Q4 2022 Potbelly Corp Earnings Call

Speaker 1: I.

Speaker 2: All participants will be in listen-only mode.

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Speaker 2: After today's presentation, there will be an opportunity to ask questions.

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Speaker 2: I would now like to turn the conference over to Adia Dixon, Chief Legal Officer and Secretary. Please go ahead. Good afternoon everyone and welcome to our fourth quarter and full year 2022 earnings call. Our presenters today are Bob Wright, our President and Chief Executive Officer and Steve Syverlis.

Speaker 2: our Senior Vice President and Chief Financial Officer.

Speaker 2: Please note that we have provided a set of PowerPoint slides that will accompany our prepared remarks.

Speaker 2: You may access these slides on the Investor Relations section of our website.

Speaker 2: After our prepared remarks, we'll open the call for your questions.

Speaker 2: I would like to call your attention to our cautionary statements on slide 2 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.

Speaker 2: Any such statements, including our outlook for 2023 or any other future periods, should be considered forward-looking statements within the meaning of the Private Security's Litigation Reform Act of 1995. These forward-looking statements are not guarantees a future performance, nor should they be relied upon as representing management's views.

Speaker 2: as of any subsequent date.

Speaker 2: 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.

Speaker 2: 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 given today can be found in our Form 10K through the headings Risk Factors and MDNA.

Speaker 2: and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.

Speaker 2: During the call, there will also be a discussion of some items that do not conform to U.S. accepted accounting principles or GAP.

Speaker 2: 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.

Speaker 2: I'll now turn the call over to Bob.

Speaker 3: Thank you, Adia. Good afternoon and thank you for joining us today. Before we discuss the quarter and year, as always, I'd like to begin by thanking our Potbelly team members for their continued hard work and loyalty to our brand.

Speaker 3: Our dedicated people provide a differentiated, welcoming, and good vibes dining experience for our customers.

Speaker 3: which allowed us to gain continued momentum in both the quarter and the year.

Speaker 3: I begin on slide three with our key successes in 2022.

Speaker 3: First, let me say how very proud I am of our team and our results in 2022.

Speaker 3: I'm particularly impressed with our overall performance and momentum when considering the lingering staffing challenges, the impact of Omicron on Q1, persistent supply chain issues, and the ongoing inflationary pressure on our consumers and our business. We drove strong performance across our portfolio of shop types with notable acceleration.

Speaker 3: suburban, CBD, and airport locations.

Speaker 3: The strong recovery of CBD in airport shops with CBD's nearing pre-pandemic levels has served as a traffic-driven tailwind for the business.

Speaker 3: and we expect to enjoy continued growth portfolio-wide in 2023.

Speaker 3: Additionally, we prioritized improving operational efficiencies in 2022.

Speaker 3: which included the implementation of a streamlined training program set, refinement of how we staff our shops with the help of our hours-based labor guide, and digital tipping.

Speaker 3: We also expanded the testing and implementation of Pop Belly Digital Kitchen, or PDK as we call it, which supports order accuracy, speed of service, and throughput. And most importantly, I'm happy to report our customers have validated our operations focus as we achieved a notable improvement in customer satisfaction scores compared to previous years.

Speaker 3: We also strengthen engagement with our customers through our strategic marketing initiatives, including targeted digital advertising, special offerings, and our refined PERCS loyalty program.

Speaker 3: We've experienced great success with our LTO promotions, which included at least one craveable sandwich, cookie, or shake each quarter.

Speaker 3: These focused marketing efforts led to a continued strength in digital engagement, strong traffic, and customer excitement.

Speaker 3: Finally, we made important progress towards our franchise-focused development goals, with 51 new shop commitments signed in the latter part of 2022. Despite the economic pressure on small business, including climbing interest rates, we are very pleased with the momentum towards becoming a primarily franchise-focused organization.

Speaker 3: and have a robust and expanding pipeline of highly qualified franchise candidates to support this critical growth initiative.

Speaker 3: I'll detail our franchising progress later in today's call, but first I'd like to turn to slide forward to provide a high-level overview of our financial successes in the fourth quarter and the full year. Performance metrics included. Quarterly revenue was $120.2 million and we achieved $452 million.

Speaker 3: store sales growth came in at 18.9% for the quarter and 18.5% for the year, driven by the aforementioned strength in traffic combined with operations and marketing success.

Speaker 3: We had record fourth quarter AUVs of $24,144 and record AUVs of $22,464 for the year.

Speaker 3: All this drove positive net income for the quarter and year of $2.7 million and $4.3 million, respectively.

Speaker 3: Notably, our fourth quarter performance marked our third consecutive quarter of profitability.

Speaker 3: And lastly, we reported a justity bidot for the year of $15.7 million.

Speaker 3: clearly marking the company's strong financial health.

Speaker 3: Turning to slide 5, I'd like to take you through our marketing initiatives and successes for the fourth quarter in greater detail.

Speaker 3: Our continued focus on strategic marketing once again helps support traffic-driven sales growth.

Speaker 3: During the quarter, we reported strong digital engagement, representing 38% of revenue, which, when combined with our Perks Lawalty Program activations, meaningfully contributed to our record fourth quarter, pop line results.

Speaker 3: Our digital engagements were further supported by a combination of digital only promotions such as National Cookie Day, Week of Perks, as well as our successful LTO offerings and promotions.

Speaker 3: which this quarter included the pastrami sandwich and the eggnog shake.

Speaker 3: Additionally, our catering business continues to accelerate with targeted offerings for both social and professional engagements.

Speaker 3: As such, archatering levels as a percentage of sales are fast approaching pre-pandemic levels.

Speaker 3: We believe there remains tremendous potential to exploit additional marketing opportunities, and we expect these efforts to support traffic, further enhance engagement with our customers, and advance our unique brand position.

Speaker 3: With that, I'll now turn the call over to Steve to detail our financial performance for 2022. Steve? Thank you, Bob. Good afternoon, everyone. Please turn to slide six of the presentation, where I will highlight our AUVs and AIM store sales momentum during 2022, as well as what we've seen in the first two months of 2023.

Speaker 3: Our business experienced strong growth throughout last year with consistent quarterly improvement after the Omicron impacted first quarter of 2022.

Speaker 3: in suburban locations, in addition to a creative marketing initiative, record level engagement through our digital channel, and a resurgence in our catering business.

Speaker 3: Additionally, AUVs benefited from strategic pricing actions of approximately 13% taken during 2022, largely mitigating inflationary pressures.

Speaker 3: We are pleased to report that the momentum in the second half of last year has carried into 2023. While we have experienced more typical first quarter seasonality, we recorded AUVs of $22,311 in January and $23,815 in February .

Speaker 3: Turning to slide 7, I'll walk you through our income statement and specific financial metrics for the fourth quarter and full year compared to the prior year period.

Speaker 3: We achieved strong financial results as we met or surpassed our previously stated guidance for the fourth quarter and full year.

Speaker 3: During the fourth quarter, total revenues hit an all-time quarterly record of $120.2 billion, an increase of 17% compared to the prior year.

Speaker 3: The increase was driven by traffic gains, strong recovery and CBD locations, price increases that were implemented throughout the year, and breakout digital performance.

Speaker 3: We reported positive net income of $2.7 million for the quarter compared to a net loss of $2.5 million in the prior year period.

Speaker 3: Adjusted net income was $2.6 million compared to an adjusted net loss of $1.6 million in the fourth quarter of 2021.

Speaker 3: Fourth quarter adjusted EBITDA was $7.5 million.

Speaker 4: a greater than 190% increase compared to the year-ago period.

Speaker 4: The increase in EBITDA resulted from top line leverage continued improvement in labor and input costs.

Speaker 4: and discipline corporate spending.

Speaker 4: DNA costs in the fourth quarter were $10.8 million or 9.0% of total revenues, compared to $8.6 million or 8.4% of total revenue in the fourth quarter of 2021.

Speaker 4: The increase on both a dollar and percentage basis was attributable to compensation costs that included cash and stock compensation, bonus accrual and some professional fees.

Speaker 4: Food, beverage, and packaging costs are F&P, we're $34.2 million or 28.7% of shop sales, versus $29 million or 28.4% of shop sales in the year-to-go period.

Speaker 4: F&P increase on an absolute and percentage basis was due to higher volumes as well as meaningfully higher input costs, specifically proteins, bread, and paper plastic products. Mitigating these inflationary headwinds remains a top priority.

Speaker 4: We successfully utilize strategic price increases, our strong vendor partnerships, as well as cost optimization initiatives to largely offset these headwinds, and to continue delivering the value and potbelly experience we promise to our customers.

Speaker 4: We expect inflation to be less impactful in 2023.

Speaker 4: Labor expenses were $36.7 million or $30.8% of sales compared to $33.4 million or $32.8% in the year ago period.

Speaker 4: The decrease is attributable to the utilization of our our based labor guide, which ensures the optimal utilization of our in-shop staff.

Speaker 4: This guide is also designed to capture efficiencies associated with price increases and other labor saving initiatives.

Speaker 4: Additionally, this line item continues to benefit from top line leverage and their tipping feature for in-shop and digital orders, which provides our shop employees with higher wages of approximately $3 an hour.

Speaker 4: Other operating expenses were 17.9 million dollars or 15.1% of sales compared to 16.5 million dollars or 16.2% of sales in the year ago period.

Speaker 4: These expenses are impacted by costs that are variable with sales, such as third-party delivery and credit card fees, as well as inflation related to utilities and some other expenses.

The absolute increases were offset by sales leverage. Top level margins were 14.2%.

A 450 basis points improvement versus the year-ago period, driven by top-line leverage, as previously mentioned, cost discipline and evading inflationary pressures.

Our liquidity position at the end of the fourth quarter was $31.4 million, consisting of $15.6 million of cash on hand, plus $15.8 million available on our existing credit facility.

Importantly, I'd like to highlight our recently announced $25 million five-year term loan, which replaced our previous short-term revolver. We are pleased with this agreement, particularly considering today's challenging capital markets environment. The new term loan enhances our financial flexibility, allowing us to support our medium and long-term growth targets.

2022 also saw us gain full forgiveness on our $10 million PPP loan and complete our tax deferred payments under the CARES Act.

Turning to slide 8 for the full year 2022, our total revenues reached a record of $452 million, an increase of 19% compared to 2021.

Driven by momentum as we exited the Omicron Impact at Q1, that continued to build through year end significant improvement across our portfolio, meaningful contributions from our marketing initiatives, digital success, and continued execution against their five pillars strategy.

The Amster Sale increased 18.5% and we delivered adjusted EBITDA of $15.7 million for the full year and improvement of $15.2 million versus last year.

The drivers of our annual cost comparisons to 2021 are similar to the Q4 comparisons.

We attained solid leverage on a percentage of sales basis with the higher volumes we achieved in 2022. G&A was up 10 basis points on a percent of sales basis versus 2021 to 8.4% or $37.7 million.

Similar to the quarter, the increase on an absolute and percentage basis was a result of certain payroll and accrual expenses.

Food beverage and packaging costs for 2022 were $129.2 million or 28.8% of shop sales versus $105 million or $27.8% in 2021. The FNP increase on both an absolute and percentage basis was again driven by higher volume and higher input costs.

We continue to evaluate our supplier contracts to both manage costs and maintain the quality and value our customers enjoy and expect. Labor costs for the year were $142.1 million or 31.7% of shop sales, a 200 basis points dropped versus last year.

This decrease was due to top-line leverage and the positive impact of our hours-based labor guide, which improved scheduling efficiencies.

Labor costs on an absolute basis increase due to higher sales volumes in employee wages.

Other operating expenses were $74.9 million or $16.7% of shop sales versus $63.5 million or $16.8% of shop sales in 2021.

The absolute increases were offset by sales leverage. Top-level margins were 10.5% for the year, a 310 basis points improvement versus 2021.

Similar to the quarterly results, full-year shop margins benefited most significantly from the acceleration and top-line performance paired with the moderating inflationary pressures for key inputs and labor.

Now turning this slide 9, you'll see the breakdown of sales by the various channels.

in-shop, digital, and drive-through. Our digital business continues to contribute meaningfully to the top line, as it represented approximately 38% of sales in the period.

We continue to invest to improve this aspect of our business, including our Perks Loyalty Program, Potbelly app, potbelly.com website, select targeted digital promotions, as well as the operations enhancements that make the last step of every digital order as seamless as possible for our customers. While our digital business remains strong and is a tailwind for the business, we are

momentum as we exited the fourth quarter, which has continued into the early months of the first quarter, even as more seasonality returns to the business.

We are expecting first quarter AUVs to range between $23,000 and $24,000. Dave's door sales would be between 18.5% and 20.5%

and for shop level margins of 10.0% and 11.5%.

We're also introducing guidance for adjusted EBITDA for the first quarter of between $4 million and $5 million.

For the full year 2023, we look to build on the momentum we established in 2022 towards our 2024 and long-term growth targets.

Our outlook includes record-level AUVs, same-store sales growth in the high single digits, and shop-level margins in the low teams.

With that, I'll pass the call back over to Bob.

Thank you, Steve. Now on Slide 11, I'll provide an update on our franchise growth acceleration initiative.

As briefly mentioned earlier, we signed multiple new shop development area agreements or SDAAs in late 2022, including 51 new shop commitments.

These agreements span multiple states and regions with substantial areas for penetration and growth still available to potential franchisees. Popbellies compelling opportunity is attracted a highly active and fluid pipeline of relationships and engagement with interested franchise candidates.

In fact, our overall performance, lead generation, and franchise marketing efforts have led to material growth in leads coming into our candidate pipeline.

The management team and I have continued to foster these relationships through a regularly held discovery days.

which provide the opportunity for interested parties to present their growth vision in plans and gain an in-depth understanding of potbelly support systems in the areas of operations, technology, marketing, and development. I remain both excited and encouraged by the accelerated progress towards our franchising and re-franchising growth initiatives.

We look forward to and will continue sharing additional deals with you as they are finalized.

Now I conclude today on slide 12 where I remind you of our 2024 growth targets unveiled at the beginning of 2021.

To start, we have a strong platform in place to support these targets, including our differentiated brand, renewed focus on strategic marketing initiatives, and execution of the five-pillar strategic plan.

Beginning with AUVs, we are continuing our progress towards our goal of $1.3 million. In fact, our Q4 weekly AUVs achieved this target already.

Our shop level market target remained 16% with continued improvement driven by portfolio-wide AUV growth leverage combined with improved operational efficiencies and cost discipline.

And finally, we're working to achieve a franchise unit growth rate of at least 10% through our shop development area agreements or SDAAs. As we accelerate to our long-term target of 2,000 shops and our shift to a primarily franchise-owned system. As I mentioned earlier, I'm encouraged by the progress we've made thus far, adding 51 new shop commitments late last year.

Our strong brand, unique shop experience, and solid underlying business fundamentals combined with the efforts of our dedicated team serve as the pillars to support these goals.

We also have plans to refranchise approximately 25% of our company-owned shops in conjunction with certain SDAAs in those refranchised markets.

As I noted earlier, we are excited by our robust candidate pipeline and deal activity, and we look forward to announcing new re-franchise deals and new development deals as they are finalized. In summary, 2022 was a year of strong execution and momentum, and we expect 2023 to be a year of further acceleration.

We believe Q1 2023 will be our fourth consecutive quarter not materially impacted by COVID-19 or its Amapron variant.

And we're looking forward to discussing the trailing 12-month financial performance with you when we review Q1 earnings. We enjoy and look forward to sharing our journey with all of you. With that, I'll 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 keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

At this time, we will pause momentarily to assemble the roster.

And our first question will come from Matt Curtis of William Blair. Please go ahead.

Hi, good afternoon. So, Bob, I'd like to follow up on your comments about recruiting, about your efforts to recruit new franchisees. I mean, you talked about the discovery days that you're still holding. I was wondering if there are any other events here, franchising events you're planning to attend this year that we should be aware of or other forms of outreach you're pursuing.

And then on the 51 new shop commitments you added in 2022, I was just wondering, do you have a goal in mind for how many you would like to have in the pipeline by year end or are you thinking about it differently? In other words, looking for quality over quantity. Yeah, thanks Matt, good to speak to you.

shift in the number of leads that we have coming in. It's really in the mid-hundreds of leads per quarter where the number was much smaller than that in the past.

We're also staffing our sales team more robustly. We're adding lead specialists who are coming through those leads, turning them over to qualified salespeople, and we're even adding additional salespeople to handle the flow. So, when we say we feel good about the pipeline of candidates, it really is much, much more than the...

Discovery Day activities where you have senior leadership team involved in that. In addition to that, we've attended multiple conferences that cater to franchise candidates. In fact, the team just wrapped up a visit with with our sales booth at the airport conference this week and we continue to find that our presence there is really welcomed by whether they're...

look at in 2024 is on its way to an accelerated run rate that would be necessary for us to achieve that 2000 unit goal in the long term, that 8 to 10 year long term. It's got to be in the teens. We know that Tager needs to be in the teens to get there.

So we see that 10% number being achieved by fill in the pipeline with the proper combination of deals that are multi-unit deals.

Some of the mid-sized deals like the one we announced in Orlando, those serve that goal really well because the more of those TICS 8, 10, 12 unit SDAAs that are signed...

They deliver one or one and a half or even two units a year and that's how we get to that growth number. It's a little less about the very specific number of units that are in the deal structure and even the same way a little less about the specific number of deals.

and site control dates as well as open dates. So we can see very deep into our pipeline of growth where we expect to have those openings. And of course, our job and our sales team's job is to over-salt through that. It sounds good. That's helpful, thanks. Turning to the digital kitchen, I know initially, we see retesting that. It sounds like a lot of people are going to be currently making out. That helps an. And that helps child

and what your roll-out schedule looks like for the rest of the year.

Yeah, happy to. We continue to be very excited about this and it's like many of the other technology investments that we may, you know, were focused on the low cost of investment, the high return that goes with it. And so we are expanding it. We have it, I think, as of today, I think we have an 38 locations. I think that our expansion plans this year would have us likely in the year somewhere near.

as accuracy. Order ready on time has improved, accuracy has improved. We're actually seeing some of our early measures on things like food quality, which makes sense on time. It's ready. It's hot. And the accuracy is there. So we're seeing nice movement in that arena as well.

And here's the thing that we're really enjoying, is it definitely is helping us with those more capacity constrained shops. So don't translate that to high volume necessarily, but translate the shops where we're seeing capacity opportunities to unlock even more capacity.

And that allows us to focus on where we choose which shops come next. And that's the biggest return. So, you know, the other thing that we have already activated and we're pleased with the results because of the efficiency on the back line, this is a much simpler operation. In fact, our managers and teams will tell us, if you take this out, I'm going to leave. It's that much better for them putting it in place.

And as a result, because it's more efficient, we're taking seven hours of labor out of those shops, which is a big part of the return on investment too. So we get happier customers, more throughput, better customer experience, and happier employees as well as labor savings. We like this thing on pretty much all fronts, right? Great, great. Sounds really encouraging.

I can handle that. It's a lot different this year than it was through the back half of last year. We peaked out at commodity inflation of over 21% in Q3. Q4 started coming down and we were at 17%. We've seen it continue to come down and expect it to continue to come down through 2023. Last year,

We saw spikes in a number of areas. Meat was up for us as well as bread, two of our big inputs. We saw some higher spikes in areas that were called grocery related. We had a cato spike pretty high for a while and those kinds of things. As we look into the year going toward toward.

You know, our basket's about 55% locked now. We'll be about 60 or so here, not too long from now. 100% locked through Q2. It's still a little bit of a choppy environment, but we're seeing it loosen up a bit as supply returns. There's a little more competition with suppliers, which is helpful for us.

And it's just a much more stable environment, which gives us, you know, I think some more of that confidence in some of our margin expansion plans. What kind of cumulative price benefit are you carrying right now?

And do you have to take more price this year in order to, you know, extend restaurant little margins that we're looking to?

Yeah, sure. The prior conversation we just had around commodities and inflation go hand in glove with the way that we think about pricing as well. Remember, last year we were pretty adamant about making sure that while we needed to take price to help offset that inflation, we wanted to make sure it was we weren't doing any more than that. We want to make sure that we continue to provide a stable demand base for our customers.

It was helpful that food at home inflation continued to push higher than food away from home inflation. We ended the year last year. I think we took about 13, we'll over 13% overall, 13.

Yeah, I felt that much for the year. And as we're looking into 2023 and the commodity relief, our pricing actions come way down. We're expecting about three actions this year, like we typically have. And we're going to be kind of fighting inflation that probably puts us kind of in the mid to high single digits.

So we're not going to have to push price nearly as much as we did last year.

Okay, great. I guess I'm kind of related to that whole discussion is wage inflation. I mean, how has wage inflation been trending for you guys recently? The video extracts the first quarter, well, it was to the fourth quarter.

I would imagine using the somewhat like everyone else, but just curious. And then maybe more importantly, do you expect to make any additional investments in labor this year? Do you know what form that might take? And I asked that last part just because of the success you've had with digital tipping that you introduced last year.

Sure, I can handle the inflation side of it. We watch that closely, obviously. Again, it's a different dynamic than the F&P inflation and has been for some time. Much, much less increase in terms of the rate. We've seen it really kind of flatten as it relates to the increases. Last year, I think we were just north of 8% on the...

with the hours-based guys that the tipping absolutely helps us to the tune of $3 an hour like we talked about.

And it's also important to note, you know, with those dynamics in place, retention is high. We tend to be, you know, outperforming our peers as it relates to retention rates, makes it easier to hire folks. So it gives us, we think, an advantage in the marketplace for talent, because Potbelly tends to be a place that people want to work and it's a place that they want to stay. Yeah, if I could add to that, Matt, I think that there's a...

and we really looked at staff according to that standard.

Then there's a lot of development and training that goes into it. We've talked about the training advancements that we've made. We continue to make more of those. There's a whole other layer of multi-unit management training that's underway that we think is making a big difference. It brings down turnover. Management turnover in particular is very costly. And so...

in more ways than one, and as good as our turnover is, our chief operating officer, Adam Noise believes we can bring it down even further with that further investment in training for retention. And then the big part, and we've talked a lot about it, whether it was TIPS or we've talked about our incentive programs at the shop level and of course it's above the shop level. Finding new ways to do that, we just came off of our second annual General Managers Conference where we celebrated very best of their performances across the system.

that have been put in the hands of our associates and our managers through those incentive programs. And it's that virtuous cycle.

It helps us have the very best teams, serves our customers well, and we get the efficiency of that stability and high quality team.

Okay, great. That makes a lot of sense. I guess last one for me is on the digital engagements you've been seeing. I mean, with digital mix hitting a record level, which is impressive. I know you mentioned a number of drivers behind that, but is it really more about your increased focus this year on putting marketing dollars to work in the digital channels?

or have you really been able to start leveraging the check data that you've been collecting over the last year or so? Yeah, the best way I could explain that is if you think about it as a three-prong attack, no question that our digital advertising is one of those three prongs.

And we still believe we've got a lot of gas in that tank last year. The investment was still only about 2%, a little under that in fact, of our sales. We're very pleased with the digital efforts, but there's no video content, there's no produced content in there yet, and we've got the new branding work that was laid down with our visual identification.

and the digital only solutions that we put out where we share, we've done things like Fogo promotions that you can only access through our digital channels. We've done other day only or celebration of annual days that are available only through our digital channels. And then the third layer is our Perks Loyalty Program which is so...

it's unique to those consumers that are part of our Perks program. The week of Perks is a great example where we we did a week-long engagement and celebrated that Perks loyalty relationship with something new every single day and then we could read how those Perks loyalty customers reacted to those things. We feed different frequency users different types of computers.

communication, different types of engagement, and you know, those on the higher end of the scale differently. And all of this is really still just getting started. What's great is that there is development and the strategic effort in all three areas.

to bring that to life even further. But that's, when we say digital, it's those three areas of focus. Steve Great, great. Thanks very much guys. Appreciate it. And congrats on the strong start to the year. Thanks so much.

With that, I'd like to hand the call over to Lisa Fortuna of Alpha IR for a few additional questions. Lisa?

Thank you, operator. As we have done in those previous two earnings calls, we have offered our investors the opportunity to complement William Blair's very thoughtful questions. First question, maybe revisiting the franchising initiative. Why is Potbelly compelling from a franchisey perspective?

Yeah, thanks Lisa. Actually, I love this question because it gets at the heart of the power of the brand and how enticing it is for the franchisees. And there's really three areas that franchisees are always going to look at. The brand itself, and I will tell you that we get nothing but high marks and a lot of enthusiasm for Pop Belly as a franchise brand.

Growth potential is a significant thing of appetite for franchise candidates. They're not interested in opening one or two locations for any brand. They like the opportunity to own the territory. They want to own the DMA. They want to have the chance to build it out all at once and really control the market when they're done developing.

And the third one, of course, are the financial components of the deal. That's on two fronts. And we believe we're compelling on all three of those, brand growth potential and the financial components.

We're in a really fortunate position because with so many of our shops still owned by the company, we can be very transparent with what's going on with the company and the numbers that we're sharing on our earnings calls like this, those $1.3 million weekly average unit volumes that you saw in Q4, those are the things franchisees are looking for. They're looking for margins that...

that are going to give them really healthy returns on the investment that they make. And they take our margins, they believe that they can do better typically. And I love that about franchisees. And then they factor that operating profitability into what they see as the unit level investment economics. And we enjoy a sales to investment ratio that's two to one or better.

We actually have franchisees in the system who have built their more recent shops for less than what our FDD reports because our FDD is on our own history. They're glad to share that information with franchise candidates and we see that as another source of enthusiasm. So let's...

franchisees are looking to partner with a brand that brings them some predictability and at least some confidence in what they can do with their business in a construct like a franchise of Potbelly. And the financial piece is going to stop them every single day. They're more and more excited about our financials just like we are.

Can you provide an update on catering sales and any new initiatives to drive growth?

Yeah, the comments that we made are catering sales are now approaching pre-pandemic levels and that is still with recovery and what was traditionally the business catering client till still ahead of us.

We have done some promotional activity with catering both on the social and on the professional side where we've done some promotions around dads and grads and sporting events, final four, the Super Bowl. Those are things that we find success with. And I think we're teaching our consumer base that we're a great alternative for catering solutions.

more proactive of going back out to the business channels and business connections that we have in all of our trade areas. We're finding great success with that too. We do not set our sites on what was historically the high for catering mix. We think we can go much farther than that and make this a very meaningful part of our continued growth in the future.

Can you clarify what you meant by the first quarter of 2023 will be the fourth consecutive quarter not impacted by COVID and the discussion around the trailing 12 months financial performance when we review Q1 earnings in a few months? Yeah, sure. Let me take this one.

this quarter, the Q1 earnings call, we won't talk about Amokhan anymore, but if you're kind of really understand how well is pop belly doing. Take a look at Q2, Q3, Q4, and add to that the guidance that we're providing on this quarter one. And then I think you get a good sense.

for the momentum that we've been building, profitability that we're able to exact, and I think the way that we're able to continue to build what has really been, I think, a traffic-driven growth story. Certainly we had price and we took advantage of price. There's no question last year in the.

we're heading into this year. And in fact, when you look at, and we do closely, you look at the competition, we tend to use third party information to understand how we're performing on traffic versus other, our fast casual competitors or our sandwich competitors, and what we've seen is consistent separation in our traffic comps.

versus our competition's traffic comps. So that means we're taking share. And I think sometimes the sales numbers get a little distorted because of the pricing, but one of the true measures of how healthy the business is is that traffic side of things. So that's how I would encourage folks to look at us as we head into 2023 here.

How should we think about adjusted EBITDA for the full year 2023? Should we be taking the midpoint of what you guided to for Q1 and multiply that by four?

I think it really goes back to what I just explained. I think if you just multiply by four you're missing out on the trailing 12, right? Stent of momentum and the sense of our ability to build traffic like I just described. So yeah.

Typically also Q1 is seasonally a lower volume quarter for us.

So, it's not a real advisable way to look at an entire year by taking

taking Q1 and extrapolating forward. That was the last submitted question, so I will now turn and call back to Bob for his closing comments. Thank you, Lisa, and thank you, operator, Matt, and all of our investors at submitted questions. I want to thank you all again for your time today, yet.

That does conclude today's conference. Thank you for attending today's presentation and you may now disconnect.