Q2 2023 Potbelly Corporation Earnings Call
[music].
Good afternoon, everyone and welcome to Potbelly corporations second quarter 2023 earnings Conference call.
Today's call is being recorded.
Time, all participants have been placed in a listen only mode. The lines will be opened for your questions. Following the prepared remarks.
On today's call, we have Bob Wright, President and Chief Executive Officer.
The realist senior Vice President and Chief Financial Officer.
<unk> Vice President Controller Potbelly Corporation.
At this time I'll turn the floor over to Mr. Atkins, Sir you may begin.
Good afternoon, everyone and welcome to our second quarter 2023 earnings call.
By now everyone should have access to our earnings release and accompanying investor presentation.
It can be found on the Investor Relations section of our website.
Before we begin our formal remarks I need to remind everyone. Certain comments made on this call will contain forward looking statements regarding future events or the future financial performance the company.
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 Securities Litigation Reform Act of 1995.
These forward looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date.
Forward looking statements involve significant risks and uncertainties and events or results could differ materially from those percent 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 given today can be found in our Form 10-K under the headings risk factors and M DNA and in our subsequent filings with the Securities and Exchange Commission.
Which are available at SEC Gov.
During the call. There will also be a discussion of some items that do not conform to U S generally accepted accounting principles or GAAP.
Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix of the press release and Investor presentation issued this afternoon.
Both of which are available in the investors tab of our website.
With that out of the way I would like to turn the call over to Potbelly is president and CEO Bob right.
Thank you will good afternoon, and thank you for joining our call today I'm extremely proud of what we've achieved this quarter at a high level. We grew same store sales by 12, 9% driven.
Driven mainly by traffic growth continued.
Continued to take traffic share from the fast casual category each week through the quarter grew shop level margins by 300 basis points, including leverage across food labor and occupancy and.
Inside the incremental development deals, bringing our total shop development commitments to 106 shops to date under our franchise growth acceleration initiatives.
We continue to make excellent progress executing our five pillar strategic plan and we're excited about what we can achieve in 2023 and beyond.
Diving into more specifics, let's start with the Potbelly digital experience, we enjoyed another outstanding quarter of performance in our digital business, achieving our seventh consecutive quarter of record digital sales driven primarily by strong performance in our perks loyalty program.
For the quarter, our digital business represented approximately 38% of our total shop sales while the growth in this channel has been tremendous we believe we are still in the early innings of our digital journey.
Excited about the major opportunities ahead to further grow our perks penetration with our guests.
Our operations and customer experience improvements continue to drive traffic and sales as well we've.
We've seen year over year improvements in staffing management, and associate turnover and peak hour throughput, yielding improved customer experience scores not only overall, but in the areas of speed accuracy.
Quality and friendliness of our associates and managers are participating in their business success through our chips and shop level bonus and incentive programs driving engagement and a strong sense of ownership.
We also continue to be encouraged by the benefits, we're seeing from potbelly digital kitchen or P. D. K, which are clearly showcase through the ongoing growth of our digital business and our ability to handle the incremental throughput, particularly during peak periods.
Moreover, the improvements in the customer experience are equally important evidenced by orders ready on time accuracy and food quality scores.
We continue to expand potbelly digital kitchen installations in existing shops, and we're excited to announce that PDK will be standard in all new franchise locations further amplifying the rollout across the system.
Strategic marketing continues to support our traffic driven foundation for sales growth and is a large part of the success. We've seen in the potbelly digital experience in recent quarters. We're excited to announce the return of the underground menu only available in Iraq. During the second quarter, we added our fourth underground menu item with the reintroduction of the clubby B.
During our roasted, Turkey breasts, Hickory smoked Ham crispy, applewood smoked bacon and provolone cheese dressed with lettuce tomato and Buttermilk ranch the customer reception has been amazing with a clubby, reaching our number one sandwich in the first few days, despite only being available in yeah.
All in all our marketing at an L. T OS and digital only promotions continue to drive traffic value and excitement for our customers. While also serving as a continued growth driver for the perks loyalty program and our digital channels.
We remain keenly focused on food and marketing innovation to further expand these promotional efforts in the coming quarters.
Moving to our franchise growth acceleration initiative or F. G E R.
Our new shop development pipeline continues to build as we further emphasized our franchise focus and build the organization's capability to support growth.
We have a highly active and fluid pipeline of qualified potbelly franchisee candidates from initial leads all the way to a regularly scheduled discovery days.
We were excited to share earlier this week the summary of one of our more active markets in the state of Florida.
As part of our ongoing investment in our organization's capabilities in June we announced the appointment of Lynette Mckee Senior Vice President of franchising to oversee all aspects of franchisee market planning franchise recruitment and sales were.
We're excited for that to build upon the progress that we've already made as we continue to build towards 2000 units in the U S over the next decade.
Already in her first few weeks Lynette has begun to refine our targeted recruiting efforts fine tuned our franchisee selection criteria and she has advanced deals soon to be announced.
Furthermore, subsequent to the end of the quarter, we welcomed Brian Kyle our company founder back to the Potbelly family through the announcement of a twenty-seven unit deal that includes 12 marine franchise shops.
15 shop development agreement in Maryland.
Brian has a keen understanding of the potbelly vision and deep appreciation for the brand and what sets US apart. We look forward to his leadership and the franchise system and Tam accelerating our growth momentum in Maryland, as we continue to execute our strategic franchising growth strategy across the U S.
Potbelly has unique brand combined with proven business fundamentals and an experienced team is the foundation of our ability to drive growth for the next decade.
As we look ahead, there is still work to be done, but I'm incredibly pleased with our progress on all things franchising from lead generation, the franchisee selection to real estate and construction support.
We're building a best in class franchising organization, and we remain committed to our long term unit growth goals. We're highly encouraged by our progress thus far and look forward to sharing more updates this year as more S. P. A a's or shop development area agreements are finalized.
Turning to our 2024 growth targets are strong brand value of strategic marketing efforts and continued execution of our five pillar strategy is built upon the momentum we've created in recent years, achieving $25950 per week during the second quarter or over $1.3 million on an.
<unk> basis gives us increased confidence in achieving average unit volumes in excess of $1.3 million across the full year 2024.
Our shop level margin target remains at 16%, which will be driven by continued portfolio wide topline leverage operational efficiencies and cost discipline.
And we remain committed to our target of 10% unit growth in 2024.
Overall, we're very happy with where we stand relative to our 'twenty 'twenty four targets and we're focused on continuing to execute to achieve our near term goals.
And build the foundation to achieve our 2000 unit potential.
Finally, I'd like to thank our potbelly team for their hard work and commitment to our unique brand and the growth trajectory. We're on potbelly employees are instrumental in providing a distinct and differentiated fast casual experience for each of our customers and ensuring they're satisfied and delighted from their first moment to their last night.
I'm so proud of our team from our frontline associates, who our support center employees. It is the continued efforts of our people that drove our success in the quarter.
With that I'll now turn the call over to Steve to detail, our financial performance for the second quarter.
Thank you Bob and good afternoon, everyone.
GAAP revenues in the second quarter increased eight 4% to $124 $7 million driven by same store sales growth of 12, 9%.
Resulting in average weekly sales of $25950.
Traffic continues to be a major contributor to same store sales growth as we continue driving demand with compelling marketing.
Riding our customers value for what they pay.
<unk> price increase is primarily to mitigate increases in input costs.
I mentioned this has allowed us to continue to take traffic share from the broader fast casual category on a weekly basis.
The top line strength, we saw in the quarter was broad based with each period, achieving same store sales growth of at least 10% in each real estate type achieving same store sales growth of at least high single digits.
Our digital business continues to grow and now represent approximately 38% of revenue an increase of 170 basis points versus last year predominantly through our own channels.
Our on premise business also grew on a dollar basis.
<unk> strengthened our digital channels is a direct result of the <unk>.
Overall, potbelly digital experience, including improved App and web interface and dedicated efforts to increase perks loyalty program member acquisition and activation.
And engagement through targeted digital promotions and advertisements.
Turning to expenses.
And packaging costs were 28.0% of shop sales, a 50 basis point improvement versus the prior year period.
Overall Q2 commodity inflation was up three 4% versus last year.
Our grocery category, which includes produce condiments and chips. So the largest input cost increases with meat, primarily chicken retreating year over year.
Labor expenses were 34% of sales, a 100 basis point improvement versus the prior year period.
This improvement is attributed to topline leverage along with continued optimization of our hours based labor guide.
We continue to see wage rates moderate and expect this to continue to normalize as we move through the year.
Occupancy was 10, 5% of sales a 150 basis point improvement versus the prior year period.
The improvement was driven by top line leverage.
Other operating expenses were 16, 8% of sales roughly inline with the year ago period.
This was due to variable expenses, such as increased brand fund spend and third party delivery and credit card fees, which were offset by sales leverage on fixed expenses.
These margin improvements should not be understated 50 basis points improvement on food 100 basis point improvement on labor and 150 basis point improvement in occupancy.
These results as they showcase the potential of the Potbelly economic model for sustainable top line growth fueled by the effectiveness of our marketing efforts, including our perks loyalty program.
Based on customer experience.
Cost control and normalization of inflationary pressures.
Importantly, we are well on our way to achieving our 2024.
Margin target of 16%.
Overall shop level margin for the second quarter were $14, 4%, an increase of 300 basis points versus the year ago period.
<unk> and administrative expenses were nine 2% of revenue.
Going forward, we believe general and administrative expenses as a percentage of system wide sales is it more applicable way to view our business as we become more franchise based over time.
For the second quarter General and administrative expenses were approximately eight 2% of system wide sales.
Increase in G&A was driven primarily by higher bonus accruals as we outperformed our targets in the quarter as well as digital maintenance cost.
We are encouraged by these results as we continue to leverage sales control costs and build a development infrastructure ahead of our increasing pace of unit growth.
We reported net income of $2 $2 million for the quarter, a $1.6 million improvement versus the prior year period.
Adjusted net income was $2.0 million compared to $1 $5 billion in prior year period.
Second quarter, adjusted EBITDA was 8.0 million or six 4% of total revenue.
This was a $2 2 million dollar increase year over year, and a 140 basis point improvement on the margin.
Turning to our outlook for the third quarter of 2023, we're currently forecasting the following.
Average unit volume between 25020 $5500.
Same store sales growth between seven and 9%.
Shop level margin between 12 and 14%.
And adjusted EBITDA between five and $6 million.
For the full year 2023, our outlook includes.
Record level AAV.
Same store sales growth in the high single digits to low double digits.
And shop level margin of at least the low teens.
With that I'll turn the call back over to Bob.
Thanks, Steve we're thrilled with our second quarter results, but we're only getting started our topline strength has continued into the third quarter and we continued to take traffic share from the fast casual industry on a weekly basis.
We have line of sight on achieving our 2024 growth targets.
And we have a strong pipeline of additional shop development area agreements that we look forward to sharing in the coming months and quarters.
With that we're happy to answer any questions. Operator, please open the line for questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
I ask a question you May press Star and then one using a touchtone telephone.
So the draw your questions you May press star and two.
If you are using a speaker phone would do as you. Please pick up your handset prior depressing the numbers to ensure the best sound quality.
Once again that is star and then one.
Join the question queue, we will pause momentarily to assemble the roster.
Once again that is star and then one.
Yeah.
And ladies and gentlemen, with that I'd like to hand, the call over to Jeff Priester, managing director ICR for a few additional questions. Please go ahead.
Thank you Jeremy Potbelly has done previously we've offered investors the opportunity to send an additional questions or topics in advance of the earnings call.
The first question is on unit growth, Bob you mentioned and Youre committed to your 2020 for unit growth targets. What gives you the confidence in achieving 10% unit growth next year.
Yeah. Thanks, Jeff first of all we were excited to celebrate the the the number of shop commitments that we have since we started our franchise growth acceleration initiatives and you know what 106, we feel like the paces in our favor.
And as with the development in any brands, it's all about building momentum and so what we're looking forward to is building on the momentum we have and developing more of that as we finish this year and all through next year. The view into the pipeline itself is part of the reason that we have that confidence I mentioned it a few times in our prepare.
Remarks about looking forward to further announcements as we continue to sign and close those additional S. D. A as that we're working on it I'm excited about <unk> leadership already as we continue to invest in our team.
And their ability to manage more of that pipeline recruit more targeted and and be able to further vet our franchise candidates in a more quick manner. So.
There's a there's a lot of excitement in the pipeline itself.
We will continue to invest in that team and ensure that we're able to keep pace with the ongoing needs and growth for it but we are you know we continue to believe that this momentum that we're building will be with us for a while.
Alright. The next question is on G&A, Steve you introduce system wide sales as a metric for the first time this quarter and noted it's more ethical way to view the business can you explain why that's the case.
Sure. Thanks, Jeff Yeah, if it really relates to what Bob was just discussing in terms of our our transition to a more franchise based organization and with that we feel it's important to reflect the relationship between the sales that all of our units drive and the investment needed to support.
The investment in in those sales, notably on the on the development side.
For companies like ours that are moving toward franchising or are already there are it's a conventional way to report.
G&A is against system sales and as we continue to build a development infrastructure in.
Enable our unit growth aspirations for 2024 and beyond we feel that we're reflecting.
The investment in franchise development against only our company revenue paints, an incomplete picture of our G&A management and so as we continue to open more franchised units.
In the upcoming years, our percent of our G&A as a percent of system sales.
It could go down.
As happens with many other companies like ours.
In Indiana, if we wanted to be able to provide that kind of transparency for everyone.
Great.
And then Bob. The next question was on non traditional units you've previously spoken about growing through both traditional and non traditional units, how big of an opportunity or non traditional units and how do they fit into your 'twenty 'twenty four unit growth goals.
Yeah look I think non traditional as a big opportunity for us long term I mean, if you look at the look at our success in cross shop types as a brand you would believe that we have the ability to to continue to grow and develop the brand in all kinds of locations, but I'd like to be clear on the balance there our emphasis is on on.
S D a development and S. T E a agreements with Multiunit franchisees that will build out a certain territory is the best way to penetrate the market. It. It provides the most predictable pattern of growth for us because those are multi unit deals.
And we've shared publicly before every one of our multi unit deals has lease control dates and open dates that are responsible for those franchisees to hit those numbers and hit those timelines.
So when we sell one of those traditional packages.
And which is primarily for traditional units then we know that we build more and more sustainability and predictability into that growth trajectory.
We also have incoming inquiries on non traditional and we do have a person on staff to help us with that they're they're unique to take down you've got rfps in certain locations have different requirements. So we wanted to make sure. We had the resources to respond to that incoming with those nontraditional sites and we're going to take advantage of them.
As I said, a moment ago, how well we do in the non traditional sites, but I would not want anybody to misread, where our focus is it really is all about new development through shop development area agreements or multi unit deals that set up our franchisees to be able to build their business in the market, where they want to do business.
Great that was the last submitted question I'll turn the call back to Jamie for any additional questions on the queue.
And at this time, we have a question from Sharon Zackfia from William Blair. Please go ahead with your question.
Hey, good afternoon.
Hodgepodge of questions here I guess first on the 'twenty 'twenty four <unk> target of 1.3 million I mean, it seems like that's something you're going to hit this year.
Is there something I am missing in and kind of the math here.
Okay.
No sure I mean look I'll.
Oh go.
I mean as I said in my remarks to you know when you annualize. This most recent quarter, we we would be above that 1.3, but the reality is the trailing 12 is just not quite there and we havent really push those those 'twenty 'twenty four targets, yet until we get one more quarter really.
Two more quarters of a settling of what our trajectory is on volume.
Okay.
I guess I'm also curious I mean, you keep talking about taking share I mean, who do you think of the donors are here are you getting share from independent independence is there kind of a material larger chain that he think potbelly is getting more than their fair share from.
Yeah, it's difficult to say by chain, but we we are using our data sources that would be sourcing their data from the change. So if you look at the chain restaurants in the fast casual segment. We've got a couple of different data sources that we we acquire that data from and.
And we're pleased to see that common trends across both sources that are our pace of growth, particularly with traffic is outpacing the fast casual segment and we've been doing it week on week and month on month for a while so you know look I think that Ah I think the efforts that we talk about whether a five pillar.
He is is the reason we also feel confident those numbers are accurate.
We've talked quite a bit about the operations San Francisco, we've had staffing training the throughput and the unlocking of that throughput capacity during our peak periods, not only with potbelly digital kitchen, but in those that don't have potbelly digital kitchen, we're applying some of that learning on that frontline throughput there too.
Until we install it of course add to that all of our marketing efforts. The digital that we've leaned into so heavily the success of our perks program and we see the reasons in our strategy and execution that would make those numbers make sense to us.
And we also believe that we've we've got more gas in the tank when it comes to what we own an option marketing and execution.
Perfect I also wanted to touch on them I guess, the composition of traffic and ticket.
Because I I I heard that on that that 13 comp. The majority was traffic driven I think you were running kind of 7% ish in price, which would imply some negative mix is that a function of more kind of on premises or walk in versus delivery I know deliveries.
Generally been softer than walk in or take out across the industry. That's something I'm wondering if there's a channel dynamic happening in the mix.
Yeah. Thanks Sharon.
The real news is is that traffic is strong we're happy to see that where we're gaining share there as Bob described.
And our same store sales are largely built off of that traffic base. We have we actually we are lapping about eight 8% price from last year, which you know for US shows up in the same store sales show up both in in traffic and check we don't when we do raise price we don't typically bank on all of it.
Flowing through.
We mark some of it down for a for a level of stickiness that we have consistently kind of theme. So what we what we saw in terms of flow through within quarter. Two was was about right on target with what we expected in terms of the behavior of customers. What we've what we've seen a lot of Ah is that folks are arent really managing there.
Check so much as we brought profitable new customers to the brand and we've got existing customers coming more often.
There is more a movement into our original and skinny sizes.
And our our big sizes, while a smaller part of the mix on a unit basis.
Our are basically the same as they were last year, so that strength across the board in terms of the menu and we continue to watch if theres any real Schmidt.
Mix shifting or or if we see any any changes in customer behavior as they try to manage their check but.
We're right on where we thought we'd be in terms of the stickiness of that price flow through in.
Really excited about the traffic and what that tells US is I think the way that we've managed price over the last year in terms of sticking to our strategy of just kind of price enough to kind of outrun some of those input costs.
It gives us some confidence that run the right track there.
Thanks, and then last question I mean, clearly your your digital as a percentage of your overall sales and very healthy and then really hanging in there.
Are you seeing them I guess when I look at that kind of how would you break that out between kind of new perks members versus just you know a frequency being maintained or even increasing across existing perks members. I don't know if you are kind of disclose average active users for parks, but.
And I'm, just trying to figure out kind of how that digital flywheel is playing out for you.
Yeah, we don't disclose the breakdown on perks, either penetration or a member acquisition, but what I can tell you is we're incredibly pleased with the the perks contribution to that digital business in Q2.
And it it continues to grow and it grows at a rate that we see some continued acceleration in.
What what that means for US is again, we havent, we havent spoken publicly about the specifics, but those are more frequent users and their average check is a little bit higher as well are they also are.
Very easy to activate with the various promotions that we have to pay attention to the things like the underground menu the promotional activity like we had our tax day Bogo wing and our.
Our first day of summer Bogo, and those things even just the L. T OS in the Cookie promotions that we have we get a great reaction from our perks consumers because there are becoming more and more.
Affiliated with and have a higher affinity for the brand and they like the way that they're brought into that that's sort of friendly ecosystem. So we think that's very favorable for us over time. We also think we've got a lot of room to run with growing perks.
Because literally once they're in our channels, we get all that data, we get to speak to them directly we get more of a one on one relationship with them and we have different nurturing Chang.
Channels, depending on their behavior. The other thing is you know as we all know with some of the other third party digital business you know.
Our margins when we have a direct relationship with our customer I wish more favorable to us. So we see all kinds of reasons to keep pressing on that.
And frankly, we think we've got a lot more in in the future that we can lean on with perks.
Okay. Thank you.
Youre welcome.
And with that we have reached the end of our question and answer session. I'll now turn the call back over to Mr. Wright for closing comments.
Thank you and thank you all again for your time. This evening, we look forward to speaking with you again soon and until then I Hope you have a great night.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation and thank you for joining you may now disconnect your lines.