Q3 2023 Potbelly Corporation Earnings Call

Speaker 1: Good afternoon everyone and welcome to Pot Belly Corporation's third quarter 2023 earnings conference call. Today's call is being recorded. At this time, all participants have been placed in a listen only mode. And the lines will be open for your questions following the prepared remarks.

Afternoon, everyone and welcome to a potbelly corporations third quarter 2023 earnings Conference call. Today's call is being recorded at this time all participants have been placed in a listen only mode.

[noise] lines will be open for your questions. Following the prepared remarks.

Speaker 1: On today's call, we have Bob Wright, President and Chief Executive Officer, Steve Surrealist, Senior Vice President and Chief Financial Officer, and Adia Dixon, Chief Legal Officer, and Secretary of Potts Belly Corporation.

On today's call, we have Bob right.

<unk> and Chief Executive Officer.

Steve thriller Senior Vice President and Chief Financial Officer.

Dixon, Chief legal Officer, and Secretary, a Potbelly Corporation.

Speaker 1: At this time, I'll turn the call over to Adia Dixon. Please go ahead.

At this time I'll turn the call over to a D. A Dixon. Please go ahead.

Speaker 2: Good afternoon, everyone, and welcome to our third quarter, 2023 earnings call.

Good afternoon, everyone and welcome to our third quarter 20 twenty-three earnings call.

Speaker 2: So, now everyone should have access to our earnings release and accompanying investor presentation. If not, they can be found on the Investor Relations section of our website.

By now everyone should have access to our earnings and accompanying an investor presentation.

They can be found on the Investor Relations section of our website.

Speaker 2: 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 of the company.

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 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'srodigation Reform Act of 1995.

Such statements, including our outlook for 2023 or any other future period should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Speaker 2: These forward-looking statements are not guarantees a future performance, nor should they be relied upon as representing management views as a semi-suffitment date.

These forward looking statements are not guarantee the future performance nor should they be relied upon as representing management is as if any subsequent date.

Oh it looking statements involves significant risks and uncertainties in advance the results could differ materially from those presented due to a number of risks and uncertainties.

Speaker 2: Forward-looking statements involve significant risks and uncertainties. An event for 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 under the heading risk factors and MDNA and in our subsequent filings with the Securities and Exchange Commission which are available at SEC.gov.

Detailed information concerning these risks regarding our business and the factors that could cause actual resolved.

Different material, even though we're looking statements and other information that will be given today.

Can be found in our Form 10-K under the heading risk factors and MBNA and and our subsequent filings with the Securities and Exchange Commission, which are available at S. A C dot 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 gas.

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

Speaker 2: Reconciliation of these non-GAT measures to their most directly comparable GAT measures are included in the appendix to the press release and investor presentation issued this afternoon, both of which are available in the Investors tab of our website.

Reconciliation of these non-GAAP measures to their most directly comparable got measures are included in the appendix to the press release, an investor presentation issued this afternoon.

Both of which are available and the investors tab of our website.

Speaker 2: With that out of the way, I would like to turn the call over to Potbelly's president and CEO Bob Wright.

With that out of the way I would like to turn the call over to Potbellies, President and CEO Bob right.

Speaker 3: Thank you, Adia, good afternoon, and thank you for joining our call today. We delivered strong third quarter results demonstrated by solid type one improvement and 8% same store sales growth. Notably, our traffic growth remained a strong contributor as we continued to take traffic share from the fast casual category each week through the quarter. We also grew shop-level margins through continued leverage across food and labor costs, resulting in a 400 basis point improvement year over year.

Thank you have a do you have a good afternoon and thank you for joining our call today, we delivered strong third quarter results demonstrated by solid type one improvement and 8% same store sales growth.

[noise], our traffic growth remained a strong contributor.

As we continued to take traffic sure from the fast casual category each week through the quarter.

We also grew shop level margins through continued leverage across food in labor costs, resulting in a 400 basis point improvement.

Over a year.

Speaker 3: I'm proud to say that these results are driven by the cumulative effect of our discipline, strategy and execution over the past many quarters, driving our confidence and the sustainability of the results we've achieved thus far.

Proud to say that these results were driven by the cumulative effect of our disciplined strategy and execution over the past many quarters driving our confidence in the sustainability of the results we've achieved thus far.

Speaker 3: We remain focused on achieving the long-term growth potential of this amazing brand.

We remain focused on achieving the longterm growth potential of this amazing brand.

Speaker 3: As we look forward to the end of the year and into 2024, we will continue to execute against our five-pillar strategic plan to achieve traffic, driven profitability, and unit growth.

As we look forward to the end of the year and into 2024 will continue to execute against our five bill or strategic plan to achieve traffic driven profitability and unit growth.

Speaker 3: This includes craveable quality food at a great value, people creating good vibes, customer experiences that drive traffic growth, digitally driven awareness and connection, and franchise focused development.

This includes craveable quality food at a great value people, creating good vibes customer experiences drive traffic growth.

[noise] driven awareness and connection.

Franchise focused development.

Speaker 3: With that, let me update you on our ongoing initiatives that support these pillars, starting with the Pop-Belly Digital Experience. We're pleased with another quarter of outstanding performance in our digital business, driven by meaningful progress in our PURTS loyalty program. All in all, our digital business represented approximately 37% of our total shop sales during the quarter, an increase of approximately 150 basis points relative to the same period last year.

With that let me update you on our ongoing initiatives that support these pillars, starting with a potbelly digital experience.

Pleased with another quarter of outstanding performance in our digital business driven by meaningful progress there are perks loyalty program.

All in all our digital business represented approximately 37% of our total shop sales during the quarter, an increase of approximately 150 basis points relative to the same period last year.

Speaker 3: Importantly, we also continue to see a shift in our digital business away from third party channels and towards pop belly owned app, web, and perks originated order.

Importantly, we also continue to see a shift in our digital business away from third party channels and towards Potbelly owned App web and perks originated orders.

Speaker 3: We are committed to serving our customers with the occasions that best meet their needs each time they visit potbelly, including our unique in shop fast casual dining experience. And through the variety of order occasions delivered by the potbelly digital experience during the quarter we were thrilled to see growth in both burger.

We are committed to serving our customers with the occasions that best meet their needs. Each time, they visit potbelly, including are unique in shop fast casual dining experience.

And through the variety of order occasions delivered by the Potbellied digital experience during the quarter, we were thrilled to see growth in both vertical.

Speaker 3: Turning to our pop-billy digital kitchen, the rollout of PDK to our existing shops is progressing as planned. And we will continue the deployment of PDK across our system of existing shops, to the standard in every new franchise location.

Turning to our Potbelly digital kitchen, the rollout of PDK to our existing shops is progressing as planned and we will continue the deployment of PDK across our system of existing shops. The standard in every new franchise location more than.

Speaker 3: More importantly, it's the benefit of PDK to our operations, which are clearly demonstrated not only by the ongoing growth of our digital business and our ability to handle the incremental throughput, particularly during peak periods, but also operating efficiency and improvements in the customer experience from orders writing on time, to accuracy of food and quality scores.

Portly has the benefit of P. D K to our operations, which are clearly demonstrated not only by the ongoing growth of our digital business and our ability to handle the incremental throughput.

Take care of you during peak periods.

But also operating efficiency and improvements in the customer experience from order's ready on time to accuracy of food and quality scores.

Speaker 3: Importantly, we continue to leverage the throughput learnings from PDK and shops yet to be rolled out in our ongoing effort to drive track.

Importantly, we continue to leverage the throughput learnings from PDK and shop, she yet to be rolled out in our ongoing effort to drive traffic.

Speaker 3: Our Traffic Driven Foundation to Sales Growth continues to be supported by our marketing initiatives, including LTOs and digital only promotions designed to drive traffic, value and excitement for our customers.

Our traffic driven foundation to sales growth continues to be supported by our marketing initiatives, including L. T OS and digital only promotions designed to drive traffic value and excitement for our customers.

Speaker 3: During the quarter, we introduced our latest underground menu item with the Lucky Seven Sandwich, uniting all seven meats from two of our most popular sandwiches, the Italian and a wreck. Overall, our underground menu introductions available only on the Pop Belly app. Continue to be among the most searched menu items in our digital channels.

During the quarter, we introduced our latest underground menu item.

With the Lucky seven sandwich uniting all seven meets from two of our most popular sandwiches, the Italian and a wreck.

Overall, our underground menu introductions available only on the pot belly app continue to be involved in the most searched menu items in our digital channels.

Speaker 3: As we look ahead, we will continue to focus on food and marketing innovation to further drive growth of our Perks loyalty program and digital channel.

And as we look ahead, we will continue to focus on food and marketing innovation to further drive growth of our perks loyalty program and digital channels.

Speaker 3: Lastly, let me share some exciting updates to our Franchise Growth Acceleration Initiative or FGA. As we mentioned on our last call, during the quarter we signed a 27 unit deal in Maryland through a partnership with our company founder, Briann Kyle.

Lastly, let me share some exciting update store franchise growth acceleration initiative or F. G. A.

As we mentioned on our last call during the quarter, we signed a 27 year deal in Maryland through a partnership with our company founder Brian Kyle.

Speaker 3: During and subsequent to the end of the quarter, we signed multiple additional new development agreements, including a 40 unit deal that is comprised of four refranchised shops and a commitment to develop 36 new shops in both Ohio and Florida. Our shop development commitments now total 150 shops today. I'm proud of what our franchising team has accomplished in such a short period of time. We remain focused on achieving our 10% unit growth in 2024.

During and subsequent to the end of the quarter, we saw multiple additional new development agreements, including a 40 unit deal that is comprised of four refranchise shops, and a commitment to develop 36, new shops in both Ohio and Florida.

Our shop development commitments now total 150 shops today.

I'm proud of what our franchising team has accomplished in such a short period of time, we remain focused on achieving our 10 per cent unit growth in 2024.

Speaker 3: We continue to have a highly active and fluid pipeline of qualified pop-belie franchise candidates. And when combined with our unique brand and proven business fundamentals, we believe we have the foundation and the right team in place to drive long-term growth. Looking forward, we will continue to emphasize our franchise focus and build the organization's capability to support our franchise growth as we head towards 2000 units in the US.

We continue to have a highly active and fluid pipeline of qualified potbelly franchise candidates and when combined with our unique brand and proven business fundamentals. We believe we have the foundation and the right team in place to drive longterm growth looking.

Looking forward, we will continue to emphasize a franchise focus and build the organizations capability to support our franchise grow as we head towards 2000 units in the U S.

Speaker 3: We look forward to sharing additional updates on our next calls as more SDAs or Shop Development Area agreement that's for finalize.

We look forward to sharing additional updates on our next calls as more S. D. A a little shop development area agreements are finalized.

Speaker 3: Finally, let me reiterate how proud I am of our Pop Belly team. Their hard work and commitment to our unique brand have resulted in a strong third quarter performance.

Finally, let me reiterate how proud I am of our potbelly team their hard work and commitment to our unique brand have resulted in a strong third quarter performance.

Speaker 3: And they do so by carrying out our mission to the light customers with great food and good vibes, creating a distinct and differentiated fast casual experience for each of our customers. From their first moment to their last bite.

And they do so by carrying out our mission to the light customers with great food and good vibes, creating a distinct and differentiated fast casual experience for each of our customers from their first moment to their last by.

Speaker 3: With that, I'm going to now turn the call over to Steve to detail our financial performance for the third quarter. Thank you.

With that I will now turn the call over to Steve to detail our financial performance for the third quarter.

Thank you Bob good afternoon, everyone.

Speaker 3: Revenue is in the third quarter increased approximately 3% to $120.8 million. Driven by same-store sales growth of 8%, resulting in average weekly sales of approximately $25,190. Partially offset by the short-term revenue impact of our recent refranchising trend.

Revenues in the third quarter increased approximately 3% to $120.8 million driven by same store sales growth of 8%, resulting in average weekly sales of approximately $25190.

Partially offset by the short term revenue impact of our recent Refranchising transaction.

Speaker 3: Just in wide sales of $138.2 million, grew by approximately seven.

<unk> sales of $138.2 million grew by approximately seven per cent.

Speaker 3: Traffic continues to be strong contributor to same-store sales growth, as we drive demand through providing our customers value for what they pay, and showcasing compelling marketing through our digital trends.

[laughter] continues to be strong contributor at the same store sales growth.

We drive demand through providing our customers value for what they pay and showcasing compelling marketing through our digital channels.

Speaker 3: Additionally, we implemented modest price increases to mitigate increases in input costs and will continue to do so as necessary, although Q3 saw appreciable inflation deceleration.

<unk>, we implemented modest price increases to mitigate increases in input costs.

And will continue to do so is necessary, although Q3 saw appreciable inflation deceleration.

Speaker 3: Our digital business continues to grow and currently represents approximately 37% of revenue. An increase of 150 basis points versus last year, predominantly through our own channel.

Our digital business continues to grow and currently represents approximately 37% of revenue an increase of 150 basis points versus last year predominantly through our own channels.

Speaker 3: We attribute this growth to our progress in enhancing the overall Potbelly digital experience, dedicated efforts to increase PERC's loyalty program member acquisition and activation, and engagement through targeted digital promotions and advertising.

We attribute this growth for progress in enhancing the overall potbelly digital experience.

Dedicated efforts to increase perks loyalty program member acquisition, an activation and engagement through targeted digital promotions and advertisements.

Speaker 3: Furniture expenses, food, beverage, and packaging costs were 27.8% of shop sales, a 210 basis point improvement versus the prior year period.

Turning to expenses food beverage and packaging costs for 27.8 per cent of shop sales.

210 basis point improvement versus the prior year period.

Speaker 3: Overall, Q3 commodity inflation was greatly improved at minus 1.5% versus last year.

Overall Q3 commodity inflation was greatly improved at minus 1.5% versus last year.

Speaker 3: A grocery category, which includes produce, soup, condiments, and chips, but the largest input cost increases.

A grocery category, which includes produce stoop condiments and chess, while the largest input cost increases.

Speaker 3: with me primarily chicken retreating year over year.

With me, primarily chicken retreating you're over here.

Speaker 3: Labor expenses were 28.9% as bail, a 200 basis point improvement versus the prior year period.

Labour expenses were 28.9% a sale 200 basis point improvement versus the prior year period.

Speaker 3: This improvement is attributed to sales leverage, along with continued optimization of our our space labor guide.

This improvement is attributed to sales leverage along with continued optimization of our our space Labour Guide.

Speaker 3: We continue to see wage rates moderate and expect this to continue to normalize through the end of the year.

We continue to see wage rates moderate and expect this to continue to normalize through the end of the year.

Speaker 3: Occupancy was 10.7% of sales, a 90 basis point improvement versus the prior year period.

Occupancy it was 10.7% a sale a 90 basis point improvement versus the prior year period.

Speaker 3: The improvement was driven by top line leverage and the refranchising of our New York City market, which carried higher than average occupant.

The improvement was driven by hotline leverage and the Refranchising of our New York City market, which carried higher than average occupancy costs.

Speaker 3: Other operating expenses were 18% of sale, a 100 basis point increased versus the prior year period. This was predominantly due to increased brand fund spend.

Other operating expenses were 18 per cent of sale, a 100 basis point increase versus the prior year period.

This was predominantly due to increased brand phone spent.

Speaker 3: Overall, shop level margins in the third quarter were 14.6% an increase of 400 basis points year over year.

Overall shop level margin in the third quarter or 14.6% an increase of 400 basis points year over year.

Speaker 3: I'll cover our forward looking guidance in a moment. But as we look to our fourth quarter, last year we received one time benefits to our restaurant margin, totaling 90 basis points that we do not expect to repeat this.

Ah cover are forward looking guidance in a moment, but as we look to our fourth quarter last year. We received one time benefits to a restaurant bargain totalling 90 basis points that we do not expect to repeat this year.

Speaker 3: These results truly demonstrated increasing power of the top-value economic model, the sustainable top-line growth, fueled by the effectiveness of our marketing efforts, including our Perks loyalty program, operations focus on customer experience and throughput, through cost control and normalization of inflationary pressures. That said, we still have more work to do, and are focused on achieving our 2024 shop-level margin target of 16%.

These results truly demonstrated increasing power of the potbelly economic model for sustainable top line growth fueled by the effectiveness of our marketing efforts, including our perks loyalty program.

Operations focus on customer experience and throughput.

He didn't cost control and normalization of inflationary pressures that said, we still have more work to do and are focused on achieving our 2024 shop level margin target of 16 per cent.

General and administrative expenses word 9.8% of revenue.

Speaker 3: General and administrative expenses were 9.8% of revenue.

Speaker 3: The year-over-year increase in DNA was driven primarily by higher bonus accruals as we outperformed our targets in the quarter and increased headcount from a year ago to fuel our development.

The year over year increase in G&A was driven primarily by hired bonus accruals as we outperformed our targets and a quarter an increase headcount from a year ago to fuel our development efforts.

Speaker 3: As we discussed last quarter, we continue to believe general and administrative expenses as a percentage of system lightfails is a more applicable way to view our business as we become more franchise based over.

Have you discussed last quarter, we continue to believe general and administrative expenses as a percentage of system wide fails is it more applicable way to view our business as we become more franchise based over time.

Speaker 3: For the third quarter, general and administrative expenses were approximately 8.6% of system-wide sales.

For the third quarter general and administrative expenses, where approximately 8.6 per cent of system wide sales.

Speaker 3: We are encouraged by these results as we continue to leverage sales, control costs, and build the development infrastructure ahead of our increasing pace of unit growth.

We are encouraged by these results as we continue to leverage sale control costs and build the development infrastructure ahead of our increasing pace of unit growth.

Speaker 3: We reported net income of $1.5 million for the quarter. Adjusted net income was $1.1 million, and $800,000 improvement versus the prior year period.

We reported net income of $1.5 million for the quarter adjust.

Justin net income was $1.1 billion and 800000 dollar improvement versus the prior year period.

Speaker 3: Third quarter adjusted EBITDA with $7.3 million or 6% of total revenue.

Third quarter, adjusted EBITDA was $7.3 million or six per cent of total revenue.

Speaker 3: This was a $2.6 million increase year over year and a 200 basis point improvement on the margin. The $2.6 million increase year over year and a 200 basis point improvement on the margin.

He was a 2.6 million dollar increase year over year, and a 200 basis point improvement on the margin.

Turning to our outlook.

Speaker 3: For the full year 2023, our outlook includes AUV of $1.29 million.

For the full year 20 twenty-three our outlook includes a U V of $1.29 million.

Speaker 3: Things to our sales growth between 11.5% and 12%.

Same store sales growth between 11.5% and 12%.

Speaker 3: Shock level margins between 13.4 and 13.9%.

Bass level of margin between 13.4 and 13.9%.

Speaker 3: adjusted EBITDA of between $25.9 million and $27.9 million.

Adjusted EBITDA between $25.9 million and $27.9 billion.

Speaker 3: For the fourth quarter of 2023, we are currently forecasting the follow.

For the fourth quarter of 2023, you're currently forecasting the following.

Speaker 3: average weekly sales between $24,250 and $24,750.

Average weekly sales between $24250 and $24750.

Speaker 3: Same-store sales growth between 4% and 6%.

Same store sales growth between 4% and 6%.

Speaker 3: Shop level margins between 12.5% and 14.5%.

Chopped level margin between 12.5% and 14.5 per cent.

Speaker 3: and adjusted EBITDA between $5 million and $7 million. With that, I'll turn.

And adjusted EBITDA between $5 million and $7 billion.

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

Speaker 4: Thanks Steve. Our third quarter results demonstrated what the popnally business model is capable of. And with our momentum continuing into the fourth quarter, we believe we have light off site to achieving the full year 2024 growth target.

Thanks, Steve our third quarter results demonstrated what the pot belly business model is capable of and with our momentum continuing into the fourth quarter. We believe we have line of sight to achieving the full year 2024 growth targets.

Speaker 4: Our pipeline of additional shop development area agreements remain strong. And we look forward to sharing additional updates in the coming quarter.

Our pipeline of additional shop development area agreements remains strong and.

And we look forward to sharing additional updates in the coming quarters.

Speaker 4: While we've achieved a great deal in the recent quarters, I can assure you that we are only just getting started. With that, for happy to answer any questions, operator, please open the line for questions.

While we have achieved a great deal in the recent quarters I can assure you that we are only just getting started with that we're happy to answer any questions. Operator. Please open the line for questions.

Oh of course.

Speaker 1: To ask a question, you may press star then one on your telephone keypad. To address your question, please press star then two. If you are using a speaker phone, please pick up your handset before pressing the keys. At this time, we will pause them and terribly to assemble our roster.

To ask a question you May press star one on your telephone keypad.

Try your question. Please press Star then too.

If you're using a speaker phone please pick up your handset before pressing the keys at this time, we will pause momentarily to assemble a roster.

Speaker 1: Today's first question comes from Todd Brooks with the Benchmark Company. Please go ahead.

Today's first question comes from Todd bricks with a benchmark company. Please go ahead.

Speaker 4: A good afternoon and congratulations on the results. Good progress.

Good afternoon, and congratulations on the results good progress.

Good afternoon.

Speaker 4: a couple quick questions and maybe the easiest way to talk to it is the 4 to 6% same store sales guidance for the fourth quarter.

A quick question. So maybe the easiest way to talk to is the 4% to 6% same store sales guidance for the fourth quarter.

Speaker 4: And you disaggregate for us kind of pricing traffic and mix assumptions within that four to six, or if it's easier to talk about a pricing waterfall in the four quarters, we can attack it that way as well.

You disaggregate for us kind of pricing traffic and makes assumptions within that four to six or if it's easier to talk about a pricing waterfall.

And the food quarters, we can attack it that way as well.

Sure John what did I.

Speaker 3: When I start with pricing itself, then we can kind of get into some of the other components. So, for the quarter, we're looking at a 4% overall price increase. And that includes some of the carry forward from the prior year. We had a pricing action early in P11 here in the quarter, which was a 1.5% price increase.

When I start with with pricing itself and then we can kind of get into some of the other components. So for the quarter, where we're looking at a 4% overall price increase and that includes some of the carry forward from from the prior year, we had a pricing action early in N. P 11 here in the <unk>.

<unk>, which was a 1.5 per cent price increase.

Speaker 3: So you can think about our guide at an 8% same store sales rate. You've got, sorry, if you look at our guide at four to six, saves the sales, and then you take a look at our pricing of four, the rest ends up being a blend of traffic and makeshift. And

So you can think about our guide at at an 8%.

Yeah same store sales right, you've got sorry, <unk> you like it or if you look at our guide at four to six same store sales and then you take a look at our our pricing for you know the the rest ends up being a blend of traffic and mix shift.

And no <unk>.

Speaker 4: We've got a business that we feel like is moving in the right direction here and is continuing, it's strength. We know the category is roughly flat to negative on traffic. I think we like where we are north of that. So we don't break down all the components beyond there, but if you take your four to six range on the same store sales and our six, sorry, our 4% price increase, that should help you get to where you need to go. That's perfect, thanks Steve. And then your consumer.

We we we've got a a business that we feel like it's moving in the right direction here and is continuing.

Its strength, we know the category is roughly flat to negative on traffic I think we we like where we are in north of that.

So we don't we don't break down all the components beyond there, but if you take your <unk> four to six range on the same store sales in our six or sorry, a 4% price increase that should help you get to where you need to go.

That's perfect. Thanks, Steve and then.

Consumer I think last quarter, you might've talked about.

Speaker 4: a little bit of, I don't even know if it was check management first, as people opting into mini.

Just a little bit of.

I don't even know if it was check management versus people opting into many.

Speaker 4: as an option. What do you think about how they're building check? Are they...

As an option what do you what do you think about how they're building checks are they.

Speaker 4: having with a similar fashion as they were maybe at the outset of the year. What are you watching on the punt billing?

Behaving it was a similar fashion as they were maybe at the end of the year or what are you watching the popcorn consumer.

Speaker 5: That's a great question Todd and I think some of it actually relates to build on what Steve was talking about but We see a couple of things going on in there. Yeah, there is a little bit of a of a size shift that seems to continue from our biggs and originals to our skinnies But when you look at the traffic growth that we have and the amount of business that we're driving especially with the newer perks consumers

Yeah, that's a great question, Todd and I think some of it actually relates to to build on what Steve was talking about but we see a couple of things going on in there yeah. There is a little bit of.

Have a size shift that seems to continue from our bags and original <unk> to our skins, but when you look at the traffic growth that we have in the amount of business that we're driving especially with the newer perks consumers.

Speaker 5: We're not 100% sure that that is actually change in behavior of existing consumers or is it a change in the profile of our total consumer set.

We're we're not we're.

<unk>, 100% sure that that is actually change in behavior of existing consumers or is that a change in the profile of our total consumer set.

Speaker 5: But it's not at all unhealthy force, it's not driving a significant change in check. And the other thing is that it's actually slightly better on margin as you move through that. There's another shift that's happening. If you heard my prepare remark, tell the majority of our digital businesses now coming through our own channels, our perks app and web channels. And that's the first time you've heard us say that.

But it's it's not at all unhealthy for us, it's not driving a significant change in check and the other thing is that.

Truly slightly better on margin as you move through that there's another ship that's happening if you heard my prepared remarks Hell. The majority of our digital business is now coming through our own channels are perks, App and web channels and that's that's the first time, you've heard us say that.

Speaker 5: That means that there's a shift up by channel away from the DSP. So there's third party delivery orders. Those are always going to carry a higher check because of how we price it to offset the commission that we pay the DSP.

That means that there's.

There's a a shift up by channel away from the D. S. P. So there's third party delivery orders those are always going to carry a higher check because of how we price it to offset the commission that we pay the D. S P's.

Speaker 5: So again, it can't have some deflationary impact on the check from a penny profit. We've engineered that to be just about even for us. So there's no profitability concern. In fact, again, from a margin perspective that can be somewhat of a...

So again it it can have some deflationary impact on the check from a penny profit we've engineered that should be just about even for us. So there's there's no profitability concern in fact again from a margin perspective that can be somewhat of a.

Speaker 5: of a benefit, but because of that slight channel shift, you can see some adjustment in that check too. So...

Of a benefit.

But because of that slight channel shift you can see some some adjustment in in that check too. So what I think is you know the the broader question for the consumer in general is are we seeing really significant shifts in consumer behavior.

Speaker 5: What I think is the broader question for the consumer in general is are we seeing really significant shifts in consumer behavior?

Speaker 5: in their spending patterns and what's going on with traffic patterns. And our traffic patterns compared to the fast casual traffic. And the answer is, our consumer seems to be hanging in there really well. Look, they've got the jobs market is strong, they've got the income to support it. The most revised savings numbers suggest that the consumer in this $7,500,000 plus range.

In their spending patterns and what's going on with traffic patterns in our traffic patterns compared to the fast casual traffic and <unk>.

And the answers are consumers seems to be hanging in there really well look they've got the jobs market a strong they've got the income to support at the most revised savings number suggests that the consumer this 70 $500000 plus range has not been impacted by the pricing that we've taken any way to offset inflation over the last.

Speaker 5: has not been impacted by the pricing that we've taken anyway to offset inflation over the last 12 months.

12 months.

Speaker 4: It's great, one final one, another jump back in Q. Use touched on perks as an engine, are we?

That's great and one final one another trump back in queue.

He was touched on perks as an engine are we.

Speaker 4: I know of assets in the past, are we closer to maybe getting some quantification on?

I know of accidents in the past or are we closer to maybe getting some quantification on what.

Speaker 4: what PARCS means to Potbelly, either ties of membership or continued commentary about membership growth rates. Just wondering if we get a better understanding of how important of an

What perks means to to pot belly, either I as a membership or continued commentary about membership growth rates. Just wondering if we can get a better understanding of how important. It is thanks, yeah, especially <unk> again, we are very pleased with just how powerful perks continues to be for us and and.

Speaker 5: Yeah, especially when that's again, we are very pleased with just how powerful Perch continues to be for us. And, you know, when you see that shift,

You know when you see that shift to to our own channels over the D. S. P's purchases at the heart of that we're seeing growth in there.

Speaker 5: to our own channels over the DSP.

Speaker 5: Purchase at the heart of that. And we're seeing growth in there. The other thing that we're very excited about is the growth in perks acquisition. And in fact, the growth in the rate of perks acquisition.

The other thing that we're very excited about is the growth and perks acquisition and in fact, the growth and the rate of perks acquisition.

Speaker 5: We are seeing year over year a 60% increase, 60 plus percent increase in the acquisition rate for perks members coming through those promotional activities now.

We are seeing year over year.

60 per cent increase 60, plus per cent increase in the acquisition right for birch members coming through those promotional activities now.

Speaker 5: It's still our job to convert those to, you know, more and more frequent users. We still, you know, we still nurture that relationship. We've got the nurturing flows that we've talked about in the past, but...

It's still our job to convert those to you know more and more frequent users. We still we still nurture that relationship. We've got the nurturing clothes that we've talked about in the past, but filling the funnel, which is the the biggest first step for US is has shown a lot of momentum here in the last well in the last quarter, but in the last six months too.

Speaker 5: Filling the funnel, which is the biggest first step for us, has shown a lot of momentum here in the last, well, in the last quarter, but in the last six months too. So we're really pleased with that acquisition rate.

So what we're really pleased with that acquisition right.

That's great. Thanks, Bob.

You're welcome.

Speaker 1: Thank you. The next question comes from Jeremy Hamlin with Craig Hallam Capital Group. Please go ahead.

Thank you. The next question comes from Jeremy Handlin with Craig Hallum Capital Great. Please go ahead.

Speaker 3: Thanks. And I'll add my congratulations on terrific results. I wanted to start with your labor costs. You had pretty impressive year-over-year improvement, but I think even from a sequential standpoint, 150 basis points lower than Q2. I wanted to just understand the factors involved in seeing that type of improvement. Is that the digital kitchen?

Thanks, and I'll add my congratulations on a terrific resolved I wanted to start with your your labor costs, you kept pretty impressive.

Your over your improvement, but I think even from a sequential standpoint, you know 150 basis points lower than Q2, why don't you just understand the factors involved in and see that type of improvement.

Is that you know the digital kitchen, and and you know kind of changes in the make line that we're starting to see.

Speaker 3: kind of changes in the make line that we're starting to see.

Speaker 5: that kind of transform the business but any color that you could add to what you're seeing there would be appreciated.

That's kind of transform the business, but any color that you could add to what you're seeing there would be appreciated.

Speaker 3: Great, welcome Jeremy. Thanks for the question. Yeah, I'll start, I think just to give you the headlines in terms of the shift we've seen.

Great Welcome Jeremy Thanks for the question, Yeah, I'll I'll start I think just to give you the headlines in terms of the ship. We've we've seen some of it comes from some of the the sales leverage we get obviously on the fifth element of labor, that's a benefit to us, but also I think primarily.

Speaker 3: Some of it comes from some of the sales leverage we get, obviously on the fixed element of labor that's a benefit to us, but also

Speaker 3: I think primarily where we see a lot of benefit is in the management of the hours at the shop level and the continued optimization of our space, our space labor guide.

Where we see a lot of benefit is in the management of the hours at the shop level and the continued optimization of our hours faced our space Labor Guide also I think labour inflation for US has has been fairly consistent certainly off its peak.

Speaker 3: Also, I think labor inflation for us has been fairly consistent, certainly off its peak.

Speaker 3: from about 18 months ago. And having that visibility is helpful. We've also experienced turnover rates, which are certainly lower than from the data we've seen, lower than that of the fast casual industry. And so all of those elements.

From sorry about 18 months ago and that having that visibility is is helpful. We've also experienced turnover rates, which are certainly lower than from the data we've seen lower than that of the fast casual industry and so all of those elements.

Speaker 3: I think would be contributing factors to that improvement on the labor line that we're seeing.

I think would be contributing factors to that improvement on the on the Labour line that you're saying.

Speaker 5: Yeah, Jeremy, nothing, you know, nothing like the continued momentum on the top line, really stable, associate and management turnover and retention and we get the efficiency that goes with that. You ask specifically about PDK.

Yeah, Jeremy nothing you know nothing like the the continued momentum on the top line really stable associate it and management turnover and retention and we're getting the efficiency that goes with that you ask specifically about P. D K.

Speaker 5: The rate of our continued implementation of PDK is really just isn't rapid enough to influence the entire portfolio that quickly, but what we what we are seeing is we continue to see.

The rate of our car continued implementation of P. D. K is really just isn't rapid enough to influence the entire portfolio that quickly, but what we what we are seeing as we continue to see.

Speaker 5: the savings that we seek out of the labor that goes with that efficiency on the back line, we capture most of that in the first two or three weeks after implementing PDK, getting those behaviors changed. And then that becomes the new normal. And, you know, the better part of that, as we've said in previous quarters,

The savings that we seek out of the labor that goes with that efficiency on the back line. We capture most of that in the first two or three weeks after implementing PDK getting those behaviors changed and then that becomes the new normal and you know the the the better part of that as we said in previous quarters. We.

Speaker 5: We are, you know, we are continuing to expand the rollout of PDK, and we do it by prioritizing those most capacity-constrained shots.

<unk> you know we are continuing to expand the rollout of P D K and.

And we we do it by prioritizing those most capacity constrained shops those.

Speaker 5: Those are the ones that are going to be very peaky at dinner or peaky at lunch where we have that longest line because

Those are the ones that are gonna be very picky at dinner or picky at lunch, where we have you know we have that longest line because.

Speaker 5: We often talk about PDK with the backline digital components and helping us with all that digital businesses coming through those channels. PDK also includes...

We often talk about PDK with the back line digital <unk> components in helping us with all that digital business is coming through those channels. TDK also includes handheld order tablet that helps us move the frontline. So that's why we've prioritized those those shops and when we put it in there we get we get the benefit of being able to move that frontline and.

Speaker 5: a handheld order tablet that helps us move the front line. So that's why we prioritize those those shops. And when we put it in there, we get, you know, we get the benefit of being able to move that front line and extract even more throughput. And of course there's there's a benefit that goes.

<unk>, even more throughput and of course, there's there's a benefit that goes with that.

Speaker 5: Last thing I'd say, we have to give our operations team a lot of credit here. They're becoming more seasoned, the multi-unit operators at the district manager and director level have been in position for a long time. They really are jelling as a team and their management of the labor and the stability of that management continues to help us as well.

Last thing I'd say, we have to give our operations team a lot of credit here, they're becoming more season, the multi unit operators at the district manager director level.

Been in position for a long time, they really are gelling as a team and their management of of the labor and the stability of that management continues to help us as well.

Speaker 3: Great, health color. So as a follow-up question, as we look towards getting to that 16% shop level margin target for FY24, I want to just understand in terms of, you know, the component parts here, your guidance for FY23 is 13.4 to 13.9% shop level margin.

Great how color.

As a follow up question as we look towards getting to that 16% shop level margin target for F. Y 24, why don't just understand in terms of you know the component parts here your guidance for F. Y 23 is 13.4 to 13.9 per <unk>.

Sent shop level of margin.

Speaker 3: In terms of which of the line items you expect to generate that kind of 200 to a little bit over 200 basis point improvement in margins next year, where do you expect the primary contributing factors to come from? Is that still labor and occupancy leverage or what are kind of the factors you

In terms of which of the line items, you expect to generate that kind of 200 to a little bit over 200 basis point improvement in margins next year, where do you expect the primary contributing factors to come from is that you know still labor and occupancy leverage or.

Or you know.

What are kind of factors you expect to drive most of those gains.

Yeah sure I think it's you you hit on two of them I can give some more color I think certainly on the labor side, we expect to get more efficient and effective with a three P. D K as well as some additional efforts to continue to optimize labor in the shops as Bob described that will be a major contributor to it.

Speaker 3: It's you hit onto of them, I can give some more color. I think certainly on the labor side, we expect to get more efficient and effective through PDK as well as some additional efforts to continue to optimize labor in the shops and subscribe. That will be a major contributor to it.

Speaker 3: We, we frankly on the sales leverage that will flow through to occupancy. That's going to be another kind of benefit to us.

We we frankly on the sales leverage down flow through the occupancy that's gonna be another kind of benefit to us, but also we expect to see continued benefit to us in terms of food input costs that will be a contributor as well and then when you look at the business and you say, okay, well, there's there's there's not one.

Speaker 3: But also, we expect to see continued benefit to us in terms of food input costs that will be a contributor as well.

Speaker 3: And then when you look at the business and you say, okay, well, there's that one silver bullet for us that's gonna push the margin all the way. It's gonna be a contribution from a few other things too. So.

<unk> silver bullet for us that's gonna push the margin all the way, it's gonna be <unk> contribution from from a few other things too. So for example, we expect our catering business to continue to grow that tends to be a a a healthy margin business for us we still have runway yet to go in our C. B D portfolio.

Speaker 3: For example, we expect our catering business to continue to grow. That tends to be a healthy margin business for us.

Speaker 6: We still have runway yet to go in our CBD.

Speaker 6: portfolio. And that still continues to be a tailwind for us as there are return to work.

And that that still continues to be a tailwind for us as as there are <unk> returned to work. There's return to work momentum that continues to build that's gonna be a component for us as well and then you know we we also will continue to price strategically to continue to out run inflate.

Speaker 6: There's return to work momentum that continues to build. That's going to be a component for us.

Speaker 3: as well. And then, you know, we also will continue to price strategically to continue to outrun inflation. And we feel like, you know, while we won't expand margin because of that, we will remain competitive. And being competitive means for us kind of being at or below where our fast casual competitors are.

<unk> and we feel like you know, while we won't expand margin because of that we will remain competitive and being competitive means for us kind of being at or below where are fast casual competitors are and we've seen some benefit on traffic from from being in that position and so added traffic obviously creates the leverage that then sorry.

Speaker 3: And we've seen some benefit on traffic from being in that position. And so added traffic obviously creates the leverage that then starts to flow through the rest of the P&L, where we typically don't get a ton of additional leverage like we used to before the pandemic is in our other OPEX line. About half of it's fixed, and the other half just floats with the business. That's where our brand funds sit.

Through the rest of the P&L, where we typically don't get a ton of additional leverage like we used to before the pandemic is in our other opex lying about half of its fixed and the other half is floats with the business, that's where I'm <unk>.

Speaker 3: That's where our fees for third party delivery and so forth sit. You know, we might get a little bit of benefit there if we see continued shift away from the DSP component of things, but it's really that amalgamation of all those components that describe that will help us get to that 16. And by the way, based on our momentum and our trends, we feel like we've got that 16% clearly in our sites for next year.

That's where our fees for third party delivery and so forth. So you know, we we might get a little bit of benefit there. If we see continued shift away from from the D. S. P component of things, but it's really that amalgamation of all those components that described that'll help us get to that 16 and by the way based on our momentum and our trends.

We feel like we've got that that's 16 per cent clearly in our sights for next year.

Speaker 3: Great. Another question here, just in terms of the color that you provided in the queue here on the sale of the Ohio location.

Great. Another question here just in terms of the sale of of you know the color that you provided in in the queue here on the scale of the Ohio locations.

Speaker 5: $3.3 million, substantially higher, I think that's what, $825K, a unit, substantially higher than what you realized on your first two deals this year. One to understand first, what should we be expecting as you look to refranchise, you know, approximately 100 locations over the next few years.

$3.3 million substantially higher I think that's what 825 K or a unit.

Substantially higher than than what you realized on on your first two deals. This year one to understand first what should we be expecting as you look to refranchise approximately 100 locations over the next few years.

Speaker 5: And then, you know, what was driving specific to these deals, why the Ohio locations were so much more highly valued?

And then you know what was driving specific to these deals why the Ohio locations, where so much more highly valued.

Speaker 3: than the other locations. I know that New York City locations were not super profitable. And that's probably part of the answer, but wanted just a little more colors.

Then the other locations I know that New York City locations, where not super profitable and that's probably part of the answer but wanted just a little more color there.

Speaker 5: Yeah, look, that's that's the primary element that goes into valuation of, you know, of a franchised restaurant concept and it's trading.

Yeah look that's the that's the the prime.

Primary element that goes into valuation of you know, but franchise restaurant concept and its trading.

Speaker 5: And the other thing that I think affects that is the timing. If you look at this business continues to get stronger and stronger. And so...

And the other thing that I think affects that is the timing if you look at this.

This business continues to get stronger and stronger and so.

Speaker 5: You know, our willingness to sell franchise or company units into the franchise system is really driven by our desire to continue to develop and to spur that development.

You know, our our willingness to sell franchise or company units into the franchise system is really driven by a desire to continue to develop into spur that development.

Speaker 5: terms of the value difference, you know, each deal is going to be different. Each deal has to be rooted in the economics of that particular portfolio. And the history of that particular portfolio. So that really is the difference between those. But I can tell you that we're, you know, we're excited about each one. We would only do one if it were a creative to the business overall, especially with the growth that comes with them.

In terms of the the valued difference each deal is going to be different H deal has to be rooted in the economics of that particular portfolio.

And the history of that that particular portfolio. So that that really is the difference between those but I can tell you that where you know we're excited about each one we would only do one if it were accretive to the business overall, especially with the growth that comes with them.

Speaker 5: But yeah, you spotted it in the queue that most recent deal with Royal Restaurant Group, we're very pleased with, you know, to sell four units.

But yeah, you spotted it in the queue that that most recent deal with Royal restaurant Group. We're very pleased with you know to sell four units.

Operator: Good afternoon everyone and welcome to Potbelly Corporation's third quarter 2023 earnings conference call. Today's call is being recorded. At this time, all participants have been placed in a listen only mode and the lines will be open for your questions following the prepared remarks.

Speaker 5: It's 17 additional units in central Ohio to be developed there. And then of course the remainder of the other 19 down in Florida in a group that

It's 17 additional units in central Ohio to redevelop there and then of course, the the remainder of the the other 19 down in Florida and I'm in a group that.

Speaker 5: CEO , the CFO and the COO all work together in one of QSR's largest franchise groups in a multi-state environment, done development before. And we're just incredibly excited to see this quality of franchise. He's coming to the brand.

C E O the CFO and the C O O all work together and one of <unk> largest franchise groups and a multistate environment done development before.

Operator: On today's call we have Bob Wright, President and Chief Executive Officer, Steve Cirulis, Senior Vice President and Chief Financial Officer, and Adiya Dixon, Chief Legal Officer and Secretary of Potbelly Corporation.

And you know, we're just incredibly excited to see this quality of franchisees coming to the branch.

Yeah, It sounds tremendous and I you know if you can add color. They're on just the franchisee pipeline are you seeing a different type of you know.

Speaker 3: Yeah, it sounds tremendous. And you know, if you can add color there on just the Franchisee pipeline, are you seeing a different type of, you know,

Adiya Dixon: At this time, I'll turn the call over to Adiya Dixon. Please go ahead. Good afternoon everyone and welcome to our third quarter 2023 earnings call. By now, everyone should have access to our earnings release and accompanying investor presentation. If not, they can be found on the investor relations section of our website.

Speaker 3: type of franchisee that's interested in the business now as opposed to you know six or nine months ago are you you know anticipating looking for slightly larger partners like RRG or you know are you still looking to fill kind of with more mid-tier mid-scale franchisee

Type of franchisee that's interested in the business now as opposed to you know six or nine months ago are you anticipating or looking for slightly larger <unk> partners like R. R. G or you know or are you still looking to fill kind of more mid tier.

Adiya Dixon: 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 of 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 the future performance nor should they be relied upon as representing management views as a semi subsequent date.

Scale franchisees.

Speaker 5: Yeah, I think there's kind of two parts to the answer to your question. First one is just in the quality of franchise candidate that we're seeing, we are very excited to see the quality of our franchise candidate just continue to improve. And I mean that with all the same excitement, we've stated about all the previous ones that have joined the system. The brand is getting stronger. Our performance is getting stronger.

Yeah, I I think there's kind of two parts to the answer to your quite first one is just in the quality of franchise, Canada. We're seeing we are very excited to see the yeah. The quality of our franchise. Canada's just continue to improve and I mean that with all the same excitement. We've we've stayed at about all the previous ones that have joined the system the brain.

Is getting stronger performance is getting stronger.

Speaker 5: And candidly, franchisees follow the lead of other franchisees that they respect. And so as you strengthen the system, you tend to strengthen the candidate pool. And I'm glad we're enjoying that natural trend. And we're taking advantage of it. We've also invested heavily.

And candidly franchisees followed the lead of other franchisees that they respect and so as you strengthen the system you tend to strengthen the candidate pool and I'm glad we're enjoying that natural trends and and we're taking advantage of it and we've also invested heavily.

Adiya Dixon: Forward looking statements involve significant risks and uncertainties and events and 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 given today can be found in our form 10k under the heading risk factors and MDNA and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.

Speaker 5: and our development team to be able to recruit the best. So that's very exciting for us. 40 units is a big deal. In fact, you probably could find me saying in the past that we wouldn't do very many of those because there aren't that many groups that can fulfill that much development in that short period of time.

And our development team to be able to recruit the best so that that's very exciting for US 40 units. There was a big deal. In fact, you you probably could you know find me, saying in the past that you wouldn't do very many of those because there aren't that many groups that can fulfill that much development in that short a period of time.

Adiya Dixon: During the call, there will also be a discussion of some items that do not conform to US generally accepted accounting principles or gaps. Reconciliation of these non-gat measures to their most directly comparable gat measures are included in the appendix to the press release and investor presentation issued this afternoon, both of which are available in the investor's tab of our website.

Speaker 5: As a reminder, we've always said that our development deals, we'd like them to be about one unit a year, unless you have more than eight units, and then it's an eight-year limit to finish developing that out.

As a reminder, we've always said that our our development deals we'd like them to be about one a unit a year unless you have more than eight units and then it's an eight year limit to finish developing that out.

Speaker 5: And by and large, we've stayed really true to that development pipeline and pace.

And by and large we've we've stayed really true to that development pipe pipeline and pace.

Speaker 5: Well, there aren't many groups that can develop that many units that quickly. This group can. We believe that 100 percent. So today and so I think over time, you're still going to see a blend. We'll see some in the mid to high single digit number of units deals. We'll see some in the double digit deals. And there may be one or two more of this scale, depending on the candidate that comes in and their capabilities.

There aren't many groups who can develop that many units that quickly. This group can we believe that 100 per cent. So today and so I think over time, you're still going to see a blend.

Adiya Dixon: With that out of the way, I would like to turn the call over to potbellys president and CEO Bob Wright. Thank you, Adia.

Robert Wright: Good afternoon and thank you for joining our call today. We delivered strong third quarter results demonstrated by solid type one improvement and 8% same store sales growth. Notably, our traffic growth remained a strong contributor as we continue to take traffic share from the fast casual category each week through the quarter. We also grew shop level margins through continued leverage across food and labor costs resulting in a 400 basis point improvement year over year.

Well see some in the mid to high single digit number of units deals will see some of the double digit deals and there may be one or two more of this scale depending on the candidate that comes in and their capabilities.

Speaker 5: It's all about building that compounded growth that comes with the number of deals that we're able to keep doing. So generally speaking kind of qualitatively, I'm very pleased with what we can see in the pipeline from this point forward and really pleased with the team and the work they've done so far. Thanks for taking.

It's it's all about building that that <unk> that comes with the the number of deals that were able to keep doing so generally speaking kind of qualitatively I'm I'm very pleased with what we can see in the pipeline from.

From this point forward and really pleased with the team and the work they've done so far.

Robert Wright: I'm proud to say that these results are driven by the cumulative effect of our discipline strategy and execution over the past many quarters, driving our confidence and the sustainability of the results we've achieved thus far. We remain focused on achieving the long term growth potential of this amazing brand. As we look forward to the end of the year and into 2024, we will continue to execute against our five pillars strategic plan to achieve traffic driven profitability and unit growth. This includes craveable quality food at a great value, people creating good vibes, customer experiences that drive traffic growth, digitally driven awareness and connection and franchise focused development.

Thanks for taking all my questions best wishes.

Thank you thanks.

Speaker 1: Thank you. The next question is from Mark Smith with Lake Street Capital. Please go ahead.

Thank you. The next question is from Mark Smith with Lake Street Capital. Please go ahead.

Speaker 7: Hi guys, kind of a follow up to that last question, are there any characteristics of the restaurants that you've been selling or maybe the franchisees are more interested in? You know, for instance, are we looking at lower volume or lower margin, lower profitability in these restaurants that you're selling or the franchisees like kind of cleaner ones? Anything that you can call out there?

Hi, guys kind of a follow up to that that last question are there any characteristics of the restaurants that you've been selling or maybe the franchisees are more interested in you know for instance are we looking at lower volume or lower Mart lower profitability in these restaurants that you're selling or to franchisees like.

Kind of cleaner wants anything that you can call out there.

[noise] Mark Great question. There there is some difference and you kind of see that reflected in the in the asset purchase numbers that we've got in the queue, but it's not necessarily driven by the franchisees desire for a particular type of restaurants.

Robert Wright: With that, let me update you on our ongoing initiatives that support these pillars. Starting with the Potbelly digital experience, we're pleased with another quarter of outstanding performance in our digital business driven by meaningful progress in our perks loyalty program. All in all, our digital business represented approximately 37% of our total shop sales during the quarter, an increase of approximately 150 basis points relative to the same period last year. Importantly, we also continue to see a shift in our digital business away from third party channels and towards Potbelly owned app, web, and perks originated orders.

Speaker 5: Mark, great question. There is some difference and you've kind of see that reflected in the asset purchase numbers that we've got in the queue, but it's not necessarily driven by the franchisees desire for a particular type of restaurant.

Speaker 5: The, a lot of it is geography, where are they, where do they want to develop, where do they believe they understand the marketplace and many cases, where do they have existing or previous businesses, because that's their comfort level.

The a lot of it has geography, where where are they where is it they want to develop where do they believe they understand the marketplace in many cases, where do they have existing or previous businesses because that's that's their comfort level.

Speaker 5: And, you know, that certainly has been the case with the re-franchise deals that we've done so far.

And you know that that certainly has been the case with the Refranchise deals that we've done so far.

Speaker 5: I'll tell you, we have had an increasing amount of interest in just direct development and for those that, you know, do contact us sometimes that are mostly focused on re-franchising, those conversations don't go very far.

Robert Wright: We are committed to serving our customers with the occasions that fast meet their needs each time they visit Potbelly, including our unique in shop fast casual dining experience. And through the variety of order occasions delivered by the Potbelly digital experience during the quarter, we were thrilled to see growth in both verticals. Turning to our Potbelly digital kitchen, the rollout of PDK to our existing shops is progressing as planned and we will continue the deployment of PDK across our system of existing shops, the standard in every new franchise location.

I'll tell you we we have had.

An increasing amount of interest in just direct development and for those that do contact us sometimes that are mostly focused on refranchising that those conversations don't go very far there are a lot of <unk> brands and other brands that are doing and have done refranchising, where it truly is kind of an EBIT acquisition.

Speaker 5: There are a lot of QSR brands and other brands that are doing and have done refranchising, where it truly is kind of an EBIT acquisition by the franchisee looking for growth so that they can increase value and resell the business at some point in the future.

By the franchisee looking for growth so that they can increase value in resale the business at some point in the future.

Speaker 5: And those just don't tend to be very long conversations with us because we're a growth brand and you know, you see that in this RRG deal, 36 new units after buying four, they would tell you they just love the idea of having a base of operation.

And those just don't tend to be very long conversations with us because we're a growth branch and you know you see that in this R. R. G deal 36, new units after buying for <unk>.

Robert Wright: More importantly, is the benefit of PDK to our operations, which are clearly demonstrated not only by the ongoing growth of our digital business and our ability to handle the incremental throughput, particularly during peak periods. But also operating efficiency and improvements in the customer experience from orders, writing on time to accuracy of food and quality scores. Importantly, we continue to leverage the throughput learnings from PDK and shops yet to be rolled out in our ongoing effort to drive traffic.

They would tell you they just love the idea of having a base of operations even.

Speaker 5: Even four units for them was exciting. They have managers to start with. They have places where they can train as they build all these new units. They've got a running start in a market that they really love in central Ohio. So they didn't need a large acquisition, but they did really appreciate the chance to have a small acquisition to build from.

Even four units for them was exciting they have managers to start with there are places where they can train as they build all these new units they've.

They've got a running start in a in a market that they really love in central Ohio. So.

They didn't need a large acquisition they but they didn't really appreciate the chance to have a small acquisition to build from.

Robert Wright: Our traffic driven foundation to sales growth continues to be supported by our marketing initiatives, including LTOs and digital only promotions designed to drive traffic, value, and excitement for our customers. During the quarter, we introduced our latest underground menu item with the Lucky Seven sandwich, uniting all seven meets from two of our most popular sandwiches, the Italian and a wreck. Overall, our underground menu introductions available only on the Potbelly app continue to be among the most search menu items in our digital channels. And as we look ahead, we will continue to focus on food and marketing innovation to further drive growth of our perks loyalty program and digital channels.

Perfect and then next question.

Speaker 7: Perfect. Next question, as we look at the marketing grants on contribution, do you now have that kind of where you want it or do you think there's opportunities for it to creep higher? And then maybe discuss benefits that you as well as your franchisees are seeing from that.

As we looked at the marketing grandson contribution.

Now have that kind of <unk> you know do you think there's opportunities for it to creep higher and then maybe discuss you know benefits that you as well as your franchisees are are seen from from that.

Yeah, I think I think we like where we are today, we we reserve the right Mmm, both publicly and with our franchisees to continue to invest more our expectation is in David's expectation, leading marketing is that if we're gonna put a dollar into incremental Brian fund investment that we'd like three four.

Speaker 5: Yeah, I think I think we like where we are today. We we reserve the right both publicly and with our franchisees to continue to invest more. Our expectation is and David's expectation leading marketing is that if we're going to put a dollar into incremental brand fund investment that we'd like three four or five dollars back on the top line, that's where we drive additional profitability.

Robert Wright: Lastly, let me share some exciting updates to our franchise growth acceleration initiative or FGA. As we mentioned on our last call, during the quarter, we signed a 27 unit deal in Maryland through a partnership with our company founder, Bryant Kyle. During and subsequent to the end of the quarter, we signed multiple additional new development agreements, including a 40 unit deal that is comprised of four refranchised shops and a commitment to develop 36 new shops in both Ohio and Florida.

$5 back on the top line, that's where we drive additional profitability.

Speaker 5: And, you know, in this world where we've got so many digital opportunities to invest that amount of money today, it's about 3% that we have a chance to get the kind of returns that we're really pleased with.

And you know in in this world, where we've got so many digital opportunities to invest that amount of money today. It's about three per cent that we have a chance to get the kind of returns that we're really pleased with.

Speaker 5: There will be natural plateaus in the media or in the approach that you use or in the creative that you use. And when you hit a plateau, then there's another investment that can maybe get you to another level.

There there will be natural plateaus in the media or in the approach that you use or in the creative that you use and when you hit a plateau then there's another there's another investment that can maybe get you to another level.

Robert Wright: Our shop development commitments now total 150 shops today. I'm proud of what our franchising team has accomplished in such a short period of time. We remain focused on achieving our 10% unit growth in 2024. We continue to have a highly active and fluid pipeline of qualified potbelly franchise candidates. And when combined with our unique brand and proven business fundamentals, we believe we have the foundation and the right team in place to drive long-term growth.

Speaker 5: And so I do expect that over the years we'll continue to invest more of an industry standard of around 4%, some brands are spending upwards of five, but we're not in any rush to try to catch up to that if we can't prove that we can get the return.

And so I I do expect that over the years will continue to invest in more of a of an industry standard of around 4%. Some brands are spending upwards of five but we're not in any rush to try to catch up to that if we if we can't prove that we can get the returns.

Robert Wright: Looking forward, we will continue to emphasize our franchise focus and build the organization's capability to support our franchise growth as we head towards 2000 units in the US. We look forward to sharing additional updates on our next calls as more SDAs or shop development area agreements are finalized. Finally, let me reiterate how proud I am of our potbelly team. Their hard work and commitment to our unique brand have resulted in a strong third quarter performance.

Speaker 5: Franchisees have been very happy with our marketing investments because they're seeing the same top line growth that we've been seeing.

<unk> have been very happy with our marketing investments because they're seeing that the same top line growth that we've been seeing.

Speaker 5: Particularly when you look at the underlying indicators like we're talking about with perks and digital and the digital mix and our ability to drive traffic. These are all things we think are rooted in in the operations and how we're marketing that so. I think we're we're in a good place right now for now.

Particularly when you look at the underlying indicators like we're talking about with perks and digital in the digital mix and our ability to drive traffic. These are all things. We think are rooted in in the operations in L. A marketing that so.

I think we're in a good place right now for now.

Robert Wright: And they do so by carrying out our mission to the light customers with great food and good vibes, creating a distinct and differentiated fast casual experience for each of our customers from their first moment to their last bite.

Excellent. Thank you.

Yeah. Thanks Mark.

Thank you. The next question comes from Matt Curtis with William Blair. Please go ahead.

Speaker 1: Thank you. The next question comes from Matt Curtis with William Blair. Please go ahead.

Speaker 8: Hi, good afternoon. I just wanted to get back to the pricing discussion for a moment and ask how you view the value proposition right now following your most recent price increase and if there's been any signs of consumer resistance so far. And then relatedly, I noticed on this last

Hi, Good afternoon, I, just wanted to get back into the pricing.

Steven Cirulis: With that, I will now turn the call over to Steve to detail our financial performance for the third quarter. Thank you, Bob. Good afternoon, everyone. Revenue is in the third quarter increased approximately 3% to $120.8 million driven by same store sales growth of 8%. Resolving an average weekly sales of approximately $25,190 partially offset by the short-term revenue impact of our recent refranchising transaction. Just in wide sales of $138.2 million grew by approximately 7%.

[laughter] I just wanted to get back to the price of the discussion for a moment and ask how how you view the value proposition right now for your most recent price increase and if there's been any signs of consumers and so far and then Relatedly I notice on this last increase you seem to have less pricing that big.

Speaker 8: You seem to have left pricing on big unchanged correct new firm wrong. So I was wondering what your thought process was around.

Changed correct me if I'm wrong. So I was wondering what your thought process was around that.

Sure. Let me, let me just take the sort of consumer dynamic for one second.

Speaker 3: Here, let me let me just take the sort of consumer dynamic for one second.

Speaker 6: If you remember, when we talked about our pricing strategy for the year, we knew that based on the way we could see inflation evolving, we would be modest in our price increases, and we have. Our first action was 1.5, we had a 1.1, and the recent one was...

If you remember when we talked about our pricing strategy for the year. We we knew that based on the way we could see inflation development, we would be modest center price increases and and we have our first action was one and a half we have one one in recent one was.

Steven Cirulis: Traffic continues to be strong contributor to same-store sales growth as we drive demand through providing our customers' value for what they pay and showcasing compelling marketing through our digital channels. Additionally, we implemented modest price increases to mitigate increases in input costs and will continue to do so as necessary, although Q3 saw appreciable inflation deceleration. Our digital business continues to grow and currently represents approximately 37% of revenue and increase of 150 basis points versus last year, predominantly through our own channels.

Speaker 6: in a similar zone as those others. And that was deliberate. We got where we needed to be as a piece of the inflation, which has come back to us. So that's been helpful. What we've seen as a benefit, I alluded to it and I answered to the earlier question, looks like some other of our competitors have have continued to take some price. And that may have benefited us in terms of relative value that we're providing to our customer base.

In a similar zone as those others and that was deliberate we we got where.

Where we needed to be as specific inflation, which has come back to us. So that's that's been helpful. What we've got we've seen as a benefit I alluded to it and the answer to the earlier question is you know it.

It looks like some other of our competitors have have continued to take some price and that may have benefited us in terms of relative value that we're providing to our to our customer base.

Steven Cirulis: We attribute this growth to our progress in enhancing the overall top-bellied digital experience, dedicated efforts to increase Perk's loyalty program member acquisition and activation and engagement through targeted digital promotions and advertisements. Turning to expenses, food beverage and packaging costs were 27.8% of shop sales, the 210 basis point improvement versus the prior year period. Overall, Q3 commodity inflation was greatly improved at minus 1.5% versus last year. Our grocery category, which includes produce, soup, condiments and chips, while the largest input cost increases.

Speaker 6: as well, our menu is fairly broad. So even though we might see some movement around from whether that's away from DSPs or whether that's from Big San, which is to others.

As well you know our menu is fairly broad so even though we might we might see some movement around from from whether that's you know away from D. S. P S or whether that's you know from you know big sandwiches to others.

Speaker 6: We feel like we still create that kind of what you get for what you pay equation is working in our favor. And the best we can tell, Matt, from the data we see relative to fast casual, our traffic, you know, continues to put us in a position where we're taking shares.

We feel like we still create that kind of what you. What you yeah for what you pay equation is working in our favor and the best we can tell Matt from the data, we see a relative too fast casual our traffic you know continues to put us in a position where we're taking sure. We're taking traffic Sharon we were doing it consistently weak.

Speaker 6: We're taking traffic sharing, we're doing it consistently week over week over week and have throughout the quarter. So as Bob said, I think we're in a good spot as it relates to our demographic.

Steven Cirulis: With meat, primarily chicken retreating year over year. Labor expenses were 28.9% of sales, a 200 basis point improvement versus the prior year period. This improvement is attributed to sales leverage, along with continued optimization of our hours-based labor guides. We continue to see wage rates moderate and expect this to continue to normalize through the end of the year. Occupancy was 10.7% of sales, a 90 basis point improvement versus the prior year period.

Over a week over a week and half throughout the quarter. So as Bob said I think we're in a in a good spot as it relates to our demographic in terms of their their employment level of their savings that they still have left in.

Speaker 6: in terms of their employment level, their savings that they still have left. And they still like to come to pot.

And they still like to come come to potbelly. So.

Speaker 3: I think we feel pretty good about where we're headed here into the end of the fourth quarter and then.

I think we we feel pretty good about where we're headed here due to the end of the fourth quarter and then.

Speaker 3: You know, the second part of your question was related to kind of where we're taking price and where we're not taking price.

You know you're you're the second part of your question was related to kind of where where we're taking pricing where we're not taking price <unk>.

Speaker 3: You know, we tend not to take price in consistent places across the menu because we want to make sure that we're within both psychological barriers, right? Nine zeros and those kinds of things you want to make sure. As well, we want to balance across channels. Sometimes we'll take a digital only price. Sometimes we'll take a size only price or sometimes we'll take a category only price. It really varies. And this last price increase.

We we we tend not to take pricing consistent places across the menu because we wanted to make sure they were within within both psychological barriers right nine zeros and those kinds of things we want to make sure as well, we we want a balance across channels. So sometimes we'll take a digital only price sometimes will take a size on the price or sometimes will take a category only price it really it.

Steven Cirulis: The improvement was driven by top line leverage and the refranchising of our New York city market, which carried higher than average occupancy costs Other operating expenses were 18% of sales, a 100 basis point increase versus the prior year period. This was predominantly due to increased brand fund spent. Overall shop level margins in the third quarter were 14.6% an increase of 400 basis points year over year.

Really varies in this last price increase we we may have hit big is a little bit less than we did others.

Speaker 6: We may have hit bigs a little bit less than we did others.

Speaker 6: as we try to maintain that value across the menu for our consumers.

As we tried to maintain that maintain that value across the menu for for our consumers.

Steven Cirulis: I'll cover our forward looking guidance in a moment, but as we look to our fourth quarter, last year we received one time benefits to our restaurant margin, totaling 90 basis points that we do not expect to repeat this year. These results truly demonstrated increasing power of the potbelly economic model, the sustainable top line growth, fueled by the effectiveness of our marketing efforts, including our perks loyalty program, operations focus on customer experience and throughput cost control and normalization of inflationary pressures that said we still have more work to do and are focused on achieving our 2024 shop level margin target of 16%.

Speaker 8: Okay. Understood. And then for the increased grant fund contribution, which hit the other operating expenses line, could you run us through what that spend has been specifically earmarked for?

Okay understood and then for the increased grandson contribution, which I hit the other our operating expenses line could.

Did you run this through what that spend this been specifically earmarked for.

Speaker 5: Yeah, brand fund is, I mean, it's, it's marketing, right? So it's, uh, our, our media is, uh, 100% digital. Uh, it's delivered, uh, back to the shops in an equitable fashion. That's one of the reasons franchisees really appreciate how we manage the brand fund because they know that they get, they get their contributions.

Yeah, <unk> I mean, it's it's marketing right. So it's our our media is 100 per cent digital it's delivered back to the shops in an equitable fashion. That's one of the reasons franchisees really appreciate how we manage the brand phone because they know that they get.

They get their contributions.

Speaker 5: redeployed into their markets. But it, you know, it's across the media channels. We've got paid social, we've got digital, we've got...

Redeployed into their markets, but it.

Steven Cirulis: General and administrative expenses were 9.8% of revenue. The year over year increase in DNA was driven primarily by hired bonus accruals as we outperformed our targets in the quarter and increased headcount from a year ago to fuel our development efforts. As we discussed last quarter, we continue to believe general and administrative expenses as a percentage of system light sales is a more applicable way to view our business as we become more franchise based over time.

You know, it's it's across the media channels, we've got paid social we've we've got digital we've got.

Speaker 5: I should say our web and our app advertising got promotional activity and then promotional activations that we do for every one of our new products that get rolled out. We've we've got.

Uhm I should say, our our our web and our App advertisement gets promotional activity and then promotional activations that we do for every one of our new products that get rolled out we've we've got.

Steven Cirulis: For the third quarter, general and administrative expenses were approximately 8.6% of system light sales. We are encouraged by these results as we continue to leverage sales, control costs, and build the development infrastructure ahead of our increasing pace of unit growth. We reported net income of $1.5 million for the quarter. Adjusted net income was $1.1 million and $800,000 improvement versus the prior year period. Third quarter adjusted EBITDA with $7.3 million or 6% of total revenue.

Speaker 5: search engine optimization and the like catering, advertising and so on. So it's across the spectrum of what you would see in normal digital advertising for us. We have started to experiment with some media expansion in there too, because again, we know that we're even for what we're investing and what we're getting back, we know that there's more that we can continue to pour in, so we've got to do some experimentation along the way too. Okay, great.

Search for search engine optimization, and and the like catering advertising and so on so it's across the spectrum of what you would see in normal digital advertising for US we have started to experiment with some some media expansion in there too because again, we know that we're even for what we're investing.

<unk> and what we're getting back we know that there's more that we can continue to pour in so we've gotta do some experimentation along the way too.

Okay, great. Thanks, a lot guys. Good luck the rest of the year.

Yeah. Thanks man Thanks Ma'am.

Steven Cirulis: This was a $2.6 million increase year over year and a 200 basis point improvement on the margin. Turning to our outlook for the full year 2023, our outlook includes AUV of $1.29 million. Things to our sales growth between 11.5% and 12% stock level margins between 13.4% and 13.9%. Adjusted EBITDA of between $25.9 million and $27.9 million.

Thank you. The next question is a follow up come Jeremy Hamblin with Craig Cat, Craig Hallum Capital K. Please go ahead.

Speaker 1: The next question is a follow up from Jeremy Hamlin with Craig Cap. Craig Helen Capital Group. Please go ahead.

Speaker 8: thank you for taking the additional question just want to make sure i'm uh... the uh... you for Q4 you've got uh... fourteenth week here uh... and just want to understand uh... you know i i i believe that that is you know kind of uh... the holiday week post christmas and to understand what the typical sales volumes look like in that week and how we should be thinking about uh... you know the impact of that week on uh... some of these line items like uh... occupancy

Thanks for taking the original question I just wanted to make sure on the.

Q for you've got 14th week here and just wanted to understand you know I I I believe that that is you know kind of the the holiday week post Christmas.

And to understand what the typical sales volumes look like in that week and how we should be thinking about you know the impact of that week on some of these line items like occupancy in labor.

Steven Cirulis: For the fourth quarter of 2023, we are currently forecasting the following. Average weekly sales between $24,250 and $24,750. Same-store sales growth between 4% and 6%, shop level margins between 12.5% and 14.5%. Adjusted EBITDA between $5.9 million and $7.9 million.

Sure.

Speaker 6: I think there's probably a few things going on. Number one, that week, for us anyway, includes.

I I think there's probably a few things going on number one that week for us anyway includes <unk>.

Speaker 3: Christmas and it includes New Year's Eve. So it is going to be the way we would play out a lower volume week.

Christmas and it includes new year's Eve. So it is going to be the way, we would play it at a lower volume.

Week. So you can imagine how that starts to starts to flow through you know the rest of the P&L. So we don't <unk>. It ended up being about us if we have a seven day week normally does it'd be about a five and a half a week I think as we tried to think about.

Speaker 3: So you can imagine how that starts to flow through, you know, the rest of the P&L. So we don't, it ends up being about, if we have a seven-day week, normally it ends up being about a five-and-a-half-day week, I think, as we try to think about the adjustment in our P&L.

Robert Wright: With that, I'll turn the call back over to Bob. Thanks, Steve. Our third quarter results demonstrated what the Potbelly Business Model is capable of.

Robert Wright: And with our momentum continuing into the fourth quarter, we believe we have line of sight to achieving the full year 2024 growth targets. Our pipeline of additional shop development area agreements remain strong. And we look forward to sharing additional updates in the coming quarters. While we've achieved a great deal in the recent quarters, I can assure you that we are only just getting started with that.

Just <unk> in our in our P&L.

Speaker 3: margins and so forth, I think it'll be roughly be around the same. It's not going to really impact those kinds of things, mostly volume.

Margins and so forth I think it'll be roughly be around the same it's not going to really impact those kinds of things mostly volume.

Got it thanks for taking the extra one.

Operator: But for happy to answer any questions, operator, please open the line for questions. Of course, to ask a question, you may press star, then one on your telephone keypad. To address your question, please press star, then two.

Speaker 5: Yeah, Jeremy, just a couple of specifics, you know, one of the things that I think Steve and his team do really well is we look at something like this. We don't get a free week of occupancy. We would have accrued or accounted for that with that 53rd week and spread that accordingly. And, you know, same thing with any of the other fixed costs. So, it puts a little sales pressure on there. But other than that, it's just, you know, happens to us every five or six years, right? Yeah.

Yeah, Jeremy just a couple of specifics me on one of the things that I think Stephen his team do really well as <unk>, we look at something like this we we we don't get a free week of occupancy. We would have we would have a crude or or accounted for that with that 50, <unk>, we can spread that accordingly.

Operator: If you are using a speaker phone, please pick up your handset before pressing the keys. At this time, we will pause them internally to assemble our roster.

And you know the same thing with any of the other fixed costs. So it it it puts a little sales pressure on there, but other than that it's it's just you know what happens to us every five or six years right yeah.

Todd Brooks: Today's first question comes from Todd Brooks with the benchmark company. Please go ahead. Hey, good afternoon and congratulations on the results. Good progress. Thanks, Todd. Good afternoon. A couple of quick questions. And maybe the easiest way to talk to it is the four to six percent temp store sales guidance for the fourth quarter. And you disaggregate for us kind of pricing traffic and mix assumptions within that four to six. Or if it's easier to talk about a pricing waterfall in the four quarters, we can attack it that way as well.

Got it thank you.

Speaker 9: Good plan.

Yeah, you bet.

Thank you.

Speaker 1: Ladies and gentlemen, we have reached the end of today's question and answer session.

Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the call back over to Bob right for closing remarks.

Speaker 1: I would like to turn the call back over to Bob Wright for closing remarks.

Thank you operator, and thank you all again for your time this evening and for joining US. We appreciate the questions. The engagement and certainly look forward to talking again soon I hope you all have a great night.

Speaker 5: Thank you operator and thank you all again for your time this evening and for joining us. We appreciate the questions, the engagement and certainly look forward to talking again soon. Hope you all have a great night.

The conference has now concluded. Thank you for your participation you may now disconnect your lines.

Speaker 1: conference is now concluded. Thank you for your participation. You may now disconnect your line.

Speaker 10: .

[music] [noise].

Todd Brooks: Sure, Todd. What did I, what did I start with pricing itself, then we can kind of get into some of the other components. So for the quarter, we're looking at a four percent overall price increase. And that includes some of the carry forward from the prior year. We had a pricing action early in P 11 here in the quarter, which was a 1.5 percent price increase. So you can think about our guide at an 8 percent, you know, same store sales rate.

Todd Brooks: You've got, sorry, if you look at our, if you look at our guide at four to six, save store sales. And then you take a look at our pricing of four, you know, the rest ends up being a blend of traffic and makeshift. And no, our, we, we've got a business that we feel like is moving in the right direction here and is continuing its strength. We know the category is roughly flat to negative on traffic.

Todd Brooks: I think we like where we are north of that. So we don't, we don't break down all the components beyond there. But if you take your, your four to six range on the same store sales and our six are, sorry, our 4 percent price increase, that should help you get to where you need to go. That's perfect. Thanks, Dave. And then your consumer. I think last quarter, you might have talked about just a little bit of, I don't even know if it was check management versus people opting into many.

Todd Brooks: As an option, what do you, what do you think about how they're building check? Are they behaving with a similar fashion as they were, maybe at the outset of the year? What are you watching on the pot building? Consumer. That's a great question, Todd. And I think some of it actually relates to build on what Steve was talking about. But we see a couple of things going on in there. Yeah, there is a little bit of a of a size shift that seems to continue from our biggs and originals to our skinnies.

Todd Brooks: But when you look at the traffic growth that we have and the amount of business that we're driving, especially with the newer perks consumers. We're not 100% sure that that is actually change in behavior of existing consumers or is it a change in the profile of our total consumer set. But it's not at all unhealthy force. It's not driving a significant change in check. And the other thing is that it's actually slightly better on margin as you move through that.

Todd Brooks: There's another shift that's happening. If you heard my prepared remarks, how the majority of our digital businesses now coming through our own channels are perks app and web channels. And that's that's the first time you've heard us say that. That means that there's a there's a shift up by channel away from the DSP. So there's third party delivery orders. Those are always going to carry a higher check because of how we price it to offset the commission that we pay the DSPs.

Todd Brooks: So again, it can't have some deflationary impact on the check from a penny profit. We've engineered that to be just about even for us. There's no profitability concern. In fact, again, from a margin perspective that can be somewhat of a benefit. But because of that slight channel shift, you can see some some adjustment in that check too. So what I think is the broader question for the consumer in general is are we seeing really significant shifts in consumer behavior in their spending patterns and what's going on with traffic patterns in our traffic patterns compared to the fast casual traffic.

Todd Brooks: And the answer is our consumer seems to be hanging in there really well. Look, they've got the jobs market is strong. They've got the income to support it. The most revised savings numbers suggest that the consumer in this $7,500,000 plus range has not been impacted by the pricing that we've taken anyway to offset inflation over the last 12 months. That's great. One final one. I'll jump back in queue. Use touched on perks as an engine.

Todd Brooks: Are we? I know of assets in the past. Are we closer to maybe getting some quantification on what perks means to pot belly either. Is it membership or continued commentary about membership growth rates? Just wonder if we get a better understanding of how important of an engine it is. Thanks. Yeah, especially when that's again, we are very pleased with just how powerful perks continues to be for us. And you know, when you see that shift to our own channels over the DSPs.

Todd Brooks: The first purchase at the heart of that. And we're seeing growth in there. The other thing that we're very excited about is the growth in perks acquisition. And in fact, the growth in the rate of perks acquisition. We are seeing year over year, a 60% increase, 60 plus percent increase in the acquisition rate for perks members coming through those promotional activities. Now, it's still our job to convert those to, you know, more and more frequent users.

Todd Brooks: We still, you know, we still nurture that relationship. We've got the nurturing flows that we've talked about in the past, but filling the funnel, which is the biggest first step for us has has shown a lot of momentum here in the last well in the last quarter been the last six months to. So we're really pleased with that acquisition rate. Thanks, Bob. You're welcome. Thank you.

Jeremy Hamblin: The next question comes from Jeremy Hamblin with Craig Holland Capital Group. Please go ahead. Thanks, and I'll add my congratulations on terrific results. I want to start with your labor costs. You had pretty impressive year-over-year improvement, but I think even from a sequential standpoint, you know, 150 basis points lower than Q2. I want to just understand the factors involved in seeing that type of improvement. You know, is that the digital kitchen and kind of changes in the pipeline that we're starting to see, you know, that kind of transform the business, but any color that you could add to what you're seeing there would be appreciated.

Jeremy Hamblin: Great. Welcome, Jeremy. Thanks for the question. Yeah, I'll start. I think just to give you the headlines in terms of the shift we've seen, some of it comes from some of the sales leverage we get, obviously, on the fixed element of labor that's a benefit to us, but also I think primarily where we see a lot of benefit is in the management of the hours at the shop level and the continued optimization of our space labor guide.

Jeremy Hamblin: Also, I think labor inflation for us has been fairly consistent, certainly off its peak from about 18 months ago, and having that visibility is helpful, we've also experienced turnover rates which are certainly lower than from the data we've seen lower than that of the fast casual industry. And so all of those elements, I think, would be contributing factors to that improvement on the labor line that we're seeing. Yeah, Jeremy, nothing, you know, nothing like the continued momentum on the top line, really stable associate and management turnover and retention and we get an efficiency that goes with that.

Jeremy Hamblin: You asked specifically about PDK. The rate of our continued implementation of PDK is really just isn't rapid enough to influence the entire portfolio that quickly, but what we are seeing as we continue to see the savings that we seek out of the labor that goes with that efficiency on the back line, we capture most of that in the first two or three weeks after implementing PDK and those behaviors changed. And then that becomes the new normal.

Jeremy Hamblin: And the better part of that, as we've said in previous quarters, we are continuing to expand the rollout of PDK and we do it by prioritizing those most capacity constrained shops. Those are the ones that are going to be very picky at dinner or picky at lunch where we have that longest line because we often talk about PDK with the back line digital components and helping us with all that digital businesses coming through those channels.

Jeremy Hamblin: PDK also includes a handheld order tablet that helps us move the front line. So that's why we've prioritized those shops. And when we put it in there, we get the benefit of being able to move that front line and extract even more throughput. And of course there's a benefit that goes with that. Last thing I'd say, we have to give our operations team a lot of credit here. They're becoming more seasoned, the multi-unit operators at the district manager and director level have been in position for a long time. They really are jelling as a team. And their management of the labor and the stability of that management continues to help us as well. Great, health color.

Jeremy Hamblin: So, as a follow-up question, as we look towards getting to that 16% shop level margin target for FY24, I want to just understand in terms of, you know, the component parts here, your guidance for FY23 is 13.4 to 13.9% shop level margin, in terms of which of the line items you expect to generate that kind of 200 to a little bit over 200 basis point improvement in margins next year. What do you expect the primary contributing factors to come from?

Jeremy Hamblin: Is that, you know, still labor and, you know, occupancy leverage or, you know, what are kind of factors you expect to drive most of those gains? Sure, I think it's, you hit on two of them, I can give some more color. I think certainly on the labor side, we expect to get more efficient and effective through PDK as well as, you know, some additional efforts that continue to optimize labor in the shops as Bob described.

Jeremy Hamblin: That will be a major contributor to it. We, frankly, on the sales leverage that will flow through the occupancy that's going to be another kind of benefit to us. But also, we expect to see continued benefit to us in terms of food input costs that will be a contributor as well. And then when you look at the business and you say, okay, well, there's not one silver bullet for us that's going to push the margin all the way.

Jeremy Hamblin: It's going to be a contribution from a few other things too. So for example, we expect our catering business to continue to grow. That tends to be a healthy margin business for us. We still have runway yet to go in our CBD portfolio. And that still continues to be a tailwind for us as there are return to work momentum that continues to build. That's going to be a component for us as well.

Jeremy Hamblin: And then, you know, we also will continue to price strategically to continue to outrun inflation. And we feel like, you know, while we won't expand margin because of that, we will remain competitive. And being competitive means for us kind of being at or below where our fast casual competitors are. And we've seen some benefit on traffic from being in that position. And so added traffic obviously creates the leverage that then starts to flow through the rest of the P&L.

Jeremy Hamblin: Where we typically don't get a ton of additional leverage, like we used to before the pandemic is in our other OPEX line. About half of its fixed and the other half is floats with the business. That's where our brand's fund sits. That's where our fees for third-party delivery and so forth sit. So, you know, we might get a little bit of benefit there. If we see continued shift away from the DSP component of things, but it's really that amalgamation of all those components that describe that'll help us get to that 16.

Jeremy Hamblin: And by the way, based on our momentum and our trends, we feel like we've got that that 16 percent clearly in our sites for next year. Great. Another question here. Just in terms of the color that you provided in the queue here on the sale of the Ohio location, and $3.3 million, substantially higher, I think that's what, $825K or a unit, substantially higher than what you realized on your first two deals this year.

Jeremy Hamblin: One to understand first, what should we be expecting as you look to refranchise, you know, approximately 100 locations over the next few years. And then, you know, what was driving specific to these deals, why the Ohio locations were so much more highly valued than the other locations. I know that New York City locations were not super profitable and that's probably part of the answer, but want to just a little more color there.

Jeremy Hamblin: Yeah, look, that's the primary element that goes into valuation of a, you know, of a franchise restaurant concept and it's trading. And the other thing that I think affects that is the timing. If you look at this business continues to get stronger and stronger and so, you know, our, our willingness to sell franchise or company units into the franchise system is really driven by our desire to. To continue to develop and to spur that development.

Jeremy Hamblin: In terms of the value difference, you know, each deal is going to be different. Each deal has to be rooted in the economics of that particular portfolio. And the history of that particular portfolio. So that really is the difference between those, but I can tell you that we're, you know, we're excited about each one. And we would only do one if it were a creative to the business overall, especially with the growth that comes with them.

Jeremy Hamblin: But yeah, you spotted it in the queue that that most recent deal with raw restaurant group. We're very pleased with, you know, to sell four units. It's 17 additional units in central Ohio to be developed there. And then, of course, the, the remainder of the, the other 19 down in Florida in a, you know, group that CEO, the CFO and the COO all work together in one of QSR's largest franchise groups in a multi state environment, done development before. And, you know, we're just incredibly excited to see this quality of franchise. He's coming to the brand. Yeah, it sounds tremendous.

Robert Wright: And I, you know, if you can add color there on just the franchisey pipeline. Are you seeing a different type of, you know, type of franchisey that's interested in the business now as opposed to, you know, six or nine months ago. Are you, you know, anticipating looking for slightly larger partners like RRG or, you know, are you still looking to fill kind of more mid tier, a mid scale franchisey? Yeah, I think there's kind of two parts to the answer to your question.

Robert Wright: But first one is just in the quality of franchise candidate that we're seeing. We are very excited to see the quality of our franchise candidates just continue to improve. And I, I mean that with all the same excitement, we've, we've stated about all the previous ones that have joined the system. The brand is getting stronger performance is getting stronger. And candidly franchisees follow the lead of other franchisees that they respect. And so as you strengthen the system, you tend to strengthen the candidate pool.

Robert Wright: And I'm glad we're enjoying that natural trend. And, and we're taking advantage of it. We've also invested heavily, and our development team to be able to recruit the best. So that's very exciting for us. 40 units is a big deal. In fact, you probably could find me saying in the past that we wouldn't do very many of those because there aren't that many groups that can fulfill that much development in that short a period of time.

Robert Wright: As a reminder, we've always said that our development deals, we'd like them to be about one unit a year, unless you have more than eight units and then it's an eight year limit to finish developing that out. And by and large, we've stayed really true to that development pipeline and pace. Well, there aren't many groups that can develop that many units that quickly. This group can, we believe that 100% so today.

Robert Wright: And so I think over time, you're still going to see a blend. We'll see some in the mid to high single digit number of units deals. We'll see some in the double digit deals and there may be one or two more of this scale, depending on the candidate that comes in and their capabilities. It's all about building that compounded growth that comes with the number of deals that we're able to keep doing.

Robert Wright: So generally speaking, kind of qualitatively, I'm very pleased with what we can see in the pipeline from this point forward and really pleased with the team and the work they've done so far. Thanks for taking all my questions. Best wishes. Thank you.

Mark Smith: The next question is from Mark Smith with Lake Street Capital. Please go ahead.

Robert Wright: Hi, guys. Kind of a follow up to that last question. Are there any characteristics of the restaurants that you've been selling or maybe that franchisees are more interested in? For instance, are we looking at lower volume or lower marked lower profitability in these restaurants that you're selling or to franchisees like kind of cleaner ones, anything that you can call out there? Mark, great question. There is some difference and you kind of see that reflected in the asset purchase numbers that we've got in the queue, but it's not necessarily driven by the franchisees desire for a particular type of restaurant.

Robert Wright: A lot of it is geography. Where are they? Where do they want to develop? Where do they have existing or previous businesses? Because that's their comfort level. And that certainly has been the case with the refranchised deals that we've done so far. I'll tell you, we have had an increasing amount of interest in just direct development. And for those that do contact us sometimes that are mostly focused on refranchising that those conversations don't go very far.

Robert Wright: There are a lot of QSR brands and other brands that are doing and have done refranchising where it truly is kind of an EBIT acquisition by the franchisee looking for growth so that they can increase value and resell the business at some point in the future. And those just don't tend to be very long conversations with us because we're a growth brand. And you see that in this RRG deal, 36 new units after buying four.

Robert Wright: They would tell you they just love the idea of having a base of operations. Even four units for them was exciting. They have managers to start with. They have places where they can train as they build all these new units. They've got a running start in a market that they really love and central Ohio. So they didn't need a large acquisition, but they didn't really appreciate the chance to have a small acquisition to build from.

Robert Wright: So perfect.

Robert Wright: And then next question is we look at the marketing grants on contribution. You now have that kind of where you want it, or you know, do you think there's opportunities for it to creep higher and then maybe discuss benefits that you as well as franchises are seen from from that. Yeah, I think I think we like where we are today, we we reserve the right both publicly and with our franchisees to continue to invest more our expectation is and David's expectation leading marketing is that if we're going to put a dollar into incremental brand fund investment that we'd like three, four or five dollars back on the top line, that's where we drive additional profitability.

Robert Wright: And in this world where we've got so many digital opportunities to invest that amount of money today, it's about 3% that we have a chance to get the kind of returns that we're really pleased with. There will be natural plateaus in the media or in the approach that you use or in the creative that you use and when you hit a plateau, then there's another there's another investment that can maybe get you to another level.

Robert Wright: And so I do expect that over the years will continue to invest more of an industry standard of around 4% some brands are spending upwards of five, but we're not in any rush to try to catch up to that if we if we can't prove that we can get the returns, franchisees have been very happy with our marketing investments because they're seeing the same top line growth that we've been seeing. Particularly when you look at the underlying indicators, like we're talking about with perks and digital and the digital mix and our ability to drive traffic, these are all things we think are rooted in in the operations and and our marketing that so I think we're we're in a good place right now for now.

Mark Smith: Yeah, thanks, Mark.

Operator: Thank you.

Matthew Curtis: The next question comes from Matt Curtis with William Blair, please go ahead. How are you going to have to know? I just want to get back to the pricing. Let's go. Hi, I just wanted to get back to the pricing discussion for a moment and ask how you view the value proposition right now following your most recent price increase. And if there's been any signs of consumer resistance so far. And then, relatedly, I noticed on this last increase, you seem to have left pricing on big unchanged correct me if I'm wrong. So I was wondering what your thought process was around that.

Robert Wright: Let me let me just take the sort of consumer dynamic for one second. If you remember, when we talked about our pricing strategy for the year, we knew that based on the way we could see inflation development, we would be modest in our pricing and we have our first action was one and a half way to one one and recent one was in a similar zone as those others. And that was deliberate.

Robert Wright: We got in where we needed to be a piece of the inflation, which has come back to us. So that's that's been helpful. What we've what we've seen as a benefit. I alluded to it and answer to the earlier question is, you know, looks like some other of our competitors have have continued to take some price and that may have benefited us in terms of relative value that we're providing to our customer base.

Robert Wright: As well, you know, our menu is fairly broad. So, you know, even though we might we might see some movement around from from whether that's, you know, away from DSPs or whether that's, you know, from, you know, big sandwiches to others, we feel like we still create that kind of what you, what you get for what you pay equation is working in our favor. And the best we can tell Matt from the data, we see relative to fast casual our traffic, you know, continues to put us in a position where we're taking share.

Robert Wright: We're taking traffic share and we're doing it consistently week over week over week and and have throughout the quarter. So as Bob said, I think we're in a good spot as it relates to our demographic in terms of their employment level, their savings that they still have left and. And they still like to come come to pot belly. So I think we feel pretty good about where we're headed here into the into the fourth quarter.

Robert Wright: And then, you know, you're the second part of your question was related to kind of where we're taking price and where we're not taking price. You know, we, we tend not to take price and consistent places across the menu because we want to make sure that we're within, we're within both psychological barriers, right. Nine zeros and those kinds of things you want to make sure as well, we want to balance across channels.

Robert Wright: Sometimes we'll take a digital only price. Sometimes we take a size only price or sometimes we'll take a category only price. It really, it really varies. And this last price increase, we may have hit bigs a little bit less than we did others as we try to maintain that maintain that value across the menu for our consumers. Okay, understood.

Steven Cirulis: And then for the increased brand fund contribution, which I hit the other operating expensive line, could you run us through what that spend has been specifically earmarked for? Yeah, brand fund is, I mean, it's marketing, right? So our media is 100% digital. It's delivered back to the shops in an equitable fashion. That's one of the reasons franchisees really appreciate how we manage the brand fund because they know that they get, they get their contributions redeployed into their markets.

Steven Cirulis: But it, you know, it's, it's across the media channels. We've got paid social. We've, we've got digital. We've got, I should say, our web and our app advertising, we've got the promotional activity and the promotional activations that we do for every one of our new products that get rolled out. We've, we've got search, search engine optimization and the like catering, advertising and so on. So it's across the spectrum of what you would see in normal digital advertising for us.

Steven Cirulis: We have started to experiment with some, some media expansion in there too, because again, we know that we're, even for what we're investing and what we're getting back, we know that there's more that we can continue to pour in. So we've got to do some experimentation along the way too.

Matthew Curtis: Okay, great. Thanks a lot, guys. Good luck the rest of the year. Yeah, thanks, Matt. Thanks, Matt. Thank you.

Jeremy Hamblin: The next question is a follow-up from Jeremy Hamlin with Craig Cap, Craig Helen Capital Group. Please go ahead. Thanks for taking the additional question.

Jeremy Hamblin: Just want to make sure on the, for Q4, you've got a 14th week here and just wanted to understand, you know, I believe that that is, you know, kind of the holiday week post Christmas and to understand what the typical sales volumes look like in that week and how we should be thinking about, you know, the impact of that week on some of these line items like occupancy and labor. I think there's probably a few things going on.

Jeremy Hamblin: Number one, that week for us anyway includes Christmas and it includes New Year's Eve. So it is going to be the way we would play out a lower volume week. So you can imagine how that starts to, starts to flow through, you know, the rest of the PNL. So we don't, we, it ends up being about a, if we have a seven day week, normally it ends up being about a five and a half day week.

Jeremy Hamblin: I think it's a week we try to think about the adjustment in our, in our PNL margins and so forth. I think it'll be roughly be around the same. It's not going to really impact those kinds of things, mostly volume. Got it. Thanks for taking the extra one.

Robert Wright: Yeah, Jeremy, just a couple of specifics. You know, one of the things that I think Stephen his team do really well is we look at something like this. We don't get a free week of occupancy. We would have, we would have a crewed or accounted for that with that 53rd week and spread that accordingly. And, you know, same thing with any of the other fixed costs. So it puts a little sales pressure on there, but other than that, it's, it's just, you know, it happens to us every five or six years, right? Yeah. Got it. Thank you. Yeah, you bet. Thank you.

Operator: Ladies and gentlemen, we have reached the end of today's question and answer session.

Robert Wright: I would like to turn the call back over to Bob Wright for closing remarks. Thank you, operator. And thank you all again for your time this evening and for joining us. We appreciate the questions, the engagement and certainly look forward to talking again soon. Hope you all have a great night.

Operator: The conference is now concluded. Thank you for your participation.

Operator: You may now disconnect your lines.