost and revenue and then the second part of that question is on the Refranchise Refranchising side, we haven't seen any deal yeah cause there and just wondering if there's any any color you can add.
Delighted I'll I'll take that Lisa yeah on the first of all are they asked my family are franchisee in Tampa. We are we are just a lighter with them in fact I was on the phone with our vice President of development of your spending the day with them searching for all their neck sites yesterday and today, they're engaged in a great offer.
The Raiders.
They're putting a wonderful face on the brand the building the branch were catering, which is a great way not only to build their sales, but but to build a brand and extend it as they continue to develop new units.
But I love the question on the economics, because they answer the straightforward answer as they built them for less than we have published an R. F. D. D I won't I won't share their specific numbers, that's theirs to share but.
Not surprising franchisees can be very efficient with construction and with their business and they built both of those units for.
A a decent amount less than what we've published in or F. D D, which is around that 606 50 range there below that.
<unk> their volume in both units is better than the national average here at Potbelly in fact, a second location.
Is significantly above the national average, that's a drive through location, which does well, but really balanced business across the board and one thing I would make note of Matt earlier asked about kind of our development strategy. There's a second layer of mapping work. We do for every franchisee, that's <unk> and S D a from us.
We at our expense will put together a target of trade area map for that franchisee literally giving them Green circle trade areas. Most closely correlate to the predictive success of a potbelly and their second location is right in the middle of one of those green circles and so you know we're excited to see the correlation of that success at the trade area.
With that match, what we expect is what they are experiencing.
The last thing I'd say about them, which I think is really important.
Is franchising and franchise deals tend to be get other franchise deals. We have had as we should expect franchise candidates that we haven't made announcements about or talking to our existing franchisees and as other franchisees asked similar questions they become more and more interested and more confident about their.
Ability develop your potbelly, so very pleased with them knowing.
Knowing the Refranchising side Ah you're right, we haven't announced Refranchising deal, even though we've announced these three development deals and and candidly. We're okay with that my prepared remarks, I said that we would still plan to Refranchise about 100 of our locations between now and the end of 2024.
And we still expect to do that it's part of our optimization of our assets part of our focus strategy to get us focused on a more limited number of markets, but the number one reason that we talked about refranchising as we believe especially in our underpenetrated markets, putting those units in the hands of the developing franchisee.
Is the best way to catalyze growth some growth has always been our goal with Refranchising, we're getting a grow through the S. D as in markets, where we haven't refranchised yet.
And so I know that that's to come.
It is a different I mean look it is a different environment for the acquisition of ongoing businesses. There definitely has been an impact the economy, what's going on with interest rates is impacted franchisees buying other franchises, especially very large mmm significant size and scale deals unless.
Like what we're offering ardiles benefit from their size because they don't require any amount of leverage that maybe somebody who's very large Q S. All ideas require but there is a little bit of a slowing her pace there <unk>.
No swelling of interest and I wanted to be really clear about that but.
But the market is is causing franchisees to just be a little extra cautious when they're making acquisitions development is a different story.
In the meantime, I can assure you that every <unk> every market we considered refranchising.
Is benefiting from all of the success that we're sharing about our brand. So they when they get sold they will be that much more successful for the franchise either buys them, they're benefiting from the sales and margin growth and in the meantime, they're contributing to our sales and profitability as a company. So it's not a it's not a bad thing that we.
You know we may when they do those deals here in the in the near future versus having one or two of them already done.
Can I have the digital over the last two years Ah pop Valley has invested heavily I'm the customer facing digital France, and we've seen digital set it around 36 per cent of sales. What's your long term digital mixed call and how do you plan to drive it pass current level.
Yeah actually we're very pleased that it is at 36% and the last four quarters. It's been 36 per cent three out of those four quarters and 39% in and one of them.
All the while growing or average volumes and so we are growing digital we're growing it at pace with the rest of the business. We do believe that there's incremental growth and even incremental growth in the mix in the future. We haven't stated a goal of what that would be extra Emily.
But when you look at our digital assets and under David's leadership, what we've learned to do so far with the digital advertising with our paid placement with perks loyalty program and how we've engaged are approached customers, especially on our product innovation, we definitely think that there's more there.
A certain portion of our catering growth, we expect to show up in our digital mix.
There's still quite a bit of catering that comes through over the phone and believe it or not there's a fax or two that comes in occasionally but large larger and larger portion of it continues to be digital. So we think that there is growth there as well.
But really please listen this is this was in the single digits pre pandemic and and here. We are again, just south of 40% for a sustained period of time, while the top line continues to grow and I think there's more to come they only last thing I'd emphasize on the the driving of digital.
Is given that our investment in marketing is still so relatively low compared to the industry two per cent of our system wide sales being invested in marketing right now.
Almost all of that exclusively invested in digital assets.
One should believe that as we expand and we've we've challenged ourselves we will only expand our marketing spend as we get at least a three to 513 to five to one return on that investment.
We think there's a lever there too for continued top line growth and sure someone that's gonna show up in digital I'm sure.
Uhm last two questions kind of related to one another so I'll kind of put them together back on an inflation, we touched on food, but maybe if you could comment on labor as well as just broadly speaking the mitigating actions you have taken and are continuing to to take.
<unk> innocent to upset the inflationary impacts are saying.
Sure.
Sure I'll take that Lisa yeah, like an inflation has been persistent for the year really kind of got started with labor back last year around this time and.
I think what we've seen over the course of the year and then we probably talked about this in our prior calls as we've seen labor inflation, while still high coming down alright, we <unk>, we were in the double digits in quarter, one in terms of labor inflation in it through the year.
You know it come down to the mid single digits, sending we're expecting that four four quarter for in terms of labor and we have some advantages on that on that Labour front, you know not.
Not the least of which you know is is the the the tipping that we put in place earlier in the year, which provides about two extra dollars per hour for for our workers in the shops and so that is tool that helps us.
Manage some of the Labour inflation, but also is a great tool to attract as well as retain employees in our in our shops and so you know we we also look at inflation overall and start to look forward into into next year and I think the the expectation is that labour will.
Need to kind of stay.
Day in the the mid single digits in terms of of the rate of growth, we expect and our our ability to.
Manage that as well as the causes inflation, which frankly was you know.
Really.
Tougher component of our of our inflation in Q3 as it reached north of 20 per cent and a quarter.
That started to come down and we thought we've seen it come down over the last few periods and we expect it to come down even further in quarter foreign into into next year and as Bob as mentioned before and we've we've maintained we we tried to use price as a way to mitigate some of those pressures and we've done it.
Nice job I think through the year that.
Attempt to kind of match the pace at which we see inflation with the pace at which we we move price and still try to maintain that value equation with the customer and that's why we watch demand frankly on the on the traffic site to make sure that we're kind of hitting that sweet spot.
Managing cost as well as managing demand and so yeah, well, we'll continue to do that in the next year I don't I don't suspect we have as aggressive as we're going through our budgeting process. We don't have as aggressive a profile price increases next year, because we don't expect inflation to be as as high as it is this year.
Think that concludes the the question. So I will now hand, the call back over to bomb for closing comment.
Yeah, Thank you, Lisa and and I'd like to thank our institutional investors for for submitting the questions that you do we we very much appreciate your interest and support for the Brandon and.
And delighted to have these conversations with you on a quarterly basis. So Lisa thanks for doing that.
Today for all of you. Thanks for your time, we as you can tell we are extremely happy with the third quarter performance and were highly confident in the ongoing strengthen.
Especially the positive direction of the brand.
As we progress through our next phase of growth. We're gonna continue to prioritize things, we've talked about operational excellent strengthen our marketing and our franchising initiatives and value for our customers so keep them coming back.
So with that said I just want to thank you for your time today, we look forward to engaging with many of you in our upcoming conferences will be at the Stephens Nash investments conference the Wolf consumer confidence in its ability small cap conference coming up.
Thank you all again for your interest in pop <unk> have a great night.
Thank you.
That does conclude today's conference. Thank you for attending the today's presentation you might not disconnect.
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Mmm.
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