Q2 2024 Potbelly Corp Earnings Call

Good afternoon, everyone, and welcome to Potbelly Corporation's second quarter 2024 earnings conference call.

Operator: Corporation's 2nd Quarter 2024 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. 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, Senior Vice President, Chief Legal Officer, and Secretary of Potbelly Corporation. At this time, I'll turn the call over to Adiya Dixon. Please go ahead.

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.

On today's call, we have Bob Wright, President and Chief Executive Officer.

Speaker Change: Steve Cirulis, Senior Vice President and Chief Financial Officer Adiya Dixon, Senior Vice President, Chief Legal Officer, and Secretary of Potbelly Corporation

Adiya Dixon: Good afternoon, everyone, and welcome to our second quarter 2024 earnings call. By now, everyone should have access to our earnings release and a company investor presentation. If not, they can be found in the Investor tab on our website.

Speaker Change: Good afternoon, everyone, and welcome to our second quarter 2024 earnings call. By now, everyone should have access to our earnings release and accompanying investor presentation. If not, they can be found in the investors tab on our website.

Adiya Dixon: Before we begin our formal remarks, I need to remind everyone that 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 2024 or any other future period, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date.

Speaker Change: Before we begin our formal remarks, I need to remind everyone that certain comments made on this call will contain forward-looking statements regarding future events or the future financial performance of the company.

Speaker Change: Any such statements, including our outlook for 2024 or any other future period, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker Change: These forward-looking statements are not guaranteed the future performance nor should they be relied upon as representing management's views as of any subsequent date.

Adiya Dixon: Board-looking statements involve significant risks and uncertainties, and events 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 is provided below. Another information that we'll be given today can be found under the risk factors heading and our filings with the Securities and Exchange Commission, which are available at SEC.gov.

Speaker Change: Forward-looking statements involve significant risks and uncertainties, and events or results could differ materially from those presented due to a number of risks and uncertainties.

Speaker Change: Additional detail information concerning these risks regarding our business.

Speaker Change: and the factors that could cause actual results to differ materially from the forward-looking statements and other information that will be given today.

Speaker Change: can be found under the Risk Factors heading in our filings with the Securities and Exchange Commission, which are available at sec.gov.

Adiya Dixon: During the call, there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles or gaps. Reconciliation of these non-gap measures to the most directly comparable gap measures is included in the appendix to the press release, an investor presentation issued this afternoon. Both of which are available under the investors tab on our website, and now I'll turn the call over to Potbelly's President and CEO, Bob Wright.

Speaker Change: During the call, there will also be a discussion of some items that do not conform to U.S. Generally Accepted Accounting Principles, or GAPs.

Speaker Change: Reconciliations of these non-GAAP measures to the most directly comparable GAAP 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 on our website.

Speaker Change: And now, I'll turn the call over to Potbelly's President and CEO, Bob Wright.

Bob Wright: Thank you, Adiya. Good afternoon and thank you for joining our call today.

Bob Wright: I'm proud of the hard work and dedication of our over 5,000 team members. The entire Potbelly team is committed to our mission to delight customers with great food and good vibes on our journey to be the most loved sandwich brand in every neighborhood.

Speaker Change: Despite the challenging macro environment, we maintain focus on executing our winning strategy, emphasizing what we control to continue growing Potbelly. Our customers, our associates, and our franchisees are the people that matter most to our success.

Robert Wright: Our customers, our associates, and our franchisees are the people that matter most to our success. We have an incredibly strong brand and a company that understands the power of growth regardless of the environment. During the second quarter, we grew same-store sales 0.4% as we continue to face a changing consumer dynamic, similar to what you've heard from many others. While our growth was less than anticipated, we continued to take traffic share from the broader fast casual industry and grew our top line despite macro pressure. Second, we expanded shop margins again, representing the 13th consecutive quarter of year-over-year margin expansion. Finally, we added four new shops in the quarter to go along with our franchise commitment to open 22 additional shops.

Speaker Change: We have an incredibly strong brand and a company that understands the power of growth regardless of the environment. During the second quarter, we grew same-store sales 0.4% as we continue to face a changing consumer dynamic, similar to what you've heard from many others in the industry.

Speaker Change: While our growth was less than envisioned, we continued to take traffic share from the broader fast-casual industry and grew our top line despite macro pressures. Second, we expanded shop margins again, representing the 13th consecutive quarter year-over-year margin expansion.

Speaker Change: Finally, we added four new shops in the quarter to go along with our franchise commitments of to open 22 additional shops.

Robert Wright: Early Q3 sales patterns suggest the consumer is still pressured and is managing their restaurant spend carefully, primarily by trimming visits in favor of grocery. As I look ahead, however, I've never been more confident in the future of our brand. My confidence is rooted in our outstanding people and our strategic and executional focus, particularly in three main areas. Number one, our customers love Potbelly food and service, as well as our ongoing efforts to help them with value.

Speaker Change: Early Q3 sales patterns suggest the consumer is still pressured and is managing their restaurant spend carefully primarily by trimming visits in favor of grocery.

Speaker Change: As I look ahead, however, I've never been more confident in the future of our brand.

Speaker Change: My confidence is rooted in our outstanding people and our strategic and executional focus, particularly in three main areas. Number one, our customers love potbelly food and service as well as our ongoing efforts to help them with value.

Robert Wright: Number two, our digital channels, including our Perks Loyalty Program, continue to prove that we can drive growth through these channels. And number three, the increasing momentum of our franchising and new shop development efforts. I'll expand on these factors beginning with our food, service, and values supported by effective marketing.

Speaker Change: Number two, our digital channels, including our Perks Loyalty Program, continue to prove that we can drive growth through these channels. And number three, the increasing momentum of our franchising and new shop development efforts.

Speaker Change: I'll expand on these factors beginning with our food, service, and value supported by effective marketing.

Robert Wright: Delighting our customers is always the foundation for sales growth, and I'm very pleased with our strong shop operations and the continued progress of our marketing initiatives that together fuel our traffic-driven sales growth strategy. We see the results in our overall customer satisfaction scores, as well as continued improvement in customer ratings for our food, speed, accuracy, and friendliness. Of course, the best thing we market is our amazing food, and our culinary innovation efforts continue to deliver a pipeline of exciting menu items that demonstrate our commitment to quality, craveability, and relevance.

Speaker Change: Delighting our customers is always the foundation for sales growth and I'm very pleased with our strong shop operations and the continued progress of our marketing initiatives that together fuel our traffic-driven sales growth strategy.

Speaker Change: We see the results in our overall customer satisfaction scores, as well as continued improvement in customer ratings of our food, speed, accuracy, and friendliness.

Speaker Change: Of course, the best thing we market is our amazing food and our culinary innovation efforts continue to deliver a pipeline of exciting menu items that demonstrate our commitment to quality, credibility and relevance.

Robert Wright: During the second quarter, we reintroduced the chicken cordon bleu sandwich by adding it to the underground menu, and we rolled out successful LTOs to celebrate summer with the jalapeno popper chicken sandwich, an American apple pie shape. Our most loyal customers continue to tell us that our focus on food is one of the reasons they keep coming back. To maintain the excitement among our guests, we kicked off the third quarter with the introduction of the Blueberry Muffin Cookie and the Farmhouse Chicken Sandwich.

Speaker Change: During the second quarter we reintroduce the chicken cordon blue sandwich by adding it to the underground menu. Rolled out successful LTOs to celebrate summer with the jalapeno popper chicken sandwich and American apple pie shake.

Speaker Change: A most loyal customer's continue to tell us that our focus on food is one of the reasons they keep coming back. The maintain the excitement among our guests we kicked off third quarter with the introduction of the Blueberry Muffin Cookie and the Farmhouse Chicken Sandwich.

Robert Wright: As we move through the remainder of the year, you should expect to see additional limited-time only offers, including our hot oven toasted sandwiches, our fresh baked daily cookies, and our hand-dipped milkshake. Importantly, as we discussed last quarter, and as has become readily apparent across the restaurant industry in recent months, today's consumers are more than ever looking for value when they choose to eat out. The first element of our five pillar strategy has always been great food at good value.

Speaker Change: As we move through the remainder of the year, you should expect to see additional limited-time only offers, including our hot oven-toasted sandwiches, our fresh-baked daily cookies, and hand-dipped shakes.

Speaker Change: Importantly, as we discussed last quarter, and has become readily apparent across the restaurant industry in recent months, the days consumers more than ever are looking for value when they choose to eat out.

Speaker Change: The first element of our five-pillar strategy has always been great food at a good value. And we're constantly working to further amplify our value options.

Robert Wright: And we're constantly working to further amplify our value option. It's important that our customers know we understand their situation and that we're working to help in every way we can. During the second quarter, we tested everyday value combo meal deals to help provide our more price-conscious infrequent customers with the opportunity to continue to frequent our shops. The testing revealed a clear winner, the $7.99 skinny combo, which not only responds to our customers' cravings for potbelly but also gives our less frequent price-conscious guests a great reason to keep us in their eating rotation while simultaneously protecting our margins.

Speaker Change: It's important that our customers know we understand their situation and that we're working to help in every way we can.

Speaker Change: During the second quarter, we tested every day value combo meal deals to help provide our more price conscious infrequent customers with the opportunity to continue to our shops.

Speaker Change: The testing revealed a clear winner, the $7.99 skinny combo not only responds to our customers cravings for Potbelly, but also we've given our less frequent price conscious guests a great reason to keep us in their eating rotation while simultaneously protecting our margins.

Robert Wright: Starting in late July, we expanded the $7.99 every day value combo, which includes a turkey, ham, or chicken skinny sandwich with chips and a drink across nearly all of the system. Customers have already told us how much they appreciate our efforts to help them with everyday value. In fact, we saw a 7-point lift in value scores and a 5-point lift in return intent among those that ordered the $7.99 combo. Not only that, the $7.99 combo is shown to drive both incremental sales and profitability as it continues to build usage. We're proud of adding this new option to our menu.

Speaker Change: Starting in late July , we expanded the $7.99 everyday value combo which includes a turkey, ham, or chicken skinny sandwich with chips and a drink across nearly all of the system.

Speaker Change: customers have already told us how much they appreciate our efforts to help them with everyday value.

Speaker Change: In fact, we saw a 7-point lift in value scores and a 5-point lift in return intent among those that ordered the $7.99 combo. Not only that, the $7.99 combo has shown to drive both incremental sales and profitability as it continues to build usage.

Robert Wright: In addition to the everyday value already available with our meal deal and our pick your pair options, the further support our customers during these challenging economic times. In addition to our everyday value efforts, we continue to see significant success with digital promotions, including Perks-only promotional activity to drive value, brand affinity, and frequency. So, turning to the Potbelly digital experience.

Speaker Change: We're proud to have added this new option to our menu in addition to the everyday value already available with our Meal Deal and our Pick Your Pair options to further support our customers during these challenging economic times.

Speaker Change: In addition to our everyday value efforts, we continue to see significant success with digital promotions, including Perks-only promotional activity to drive value, brand affinity, and frequency.

Robert Wright: For the quarter, our digital business represented approximately 40% of our total shop sales, an increase of approximately 200 basis points versus last year. As we've mentioned, in recent quarters, we continue to see a shift within our digital mix to Potbelly-owned channels. In fact, during the second quarter, expansion of Potbelly-owned channels represented the entire 200 basis points of year-over-year improvement in our digital mix. Additionally, as customers progress through our digital funnel, ultimately becoming perks members, we see increased frequency almost immediately.

Speaker Change: So, turning to the Potbelly digital experience, for the quarter, our digital business represented approximately 40% of our total shop sales, an increase of approximately 200 basis points versus last year.

Speaker Change: As we've mentioned, in recent quarters, we continue to see a shift within our digital mix to Potbelly-owned channels. In fact, during the second quarter, expansion of Potbelly-owned channels represented the entire 200 basis points of year-over-year improvement in our digital mix.

Speaker Change: As customers progress through our digital funnel, ultimately becoming Perks members, we see increased frequency almost immediately.

Robert Wright: Over the past three years, we've been improving and enhancing our digital capabilities, and we expect digital and perks to remain a driver of the business going forward. Recall that in January, we further strengthened our digital platform with the launch of our Enhanced Potbelly Perks Loyalty Program. Our new program is performing exactly as expected, with customers redeeming coins for a balance of the 12 menu items available and in alignment with their purchase path. Perks continues to be a key piece of our strategy in driving our growth and celebratings what our customers love the most about Potbelly. Great food and service.

Speaker Change: Over the past three years, we've been improving and enhancing our digital capabilities and expect digital and perks to remain a driver of the business going forward.

Speaker Change: Recall in January, we further strengthened our digital platform with the launch of our enhanced Potbelly Perks loyalty program. Our new program is performing exactly as expected with customers redeeming coins for a balance of the 12 menu items available, and in alignment with their purchase patterns.

Speaker Change: Hurts continues to be a key piece of our strategy in driving our growth and celebrates what our customers love the most about pop belly, great food.

Robert Wright: While we continue to provide our customers with options on how they can consume our food, be it on-premise, off-premise, digital, or in-person, we believe the ongoing transition of more of our business to perks will only further benefit us in the long term, driving closer connections to each and every customer. I've mentioned how pleased we are with our digital growth, recognizing that we believe we can continue to leverage what we control. Perks member acquisition continues to grow quarter over quarter and year over year.

Speaker Change: While we continue to provide our customers with options on how they can consume our food, be it on-premise, off-premise, digital, or in person.

Robert Wright: Thank you, Adiya. Good afternoon, and thank you for joining us on our call today. I'm proud of the hard work and dedication of our over 5,000 team members. The entire Potbelly team is committed to our mission to delight customers with great food and good vibes on our journey to be the most loved sandwich brand in every neighborhood. Despite the challenging macro environment, we maintained focus on executing our winning strategy, emphasizing what we could control to continue growing Potbelly.

Speaker Change: We believe the ongoing transition of more of our business to perks will only further benefit us in the long term, driving closer connections to each and every customer.

Speaker Change: I've mentioned how pleased we are with our digital growth, recognizing that we believe we can continue to leverage what we control.

Speaker Change: PIRC's member acquisition continues to grow quarter over quarter and year over year.

Robert Wright: Importantly, as well, once our customers join our Perks program, we see year-over-year growth in transactions and engagement from every consumer segment. Put simply, our customized communication to our various Perks customer cohorts is driving them to ever more loyal and frequent relationships with the brand. Finally, in addition to the broad-based everyday value efforts I've already mentioned, our digital channels are an incredibly effective and efficient way to deliver value enhancements to our most loyal customers, not only through the intrinsic value of their accumulated coins but through spot promotions that can activate their engagement and drive sales.

Speaker Change: Importantly as well, once our customers join our perks program, we see year-over-year growth in transactions and engagement.

Speaker Change: from every consumer segment.

Speaker Change: Put simply, our customized communication to our various PERCS customer cohorts is driving them to ever more loyal and frequent relationships with the brand.

Speaker Change: Finally, in addition to the broad-based everyday value efforts I've already mentioned, our digital channels are an incredibly effective and efficient way to deliver value enhancements to our most loyal customers, not only through the intrinsic value of their accumulated coins, but through spot promotions that can activate their engagement and drive sales.

Robert Wright: Despite Potbelly's digital experience already being a consistent and significant area of growth for us, we are not standing still. When customers utilize our digital platforms, it not only ensures a better experience, but it also allows us to more effectively communicate with and market to them.

Speaker Change: Despite Potbelly Digital Experience already being a consistent and significant area of growth for us, we are not standing still. When customers utilize our digital platforms, it not only ensures a better experience, but it also allows us to more effectively communicate with and market to them.

Robert Wright: We maintain an extensive roadmap of digital enhancements aimed at continually improving our Potbelly digital experience to best suit customers' needs, expectations, and reduce friction, while driving Potbelly brand awareness, customer engagement, and business results. Now, let me update you on our Franchise Growth Acceleration Initiative. During the second quarter, we continued to make significant progress across all phases of our unit growth funnel. Less than three years ago, I shared a vision of Potbelly growing to a 2000 unit brand in the U.S. primarily through franchise. We're well on our way.

Speaker Change: We maintain an extensive roadmap of digital enhancements aimed at continually improving our potability digital experience to best suit customers' needs, expectations, and reduced friction while driving potability brand awareness, customer engagement, and business results.

Speaker Change: Now let me update you on our Franchise Growth Acceleration Initiative.

Speaker Change: During the second quarter, we continue to make significant progress across all phases of our unit growth funnel. Less than three years ago, I shared a vision of Potbelly growing to a 2000 unit brand in the U.S. primarily through franchising. We'll well on our way.

Robert Wright: We already have 663 open and committed shops as of the end of Q2. So far this year, we've opened a total of nine shops with further acceleration expected, which I will touch on in a minute. Franchise recruitment and lead generation continues to build, especially with our in-market and in-person recruiting efforts. Importantly, we're moving those franchise candidates to franchisees through deal signings as well. We're pleased to increase our total year-to-date shop commitments to 54, an increase of 22 relative to last quarter. Our second quarter commitments include a deal that will bring Potbelly to the state of Georgia for the first time, with an agreement in the Atlanta market.

Speaker Change: We already have 663 open and committed shops as of the end of Q2. So far this year, we've opened a total of nine shops with further acceleration expected, which I will touch on in a minute.

Speaker Change: franchise recruitment and lead generation continues to build, especially with our in-market and in-person recruiting efforts.

Speaker Change: Importantly, we're moving those franchise candidates to franchisees through deal signings as well.

Speaker Change: We're pleased to increase our total year-to-date shop commitments to 54, an increase of 22 relative to last quarter. Our second quarter commitments include a deal that will bring Potbelly to the state of Georgia for the first time.

Speaker Change: with an agreement in the Atlanta market. These new agreements reflect the continued strength of our franchising efforts across the South Eastern U.S. over the last two years. And as I said, we now have 663 open and committed shops across 33 total franchise groups.

Speaker Change: And I'm proud to say that our franchisees are meeting their development commitments, which strengthens our expectations of continued growth through the remainder of 2024 and 2025.

Speaker Change: Lastly, with our ongoing acceleration of shop openings, I mentioned we open an additional four shops during Q2 for a total of seven openings year to date through the second quarter.

Robert Wright: These new agreements reflect the continued strength of our franchising efforts across the southeastern U.S. over the last two years. And, as I said, we now have 663 open and committed shops across 33 total franchise groups. And I'm proud to say that our franchisees are meeting their development commitments, which strengthens our expectations of continued growth through the remainder of 2024 and 2025. Lastly, with our ongoing acceleration of shop openings, I mentioned we opened an additional four shops during Q2 for a total of seven openings year-to-date through the second quarter.

Robert Wright: We're also proud to announce that we've opened two additional units already in the third quarter. With our current development pipeline, we expect to double Q2 openings in Q3 for a total of eight new shots with further acceleration in Q4.

Speaker Change: We're also proud to announce that we've opened two additional units already in the third quarter. With our current development pipeline, we expect to double Q2 openings in Q3 for a total of eight new shops with further acceleration in Q4.

Steven Cirulis: We currently expect to open a total of at least 30 new shops in 2024, and we already have visibility into the 2025 opening pipeline with Mordico. While it's still early, we're very pleased with our performance in our new 2024 shops. I'm proud to say that on average, these shops are not only outperforming their sales forecast, but their average weekly sales surpasses the system average. We're not simply opening shops; we're opening successful shops.

Speaker Change: We currently expect to open a total of at least 30 new shops in 2024, and we already have visibility to the 2025 opening pipeline with more to come.

Speaker Change: While it's still early, we're very pleased with our performance of our new 2024 shops. I'm proud to say that on average, these shops are not only outperforming their sales forecasts, but their average weekly sales surpasses the system average.

Speaker Change: We're not simply opening shops. We're opening successful shops.

Steven Cirulis: The success of these shops is a sign that our market planning and real estate systems are working. Of course, we expect this unit level success will further accelerate growth as we sign even more commitments to the pipeline, further increasing our confidence in our ability to reach our 2000 unit potential. With that, I'll now turn the call over to Steve to detail our financial performance for the second quarter.

Speaker Change: The success of these shops is a sign that our market planning and real estate systems are working. Of course, we expect this unit-level success will further accelerate growth as we sign even more commitments to the pipeline, further increasing our confidence in our ability to reach our 2,000-unit potential.

Speaker Change: With that, I'll now turn the call over to Steve to detail our financial performance for the second quarter.

Steven Cirulis: Thank you, Bob. Good afternoon, everyone.

Steven Cirulis: Revenues in the second quarter were $119.7 million, with company revenue of $115.5 million. Lower year over year, driven by the short-term impact of last year's re-crancias. Contrast that with our franchise revenue of $4.2 million, up $117 per cent relative to the second quarter last year, driven by a 53% increase in franchise units. As a reminder, we are de-emphasizing the sale of our company shops through refranchising, given our strong pipeline of deals in Newmark.

Steve: Thank you Bob, good afternoon everyone.

Steve: Revenue is in the second quarter of a $119.7 million, with company revenue of $115.5 million. Lower year over year, driven by the short-term impact of last year's re-cranchizing.

Speaker Change: Contrast that with our franchise revenue of $4.2 million, up $117 per cent relative to the second quarter last year, given by a 53% increase in franchise units.

Speaker Change: As a reminder, we are de-emphasizing the sale of our company shops through re-franchising given our strong pipeline of deals in new markets.

Steven Cirulis: Average weekly sales were approximately $26,110, and system-wide sales were approximately $142.3 million. Same store sales were up 40 basis points in the quarter. This is on top of positive same-store sales of 12.9% in Q2 last year. As Bob mentioned, we continue to take traffic share from both the broader restaurant industry as well as the fast casual segment during the quarter. Turning six fences, food, beverage, and packaging costs were 27.1% of shop sales, a 90 basis point improvement versus the prior year period. This was driven by a combination of commodity deflation and a modest pricing action in the quarter.

Speaker Change: average weekly sales were approximately $26,100 and system-wide sales were approximately $142.3 million.

Speaker Change: SameStore sales were up 40 basis points in the quarter. This on top of positive SameStore sales of 12.9% in Q2 last year.

Speaker Change: As Bob mentioned, we continue to take traffic share from both the broader restaurant industry as well as the fast casual segment during the quarter.

Bob Wright: Turnings of expenses, food beverage and packaging costs were 27.1% of shop sales, a 90 basis point improvement versus the prior year period. This was driven by a combination of commodity deflation and a modest pricing action in the quarter.

Steven Cirulis: Labor expenses were 28% of sales, a 240 basis point improvement versus the prior year period. This improvement is attributed to the ongoing optimization of our hours-based labor guide, an improvement in overtime management, and hours of operation adjustment. Occupancy was 10.9% of sales, a 40 basis point increase versus the prior year period. This was predominantly due to an increase in variable rent charges, as many shops with those types of lease arrangements, like airports, continue to outperform previous years.

Speaker Change: Labor expenses were 28% of sales, a 240 basis point improvement versus the prior year period.

Speaker Change: This improvement is attributed to the ongoing optimization of our hours-based labor guide and improvement in overtime management and hours of operation adjustments.

Speaker Change: occupancy was 10.9% of sales, a 40 basis point increase versus the prior year period.

Speaker Change: This was predominantly due to an increase in variable rent charges, as many shops with those types of lease arrangements, like airports, continued to outperform prior year.

Steven Cirulis: Other operating expenses were 18.4% of sales, a 160 basis point increase versus the prior year period. This was predominantly due to increased brand fund expenses and a utility rate increase. Overall, shop-level margins in the second quarter were 15.7%, an increase of 130 basis points year-over-year. General and administrative expenses were 8.3% of system-wide sales, largely in line with the year-ago period.

Speaker Change: Other operating expenses were 18.4% of sales, a 160 basis point increase versus the prior year period.

Speaker Change: This was predominantly due to increased brand fund expense and utility rate increases.

Speaker Change: Overall, shop-level margins in the second quarter were 15.7 percent, an increase of 130 basis points year-over-year.

Speaker Change: General and administrative expenses were 8.3% of system-wide sales, largely in line with the year-ago period.

Steven Cirulis: Second quarter adjusted EBITDA was $8.5 million, or 7.1% of total revenue. The year-over-year increase was driven by a 130 basis point improvement in shop-level margins and continued strong performance of our franchise shops and ongoing disciplined management of G&A. We reported net income of $34.7 million for the quarter, driven by a $31.3 million benefit from the release of most of the company's tax valuation allowance during the period. The change in the valuation allowance is the result of recent profitability and our expectation for continued sustainable profits moving forward.

Speaker Change: Second quarter adjusted EBITDA with $8.5 million or $7.1% of total revenue.

Speaker Change: The year-over-year increase driven by the 130 basis point improvement in shop-level margins and continued strong performance of our franchise shops and ongoing disciplined management of G&A.

Speaker Change: We reported net income of $34.7 million for the quarter driven by a $31.3 million benefit from the release of most of the company's tax valuation allowance during the period.

Speaker Change: The change in the valuation allowance is the result of our recent profitability and our expectation for continued sustainable profits moving forward.

Steven Cirulis: The release of the valuation allowance allows us to record $31.3 million of deferred tax assets on our balance sheet, which will be used to satisfy a substantial portion of our future cash taxes, bringing additional capital to reinvest in our business. We adjusted that income with $2.5 million, a $0.5 million increase versus the prior year period. As we announced on our last earnings call, our board authorized a $20 million share repurchase program driven by their confidence in the sustainability of our cash flows as a franchise business model. During the second quarter, we purchased approximately 86,000 shares of our common stock for a total of approximately $700,000.

Speaker Change: The release of the valuation allowance allows us to record $31.3 million of deferred tax assets on our balance sheet, which will be used to satisfy a substantial portion of our future cash taxes, bringing up additional capital to reinvest in our business.

Speaker Change: Adjusted net income was $2.5 million, a $0.5 million increase versus the prior year period.

Speaker Change: As we announced on our last earnings call, our board authorized a $20 million share repurchased program, driven by their confidence in the sustainability of our cash flows as a franchise business model.

Speaker Change: During the second quarter, we purchased approximately 86,000 shares of our common stock for a total of approximately $700,000.

Steven Cirulis: We are excited to be able to use this additional lever at our disposal to help drive long-term shareholder value. Combining our year-to-date results with the category outlook for the remainder of the year, we expect our Q3 performance to land in the following ranges. The same store sale growth of negative 3.5% to negative 1.5%, and adjusted EBITDA of between $6.5 million and $8 million. For the full year 2024, we have updated our same store sales guidance to negative 1.5% to positive 0.5% and our adjusted EBITDA to between $27 to $30 million.

Speaker Change: We are excited to be able to use this additional lever at our disposal to help drive long-term shareholder value.

Speaker Change: Incorporating our year-to-date results with the category outlook for the remainder of the year, we expect our Q3 performance to land in the following ranges.

Speaker Change: Same store sale growth of negative 3.5 percent to negative 1.5 percent. Adjusted EBITDA of between 6.5 million dollars and 8 million dollars.

Steven Cirulis: For the full year 2024, we have updated our same-store sales guidance to negative 1.5% to positive 0.5% and our adjusted EBITDA to between $27 to $30 million.

Steven Cirulis: As a reminder, the impact of re-franchising on our adjusted EBITDA growth rate is most pronounced in the first three quarters of 2024, as 25 of our 34 re-franchised sales to date occurred in the second half of 2023. In addition, as Bob previously mentioned, we anticipate opening at least 30 new shops in 2024. With that, I'll turn the call back over to Bob.

Speaker Change: As a reminder, the impact of re-franchising on our adjusted EBITDA growth rate is most pronounced in the first three quarters of 2024.

Steven Cirulis: as 25 of our 34 re-franchised sales to date occurred in the second half of 2023.

Steven Cirulis: In addition, as Bob previously mentioned, we anticipate opening at least 30 new shops for 2024.

Robert Wright: Thank you, Steve. I'm excited for what the future holds for Potbelly. The second quarter represented yet another step in our transition to a franchise-led growth story as we grew comparable restaurant sales, expanded restaurant margins for the 13th consecutive quarter, and continued to grow our open and committed shop. As we move forward, I'm confident that our customers' love of our food, the continued strength of our digital channels, and the success of our recent shop openings will allow us to capitalize on the immense opportunity ahead of us.

Robert Wright: With that, I'll turn the call back over to Bob.

Bob Wright: Thank you, Steve. I'm excited for what the future holds for Potbelly. The second quarter represented yet another step in our transition to a franchise-led growth story as we grew comparable restaurant sales, expanded restaurant margins for the 13th consecutive quarter, and continue to grow our open and committed shop count.

Bob Wright: As we move forward, I'm confident that our customers love our food to continue strength of our digital channels and the success of recent shop openings will allow us to capitalize on the immense opportunity at us.

Robert Wright: We're proud of what we've accomplished thus far, and I can assure you we're only getting started. In closing, I'd like to thank all our Potbelly team members, from our frontline associates to our support center employees, and, of course, our franchisees and their teams for their hard work and commitment to making Potbelly the most loved sandwich brand in every neighborhood. With that, we're happy to answer any questions. Operator, please open the line for questions.

Speaker Change: We're proud of what we've accomplished thus far and I can assure you we're only getting started.

Operator: Thank you. Thank you. Thank you.

Operator: In closing, I'd like to thank all our Potbelly team members, from our frontline associates to our support center employees, and of course our franchisees and their teams for their hard work and commitment to making Potbelly the most loved sandwich brand in every neighborhood.

Operator: With that, we're happy to answer any questions. Operator, please open the line for questions.

Operator: Certainly, at this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw yourself from the queue at any time by pressing the star too. And we'll take our first question from Mark Smith with Lake Street Capital. Your line is open.

Operator: Certainly. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may withdraw yourself from the queue at any time by pressing star 2.

Operator: and we'll take our first question from Mark Smith with Lake Street Capital. Your line is open.

Alex Sturnieks: Hey guys, this is Alex Sturnieks on the line for Mark Smith today. Thank you for taking my questions. The first one for me is largely around the consumer. Last quarter, you mentioned that frequent visitors were visiting less. I'm just kind of curious, did that persist this quarter? Or, you know, did you kind of retain more of that from the everyday value combo meals that you rolled out this quarter?

Alex Sturnieks: Hey guys, this is Alex Sturnieks on the line for Mark Smith today. Thank you for taking my questions. The first one for me is...

Alex Sturnieks: Largerly around the consumer, you know, last quarter you mentioned that frequent visitors were visiting last. Just kind of kids did that persist this quarter or, you know, did you kind of retain more of that from the everyday value combo meals that you rolled out this quarter?

Robert Wright: Yeah, thanks, Alex. It's good to talk to you.

Speaker Change: Yes, thanks, Alex. Good to talk to you. I think what we saw is a little bit of a continuation from our discussion in Q1. It is those less frequent consumers.

Speaker Change: And they're less digital, they're less loyal. So because of that digital disconnection, it's harder for us to get to them.

Robert Wright: I think what we saw is a little bit of a continuation from our discussion in Q1. It is those less frequent consumers, and they're less digital, and they're less loyal. So, because of that digital disconnection, it's harder for us to get to them.

Robert Wright: And that's why we shared last quarter that we intended to test some everyday value options. Something you can make sure is present all the time. Things you can market and merchandise in the shops for those infrequent customers that are coming in.

Robert Wright: And that's why we shared last quarter that we intended to test some everyday value options, something that you can make sure is present all the time, things you can market and merchandise in the shops for those infrequent customers that are coming in. And, you know, as we told you in the prepared remarks, by the end of the quarter, we had discovered which of the ones that we tested was driving the business the most for us, the $7.99 skinny combo. You get one of those turkey hammer chicken sandwiches, chips, and a drink.

Robert Wright: And, you know, as we told you in the prepared remarks, by the end of the quarter, we had discovered which of the ones that we tested was driving the business the most for us, the $7.99 skinny combo.

Robert Wright: And I think what customers are looking for is a meal that's in the sweet spot of what they can afford to continue to go out to lunch and not start making decisions to trade in the refrigerator for groceries, but they don't want to compromise on getting a whole lot. And so the fact that this is a full combo makes a lot of sense. Look, we still grew sales in the quarter, you know, up 0.4. And, you know, the full impact of the 799 combo was not really fulfilled in Q1.

Robert Wright: You get one of those turkey ham or chicken sandwiches, chips and a drink, and I think what customers are looking for is they're looking for a meal that's in the sweet spot of what they can afford to continue to go out to lunch and not start making decisions to trade to the refrigerator to grocery.

Robert Wright: But they don't want to compromise on getting a whole lunch.

Robert Wright: and so the fact that this is a full combo makes a lot of sense. But we still grow sales in the quarter, you know, at point four, and you know, the full impact of the 799 combo was not really fulfilled into one.

Robert Wright: But the other piece of it, as I mentioned, on the frequent side are more digital customers. We continue to drive growth on that side of the business. We're very pleased with our ability to stay connected with those customers, and offer them not only just the intrinsic value of the Perks Loyalty Program and the coins and that new program we put into place in Q1, but then some spot promotions that help them with that too.

Robert Wright: But the other piece of it, as I mentioned, on the frequent side, our more digital customers, we continue to drive growth on that side of the business. We're very pleased with.

Robert Wright: are building a state connected with those customers, offer them not only just the intrinsic value of the personality program that coins and that new program we put in the place in Q1, but then some spot promotions they help them with that too.

Robert Wright: Those most loyal customers or more frequent customers also, they're the ones that really like the LTO innovations and the food innovations that we bring because they're familiar with the brand and they like to explore our menu a little bit. So that's helped them too. But yeah, look, it's that customer. And they're not just, I want to be clear, that our insight doesn't suggest they're pulling back visits from Potbelly. What we're seeing is that they're pulling back visits.

Robert Wright: Those most loyal customers or more frequent customers also, they're the ones that really like the LTO innovations and the food innovation that we bring, because they're familiar with the brand and they like to explore our menu a little bit, so that's helped them too.

Robert Wright: but yeah look it's it's that customer and they're not just I want to be clear that our insight doesn't suggest they're pulling back visits from Potbelly.

Robert Wright: What we're seeing is that they're pulling back visits.

Robert Wright: Period at lunch and a little bit at dinner too, because they're just trying to manage their overall restaurant spend and then do it with shaving transactions. And our goal with 799, which we're pleased with, was to give you a very good option to trim that visit from somebody else and not put ourselves in a position where we're overly promoting the brand and creating some profitability challenges. So, I'm really pleased with what we've discovered in that column.

Robert Wright: period at lunch and a little bit at dinner too because they're just trying to manage their overall restaurant spend.

Robert Wright: and in doing it with shaving transactions.

Robert Wright: And our goal with $7.99, which we're pleased with, was to give you a very good option to trim that visit from somebody else and not put ourselves in a position where we're overly promoting the brand and creating some profitability challenges. So I'm really pleased with what we've discovered with that combo meal.

Robert Wright: Got it, yeah, that makes sense, that's a lot of help, and then just the last one for me, and you guys kind of introduced it last quarter, but the new prototype, 1800s square foot store size, you opened one in Arkansas this quarter, I think. Just kind of curious what are some takes, maybe the learnings from this and then. You know, if you have in mind, you know, an ideal mix of these to the traditional store size, kind of like a 1 in 10 or 1 in 5, anything there?

Robert Wright: Got it, yeah, that makes sense, that's a lot of help and then just the last one for me and you guys kind of introduced it last quarter, but the new prototype, 1800s worth foot store size, you open one and I can saw this quarter, I think. Just kind of curious what the puts and takes, maybe the learnings from this and then.

Speaker Change: If you have in mind an ideal mix of these to the traditional store size, kind of like a 1-in-10 or a 1-in-5, anything there?

Robert Wright: Yeah, look, the prototype is the template for all new builds going forward. Now the reason we only had one last quarter is because some of the shops that were in the pipeline had already been through design engineering and permitting, and you don't want to waste time re-permitting those.

Robert Wright: Yeah, look, the prototype is the template for all new builds going forward. Now, the reason we only had one last quarter is because the shops that were in the pipeline had already been through design engineering and permitting, and you don't wanna waste time to go re-permit those.

Robert Wright: And to be clear, the 1,800 square foot is a targeted square footage. We know that the brand can deliver everything we're looking to deliver at 1,800 square feet. Honestly, we've got some franchise locations later this year that are 1,600 square feet. So we can go smaller. In some cases, franchising may go a little bit bigger. That one in Arkansas, we're very, very happy with.

Robert Wright: And to be clear, the 1800 square foot is a targeted square foot, as we know that the brand can deliver everything we're looking to deliver at 1800 square feet. Honestly, we've got some franchise locations later this year that are 1600 square feet. So we can go smaller.

Robert Wright: In some cases, franchising may go a little bit bigger. That one in Arkansas, we're very, very happy with. It's just like the others that I spoke about on average, but very happy with the sales there.

Robert Wright: It's just like the others that I spoke about on average, but I'm very happy with the sales there. And I'm really happy with the way the prototype look came together. What it does aesthetically is, and as we build more and more and more, you're going to see this become the standard. But it really preserves what's so special about Potbelly's atmosphere. But it does it in a more efficient way, with fewer seats, matches our digital business mix today, and actually accentuates a few things that we think are so important to the brand.

Robert Wright: and I'm really happy with the way the prototype looked came together.

Robert Wright: What it does aesthetically is that as we build more and more and more, you're going to see this become the standard. But it really preserves what's so special about Potbelly's atmosphere, but it does it in more efficient way if you're seats.

Robert Wright: Machas are digital business mix today, and actually accentuates a few things that we think are so important to the brand. So the drinks, not only to grab and go drinks, but our drinks station.

Robert Wright: The stove, the drinks, not only the grab and go drinks but our drink station. The varied seating, we've held many of the custom items that make Potbelly so special. Those things that we produce uniquely for each shop when it opens. So a lot of that has been preserved, but it's more efficient. And I think I was clear last quarter, but just to remind you, that square footage. If the average unit in our legacy system is 2,300 feet, for a franchisee that's targeting leased spaces that are 1,800 feet, that 500 square feet can be tens of thousands of dollars a year in occupancy costs that just go away, and that is an occupancy advantage that just keeps on giving to those franchisees when they open.

Robert Wright: varied seating. We've held many of the custom items that make Potbelly so special.

Robert Wright: those things that we we produce uniquely for each shop when it opens. So a lot of that has been preserved but it's it's more efficient and I think I was clear last quarter but just to remind you that square footage if the average unit in our legacy system is 2,300 feet

Robert Wright: For a franchisee that's targeting lease spaces that are 1,800 feet, that 500 square feet can be tens of thousands of dollars a year in occupancy costs that just go away. And that is an occupancy advantage that just keeps on giving to those franchisees when they open.

Robert Wright: Got it. Hey, thanks for taking my questions today.

Speaker Change: Got it. Hey, thanks for taking my questions today.

Operator: We'll move next to Todd Brooks with the benchmark company. Your line is open. Hey, thanks.

Todd Brooks: Yeah, thanks for being with us.

Speaker Change: We'll move next to Todd Brooks with the Benchmark Company. Your line is open.

Todd Brooks: Hey, thanks, good to talk to you both.

Todd Brooks: Thank you very much.

Todd Brooks: Do you quick questions to lead off in a couple bigger picture ones? Steve, is there a way that you can decompose the four tenths of a percent same store sales of us kind of traffic versus price versus next?

Steven Cirulis: Yeah, sure. Let me, let me start with price. That's always the easiest thing to begin with.

Speaker Change: Yeah, sure. Let me start with, you know, price that's always easy to begin with. We had about 4.3% of gross price for the quarter.

Steven Cirulis: We had about 4.3% of gross price for the quarter, about 2.5 percent of that was carry over, and then we had 1.9 percent that we introduced with a pricing action in P2, and then we had one at the end of the quarter in P7 to get us to the 1-9. We saw about half of that come to us and check, right? So 4.3% and check, we're sorry, and prices are growing price, but 2% a little over 2% and, you know, in average check for us.

Steven Cirulis: About 2.5% of that was carry over, and then we had 1.9% that we introduced with a pricing action in P2, and then we had one at the end of the quarter in P7 to get us to the 1.9.

Steven Cirulis: We saw about half of that come to us in check, right? So 4.3% in check, or sorry, in gross price, but a little over 2% in, uh...

Steven Cirulis: Which leaves you with traffic, obviously, and there was traffic was down for us. You know, a bit. And what we always like to look at as we've compared ourselves to fast casual is whether we are doing better, even in a tougher environment. And yes, for another quarter, we did better in traffic than fast casual did. There's a little bit of a mix shift down there too. You know, we saw some things that we've already called out in prior calls with, you know, some customers moving to different sizes on our menu down from the bigs.

Steven Cirulis: in average check for us, which leaves you with traffic, obviously, and our, you know, there was, the traffic was down for us.

Steven Cirulis: and what we always like to look at as we've.

Steven Cirulis: compared ourselves to fast casual, is are we doing better, even in a tougher environment? And yes, for another quarter.

Steven Cirulis: We did better on traffic than did Fast Casual. There's a little bit of makeshift down there, too. We saw some...

Steven Cirulis: We saw some things that we've already called out in prior calls with

Steven Cirulis: You know, some customers moving to different sizes on our menu down from the bigs.

Steven Cirulis: Our $7.99 combo that features a skinny plays a part in some of that mixed shift as well as some of the discounting that we did in the quarter. We're proud of the fact that even in this environment we were able to put forth a same-story sales gain when a lot of folks are struggling out there.

Todd Brooks: Absolutely, no absolutely not. Do you want to take the opportunity? We can frame it in a couple ways. One, do you want to talk about the quarter-to-day commentary that kind of frames up the same-store sales guidance that you provided for Q3. Or do we want to attack it maybe another way, talking about... You're delivering more value, but I mean, Subway's rolled out, I think, a $3 meat tube now for people, so competitive value as well, and as you settled on the $799 for the combo. We feel good about that value but are just wondering about competitive pricing actions and the potential impact on the business.

Speaker Change: absolutely no absolutely do you want to take the opportunity and we can frame it a couple ways one do you want to talk about

Speaker Change: The quarter-to-day commentary that kind of frames up the same-store sales guidance that you provided for Q3.

Todd Brooks: Or do we want to attack it maybe another way, talking about...

Speaker Change: You're delivering more value, but I mean, there's always a world out, I think a $3 meat tube now for people so competitive value as well and as you settled on the $7.99 for the...

Speaker Change: for the combo.

Speaker Change: We feel good about that value, but just wondering about competitive pricing actions and potential impact on the business.

Todd Brooks: Todd, I think those are those are great companion questions. Let's Steve tackle the guidance piece of it because I think that's important how we're starting the quarter. And then I can pick up on the competitive piece because there's a lot going on in the competitive space for sure.

Todd Brooks: I think those are those are great companion questions. Steve can tackle the guidance piece of it because I think that's important how we're starting the quarter and then I can I can pick up on the competitive piece because there's a lot going on in the competitive space for sure.

Steven Cirulis: Sure, I'd like a Q3. It started out a little softer than we would have wanted, and there are a few factors at play. I think the beginning of the quarter had a slightly different..., dynamic as it relates to the Fourth of July for us. So July 4th was on Thursday this year, which meant that the weekend that everybody usually travels really was in P7 for us this year when it was more in P6 last year.

Steven Cirulis: Look, Q3 started out a little softer than we would have wanted, and there's a few factors at play. I think the beginning of the quarter had a slightly different

Steven Cirulis: dynamic as it relates to the 4th of July for us. So 4th of July was on Thursday.

Steven Cirulis: this year, which meant that the weekend that everybody usually travels really was in P7 for us this year when it was more in P6 last year. So that had a dynamic relation to the comp.

Steven Cirulis: So that had a dynamic relation to the comp. And Hurricane Beryl affected us a bit. We have 20-some odd Houston shops, and for the period, it was 75 to 80 basis points drag on the comp.

Steven Cirulis: and Hurricane Beryl affected us a bit. We have 20-some-odd Houston shops and

Steven Cirulis: For the period, it was 75 to 80 basis points dragged.

Steven Cirulis: So, you know, those were headwinds that we started out with right away. Also, as Bob mentioned, it's performing well, and it continues to build. So that's something that we're looking forward to seeing. The consumer environment is something that's not lost on us. And so what's reflected in the guidance is not a change, or a material change in that behavior.

Bob: on the comp.

Steven Cirulis: So, you know, that those were those were headwinds that we started out with with right away. Also, you know, we were still building that 799 combo deal. It's where, as Bob mentioned, it's performing well and it continues to build.

Steven Cirulis: So that's something that we're looking forward to seeing.

Steven Cirulis: But, you know, we've got a situation where we feel like we're highly competitive with our value. We're highly competitive with our LTOs that are coming out. And, of course, that PERCS program is really going to help us move through the quarter. And if you look at our full year guidance, You know, you'll see that we've got a positive seamstores sale at the high end of that range, so that just gives you a sense where the kind of confidence we have in the way that the business is going to move and improve as we hit, you know, to four in the latter part of the year, undaunted by what's happening out there because we feel like we've got the right kinds of tactics, not just to kind of make sure that we're competitive here and building the business back to positive same-store sales, but also ultimately we get judged on profitability.

Steven Cirulis: So the consumer environment is something that's not lost on us and so what's reflected in the guidance is not a

Steven Cirulis: We've had a material change in that behavior, but we've got a situation where we feel like

Steven Cirulis: We're highly competitive with our value. We're highly competitive with our LTOs that are coming out. And of course, that PERCS program is really going to help us move through the quarter. And if you look at our full year guidance,

Steven Cirulis: you'll see that we've got a positive same store sale at the high end of that range. So that just gives you a sense for the kind of confidence we have in the way that the business is going to move and improve as we hit Q4 in the latter part of the year.

Steven Cirulis: I'm dotted by what's happening out there because we feel like we've got, you know, the right times of tactics.

Steven Cirulis: not just to kind of make sure that we're.

Steven Cirulis: Competitive here in building the business back to the positive seems to herself.

Steven Cirulis: but also, you know, ultimately we get judged on profitability.

Steven Cirulis: And so that EBITDA number that we've guided you for the year is also something we're confident in. Even with softer sales, you can see we have the ability to kind of manage margins really well, not just at the company level or not at the shop level but also at the company level as we control some expenses along the way. So look, it's not going to be an easy back half of the year, but I think we've got a strong management team and a great plan to get after it, not just within the environment that we're in right now but to continue to build against the long-term growth plans that we've set out.

Steven Cirulis: and so that EBITDA number that we've guided you for.

Steven Cirulis: for the year.

Steven Cirulis: is also something we're confident in even what's stop for sales. You can see we have the ability to kind of manage margins really well. Not just at the company, our not the shop level bill, so the company level as we control some.

Steven Cirulis: It's not going to be an easy back half of the year, but I think we've got a strong management team and a great plan to get after it, not just within the environment that we're in right now, but to continue to build against the long-term growth plans.

Steven Cirulis: that we've set out.

Robert Wright: Yeah, Todd, if I can build on that, I think that there's a couple of things in the guidance too that we have not factored in a significant shift in consumer behavior, and, you know, there's a lot to be read that there are some reasons to believe maybe that will be the case later in the year. That We're not counting on that, and we don't like to build into our guidance things that we haven't tested.

Robert Wright: Yeah, it's how to find and build on that. I think that there's a couple of things in the guidance to that we have not factored in a significant shift in consumer behavior.

Robert Wright: and you know there's a lot to be read that there's some reasons to believe maybe that is the case later in the year that we're not counting on that. And we don't like to build into our guidance things that we haven't tested.

Speaker Change: And, you know, that $7.99, as much as we like it, we've already screened 20 more everyday value ideas that could be companion ideas. You know, we get a lot of credit from our customers for Pick Your Pair.

Speaker Change: $7.99 fits nicely into that type of everyday value because it builds on the menu. It makes sense to our customers who may already order skinny sandwiches or see that chips in a drink that they can make a meal deal out of.

Speaker Change: and then, you know, when it comes to what's going on competitively, something that...

Speaker Change: that we know from all of our experience on this team, there are things you can do that are far more aggressive.

Robert Wright: There are things you can do that are far more aggressive, but the risk to profitability and, also, as we become more and more of a franchise organization, the risk to franchisee adoption really goes up as you get more aggressive, especially if you just, on its face, discount a core menu item to a different price. And we see a lot of that out there. The transactional breakeven on those types of deals tends to be very high, and if you don't have millions of dollars to spend, and I mean maybe tens of millions to spend on television to try to get that traffic to break through that breakeven, it can be a very bad idea for the P&L, and it may not get you the sales you need even to get back to even.

Robert Wright: But the risk to the profitability, and also as we become more and more of a franchise organization, the risk to franchisee adoption really goes up as you get more aggressive, especially if you just

Robert Wright: on its face, discount, a core menu item to a different price and we see a lot of that out there.

Robert Wright: The transactional break-even on those types of deals tend to be very high. And if you don't have millions of dollars to spend, and I mean maybe tens of millions to spend on television to try to get that traffic,

Robert Wright: to break through that break-even. It can be a very bad idea for the P&L and it may not get you the sales you need even to get back to even. So we've been very careful with that. I mentioned in our remarks that 799 works really well for our customers, it works well for us too.

Robert Wright: So we've been very careful with that. I mentioned in our remarks that 799 works really well for our customers. It works well for us, too, and I think that's why you don't see us do some of the super aggressive ideas that some others are doing, but I also mentioned these things. People seem to really recognize when you're doing something that helps them out. To get a 7-point bump in value and a 5-point bump... in intent to return off of a single price-pointed combo like we've gotten is not something I've seen very often in my career, and it didn't take us cutting the price in half to get there. It just really broke through that starting place where someone says this is something I'll come back for on the day where I may be the day before my payday instead of the day after I get paid.

Robert Wright: And I think that's why you're not seeing us do some of the super-aggressive ideas that some others are. But, you know, I also mentioned these things ...

Robert Wright: People seem to really recognize when you're doing something that helps them out. To get a seven point bump in value and a five point bump

Robert Wright: and intend to return off of a single price-pointed combo like we've gotten.

Robert Wright: It's not something I've seen very often in my career, and it didn't take us cutting the price in half to get there. It just really broke through that starting place where someone says, this is something I'll come back for on the day where I may be the day before my payday instead of the day after I got paid.

Robert Wright: No, that's great. Great to hear the lift you got. And then one final one. I'll jump back in queue.

Speaker Change: Yeah, no, that's great. Great to hear the lift you got. And then one final one, I'll jump back in queue. We've got another quarter of history behind us with the new Perks Rewards here structure.

Todd Brooks: We've got another quarter of history behind us with the new Perks Rewards here structure. Are you finding, and I know we had good redemptions at lower tiers, surprisingly good at that 200 and 300 coin level early out of the gate? What I'm wondering is, as you're seeing those customers redeem at that level, are you getting enough data to point to them continuing to redeem at that level? that that's enough for them from a value standpoint, and they're happy to get a free cookie after, after, after, after 300 coins. And they're happy, and they'll keep visiting and keep... Actually, are you seeing evidence of the frequency benefit of the lower reward tiers? I guess that's a more succinct way to phrase it.

Todd Brooks: Are you finding, and I know we had good redemptions at lower tiers, surprisingly good at that 200 and 300 coin level. Early out of the gate, what I'm wondering is as you're seeing those customers.

Speaker Change: Redeem at that level.

Todd Brooks: Are you getting updated to point to them continuing to redeem to that level?

Todd Brooks: after 300 coins and they'll keep visiting and keep, actually, are you seeing evidence of the frequency benefit of the lower award tiers? I guess that's a more succinct way to ask it.

Robert Wright: We really are, and it's very interesting how different customers are using the new program to their advantage. You know, some of our most frequent customers are the ones that only get cookies. They almost, you know, kind of have this position that I'm coming all the time anyway, but I, you know, this is like a free dessert when I come back. And others are saving up for their sandwiches. It is still entrees; it still skews more entrees than it does desserts and sides, which is what we expected. The mix on the redemption is almost exactly what we expected it to be.

Robert Wright: We really are and it's very interesting how different customers are using the new program to their advantage. You know some of our most frequent customers are the ones that only get cookies.

Robert Wright: They almost, you know, kind of have this position that I'm coming all the time anyway, but I, you know, this is, this is like a free dessert when I come back.

Robert Wright: and others are saving up for their sandwich. It is still entree, it still skews more entrees than it does desserts and sides, which is what we expected. The mix on the redemption is almost exactly what we expected it to be.

Robert Wright: But when you go a layer deeper and look at individual consumer behaviors, you can see that they're dialing it in to fit their personal preferences for their visit patterns. As I mentioned in the remarks, too, we continue to see growth in member acquisition, and we continue to see growth in the penetration of those PERCS transactions. But something new that I shared this quarter is that we've divided those PERCS customers up into frequency cohorts.

Robert Wright: But when you go a layer deeper and you look at the individual consumer behaviors, you can see that they're dialing it in to fit their personal preferences for their visit patterns.

Robert Wright: I mentioned in the remarks, too, we continue to see growth in member acquisition.

Robert Wright: And we continue to see growth in the penetration of those Perks transactions. But something new that I shared this quarter is we've divided those Perks customers up into frequency cohorts.

Robert Wright: And, you know, as you might expect, when people first enter the program, they're not nearly as frequent as when they've been in a mature relationship with us for maybe a year or longer, whatever the number is. I'm using that as an example, not a specific marker of time.

Robert Wright: And, you know, as you might expect, when people first enter the program, they're not nearly as frequent as when they've been in the mature relationship with us for maybe a year or longer, whatever the number is. I'm using that as an example, not a specific marker of time.

Robert Wright: But across those cohorts, all of them, So we're bringing people into the Perks program at rates and growing year over year and quarter over quarter. And once we get them into the program, we're advancing their frequency regardless of the level that they may be at when they enter. So we're just really pleased. The last thing I'd say is the frequency overall for PERCS is consistently delivering what we have seen in past quarters. So even as it's growing, we're getting the frequency on average that we want out of those groups.

Robert Wright: but across those cohorts, all of them.

Robert Wright: of increased transactions and frequencies.

Robert Wright: So, we're bringing people into the PERCS program at rates and growing year over year and quarter over quarter, and once we get them into the program, we're advancing their frequency regardless of the level that they may be at when they enter. So we're just really pleased.

Robert Wright: That's you, you, the last thing I'd say is the frequency overall for perks is...

Robert Wright: consistently delivering what we have seen in past quarters. So even as it's growing, we're getting the frequency on average that we want out of those groups.

Todd Brooks: That's all great, Collar. Thanks for sharing that, Bob.

Todd Brooks: That's all great color, thanks!

Speaker Change: That's all great color, thanks for sharing that bud.

Operator: We'll move next to Matt Curtis with William Blair. Your line is open, and others. Thank you. Thank you.

Matt Curtis: Yeah, my pleasure.

Speaker Change: We'll move next to Matt Curtis with William Blair. Your line is open.

Matthew Curtis: Hi, good afternoon. Just on the third-quarter comp guidance, which obviously includes the slowdown you saw in July, maybe I could just ask you to approach it in a different way. I mean, could you walk through what's happening with traffic and tickets as you move from the second quarter to the third quarter? I mean, is most of the slowdown related to letting some prices roll off the menu? Or is it more driven by the step down in traffic?

Matthew Curtis: Hi, good afternoon. Just on the third quarter comp guidance, which obviously includes the slowdown you saw in July , maybe I could just ask you to approach it in a different way. Could you walk through what's happening with

Matthew Curtis: traffic and ticket as you move from the second quarter to the third quarter. I mean is most of the slowdown related to letting some price roll off the menu or is it more driven by the step down in traffic?

Steven Cirulis: Yeah, thanks, Matt. It's honestly a combination of both.

Steven Cirulis: Yeah, thanks Matt. It's honestly it's a combination of both. We have if you look at the and Q3, you know, our carryover drops from, you know, 2.5 and Q2 to 1.4.

Steven Cirulis: We have If you look in Q3, our carryover drops from 2.5 in Q2 to 1.4 in Q3. So that's part of it for sure, but there is a softness that we see in traffic as well. So I think what we're able to do, though, is think about what we want to do with price. We've always discussed pricing as a way to outrun inflation in terms of its increases. We've seen some really, I think, beneficial commodity numbers and some labor inflation lower than we thought.

Steven Cirulis: in Q3.

Steven Cirulis: So that's part of it for sure, but there is softness that we see in traffic as well.

Steven Cirulis: and...

Steven Cirulis: I think what we're able to do, though, is think about

Steven Cirulis: What we want to do with price, you know, we've, we've always discussed pricing as a

Todd Brooks: Hey, thanks, good to talk to you, Brooks. You too, Tom. A few quick questions to lead off, and then a couple bigger picture ones. Steve, is there a way that you can... Decompose the four-tenths of a percent same-store sales of us kind of traffic versus price versus mix.

Speaker Change: As a way to outrun inflation in terms of its increases and we've seen some really, I think, beneficial.

Speaker Change: Commodity numbers and some later inflation lower than we thought. So, you know, we have another price increase plan for Q3, but honestly, we're contemplating whether or not we needed it at all. As we want to continue to kind of support the business and meet the customer where they are.

Steven Cirulis: So we have another price increase planned for Q3. But honestly, we're contemplating whether or not we need it at all as we want to continue to kind of support the business and meet the customer where they are. So it's not one of those things where we've seen traffic fall off to the extent that pricing isn't helping us a bit. So it's a combination.

Steven Cirulis: So it's not one of those things where we've seen traffic fall off to the extent that pricing isn't helping us a bit. So it's a combination of the two.

Matthew Curtis: Okay, so assuming you do go ahead and take that price increase in the third quarter, can we expect your price benefit for the third quarter to remain at that four-point-something level? I think you said 4.3 in the second quarter, or would it fall into the three-point-something range?

Speaker Change: Okay, so assuming you do go ahead and take that price increase in the third quarter to re-expect your price benefits in the third quarter to remain at that four point something level, I think you said four point three in the second quarter, or would it fall into the third point something range?

Steven Cirulis: It'd be in that low four-range.

Matthew Curtis: So, shifting over to something else, let's say unit development guidance for this year being lowered. Could you tell us what you're seeing in the franchise pipeline and how you'd expect the ramp to be in franchise development in 2025? I mean, what I'm getting at basically is, do you see right now the potential to move back into double-digit franchised unit growth territory next year?

Speaker Change: It would be in that low four range.

Speaker Change: Low 4 range, okay?

Matthew Curtis: So shifting over to something else, let's see a unit developed guidance to this year being lowered. Could you tell us what you're seeing in the franchise pipeline and how you'd expect the ramp?

Matthew Curtis: to be in franchise development of 2025. What I'm getting at basically is, do you see right now the potential to move back into double digit of franchise unit growth territory next year?

Robert Wright: Yeah, I'll be brief because I want to be clear, yes, absolutely. What we're seeing, you know, we talked about the 30 shops that we could see in the 2024 pipeline. I was really clear in the last quarter that, you know, you never know how some of these things will move depending on an issue with the water line or whatever may happen, and then there were ten more that we saw that were potential.

Robert Wright: Yeah, I'll be brief because I want to be clear. Yes, absolutely. What we're seeing, you know, we talked about the 30 shops that we could see in the 2024 pipeline. I was really clear on the last quarter that you never know how some of these things moved depending on

Robert Wright: you know, an issue with the water line or whatever may happen. And then there were 10 more that we we saw that were potential.

Robert Wright: Those 10 didn't go away, and there are others beyond those, but I know we've stated our long-term growth algorithm would be a low double-digit CAGR unit growth rate. We do not expect to wait beyond 2025 to get to that number. I think what we can see in our pipeline is that we're looking at 10% growth or better next year. This is just building momentum. That's the other reason I tried to be clear about what we're seeing in Q3.

Robert Wright: Those 10 didn't go away and there are others beyond those but we I know we've stated our long-term growth algorithm would be low double-digit CAGR unit growth rate.

Robert Wright: We do not.

Robert Wright: We do not expect to wait beyond 2025 to get to that number. I think what we can see in our pipeline, we're looking at 10% growth or better next year.

Robert Wright: And you know, this is just building momentum. That's the other reason I tried to be clear with what we're seeing in 2, 3. If we open 4 and 2, 2, we can double that number in 2, 3, you don't have to double it, but you nearly double it again in 2, 4 and that's that picking up of momentum.

Robert Wright: If we open four in Q2, we can double that number in Q3. You don't have to double it, but you nearly double it again in Q4, and that's the picking up of momentum. And the reason we believe in those things is because we can see every layer of the systems that we're providing the support for the franchisees to get there. Yeah, look, the long-term growth of the brand is still something that has us all super excited about the future, and unit growth development is not an exception.

Robert Wright: And the reason we believe in those things is because we can see every layer of the systems that we're providing the support for the franchisees to get there.

Robert Wright: Yes, I looked, the long-term growth of the brand is still something that has us all super excited about the future and the unique growth development is not an exception.

Matthew Curtis: Okay, great. Thanks for clarifying that.

Speaker Change: Okay, great, thanks for clarifying that.

Matthew Curtis: And last one for me, I guess, on the combo meals. I mean, it's good to hear you're getting some traction with the value combos. But the other value ideas you've screened, I think Bob, you mentioned you screened 20 more if I heard that right. Does that imply that you may expand, does that imply that you may expand your value offerings in the second half of the year?

Matthew Curtis: And last one for me, I guess.

Matthew Curtis: on their combo meals. I mean, it's good to hear you're getting some traction with the value combos.

Matthew Curtis: The other value ideas you've screened, I think, Bob, you mentioned you've screened 20 more if I heard that right. Does that imply that you may expand your value offerings in the second half of the year?

Robert Wright: That's exactly what I'm implying, Matt. Thanks for clarifying.

Speaker Change: And it's exactly what I'm applying that. Thanks for clarifying what I want to make clear when we were answering the previous question is that we did not make any success in any of those expanded value offerings into our guidance.

Robert Wright: What I wanted to make clear when we were answering the previous question is that we did not bake any success in any of those expanded value offerings into our guidance because until they've been tested, we're just not comfortable betting on that. So we do have things that we're working on that we believe can set us up to beat our own trajectory this year. But we've really got to get to work and get those things done.

Robert Wright: And, you know, that 799, as much as we like it, we've already screened 20 more everyday value ideas that could be companion ideas. We get a lot of credit from our customers for pick your pair. 799 fits nicely into that type of everyday value because it builds on the menu, it makes sense to our customers who may already order skinning sandwiches or see chips in a drink that they can make a meal deal out of. And then, you know, when it comes to what's going on competitively, something that... that we know from all of our experience on this team.

Robert Wright: because until they've been tested, we're just not comfortable bedding on that. So we do have things that we're working on that we believe can set us up to beat our own.

Robert Wright: Projectory this year, but we've, you know, we've really got to get to work and get those things done. I'm actually pretty excited about some of the things that were in that screening.

Robert Wright: And we screened them, of course, with customers, and the customers were very excited about some of the things that are in there. So yeah, you should expect to see us do some more and do some of it rather quickly, to be honest with you.

Matthew Curtis: Okay, sounds good. Thanks very much.

Matthew Curtis: Okay, sounds good. Thanks very much.

Speaker Change: Thank you very much.

Operator: We'll move next to Jeremy Hamblin and Craig Hallam. Your line is open.

Speaker Change: We'll move next to Jeremy Hamblin with Craig Hallam. Your line is open.

Jeremy Hamblin: Thanks, and congrats on a nice execution and a tough environment. I want to just come back to the same source of sales.

Speaker Change: Thanks and congrats on a nice execution and tough environment. I want to just come back to same-source sales. Sorry, I missed the beginning part of the call.

Steven Cirulis: Sorry, I missed the beginning part of the call, but in terms of just flushing out, can you remind us, you know, how your compares are in Q3, you know, whether or not July 23, I think, might be your toughest comparison, monthly lap of the quarter, but just, you know, how we can think about that and, from here, your expectations for, you know, kind of comp levels to reaccelerate, you know, or what Yeah, sure.

Steven Cirulis: But, in terms of just flushing out, can you remind us, you know, how your compares...

Steven Cirulis: are in Q3, you know, whether or not July 23, I think, might be your toughest comparison monthly lap of the quarter, but just, you know, how we can think about that and in terms of

Speaker Change: You know, kind of thinking about, from here, you know, your expectations for, you know, kind of comp levels to reaccelerate, you know, or what you're looking for in terms of getting to your guidance.

Steven Cirulis: I think, look, last year was a good year for us in terms of comp, but it started to normalize in the back half of the year. So, you're right, we see kind of Q3 as our peak for last year. And so what will be helpful for us is certainly that relaxation a bit.

Steven Cirulis: Yeah, sure. I think, look, last year was a good year for us in terms of comp, but it started to normalize in the back half of the year. So you're right. We see kind of Q3, you know, as our peak.

Steven Cirulis: in last year. And so what will be...

Steven Cirulis: But the way that we start to think about comps, and we mentioned that in our prepared remarks, is on a two-year basis, right? So, if we look at even quarter two, as we mentioned in our prepared remarks, we're at the end of 12-9 on a two-year basis, which, relative to, I think, some of the other things that are going on in the market, it's a pretty strong performance.

Steven Cirulis: helpful for us is certainly that relaxation a bit, but the way that we start to think about compsion and we've mentioned that in our prepared remarks is you know on a two-year basis, right? So if we look at an even quarter or two, I think we mentioned in the prepared remarks we're

Steven Cirulis: on a two-year basis, which, you know, relative to, I think, some of the other things that are going on in the market, it's a

Steven Cirulis: I think one of the other things that is important to note if we look at sort of Q3 and on a two-year basis, if we're kind of in our guidance range, we're still doing over 3% same-store sales comp. And then similarly, in Q4, it's, you know, positive outright if you kind of look at the full year, but on a two-year basis, you're still north of three So, you know, look, the environment's different this year than it was last year, of course, and as Bob discussed, we've got a lot of firepower that we're deploying against the back half of the year, and the comps that we've put into the guidance, just to remind everyone, reflect not a material change in the consumer environment, and, you know, we don't have all the things that we discussed completely tested.

Steven Cirulis: It's a pretty strong performance. I think one of the other things that is important to note, if we look at sort of Q3 and a two-year basis, if we're kind of in our guidance range, we're still doing, you know, over 3% same-store sales comp.

Steven Cirulis: and then similarly in the Q4 it's you know positive.

Steven Cirulis: I'll write if you kind of look at the full year, but onto your basis you're still north of three as well. So the environment's different this year than it was last year of course. And as Bob discussed, we've got a lot of firepower that we're deploying against the back half of the year.

Steven Cirulis: and the cops that we've put into the guidance just to remind everyone reflect.

Steven Cirulis: of not a material change in the consumer environment.

Steven Cirulis: And, you know, we don't have all the things that we discussed completely tested, so there's a lot of potential here in the back half of the year for the comp, which is why

Steven Cirulis: If you look at the look at the range, you know, we've still got

Speaker Change: We've got our sights set on a positive count for the full year.

Speaker Change: Got it, so but July is the toughest monthly lap of Q3?

Speaker Change: I... I believe that's right, yes.

Speaker Change: Okay, and then just moving on in terms of thinking about the, you know, the unit opening, you've got nine shop openings.

Speaker Change: of which I think seven franchise to company. Can you help us think about the progression of that here in Q3 in terms of expectations and then in Q4?

Speaker Change: Yeah, thanks, and you've got that right. We have shared before that we would keep a company development somewhere along the way if it made strategic sense or if it were a special site of some kind. I think you saw we made news with

Speaker Change: the opening in the Pentagon. That would have been a very difficult opening to do through franchising, and we were so excited to get started with the military. I was actually at that grand opening. The shop's performing very, very well.

Steven Cirulis: So there's, there's a lot of potential here in the back half of the year for the comp, which is why, if you look at the range, you know, we've still got our sights set on a positive comp for the full year. So, but July is the toughest monthly lap of Q3. I believe that's right. Okay. And then just moving on in terms of thinking about the, you know, the unit openings, you've got nine shop openings year to date, of which I think seven are franchised to the company. Can you help us think about the progression of that here in Q3 in terms of expectations and then into Q4?

Speaker Change: But going forward, we open 4 in the quarter, we open 3 in Q1, we're anticipating 8 in Q3.

Speaker Change: and the remainder would be in Q4. So it's kind of a steady pattern of acceleration. And we expect all the other ones that we can see in the pipeline in 2025. Obviously, we just keep getting farther and farther ahead of our own pipeline.

Speaker Change: The other qualitative commentary I offered was, our franchisees are on track with their development schedules. That's a major sign of optimism for us in the ability to continue to be on track.

Robert Wright: Yeah, thanks. And you've got that right. We, we have shared before that we would keep a company development somewhere along the way if it made strategic sense or if it was a special site of some kind. I think you saw we made news with the opening in the Pentagon, that that would have been a very difficult opening to do through franchising. And we were so excited to get started with the military.

Robert Wright: and just as importantly, the shops that we're opening are averaging better than anticipated. So that's really important to us, franchisees offer us their own forecast of what they expect to do.

Robert Wright: I was actually at that grand opening, performing very, very well. But going forward, we open four in the quarter. We open three in Q1. We're anticipating eight in Q3, and the remainder will be in Q4. So it's kind of a steady pattern of acceleration, and we expect all the other ones that we can see in the pipeline in 2025. Obviously, we just keep getting farther and farther ahead of our own pipeline.

Robert Wright: And we're seeing our new openings beat their forecast and beat the system average. So, our ability to open new shops that are on time and performing as well as we'd like them to perform, and we expect them to perform, it just bodes really well for the future.

Jeremy Hamblin: Great last one for me on your progress on labor. Really nice execution there in terms of thinking about the sustainability of that here as you progress. And, you know, I think you probably still have some other initiatives that you're working on in that particular category of expense. Just any additional color you might be able to share and think about that on a going forward basis. Sorry, you're breaking up on that question for me. I don't know if Bobby was for you, beginning repeat.

Jeremy Hamblin: Great, last one for me. On your progress on labor, really nice execution there in terms of thinking about...

Jeremy Hamblin: sustainability of that here as you progress and

Jeremy Hamblin: Sorry, you were breaking up on that question for me. I don't know if, Bob, it was for you as well. You can repeat it.

Jeremy Hamblin: Yeah, I heard we're part of it related to labor. Go ahead. Yeah, sorry.

Bobby: Yeah, I heard part of it and related to labor. Go ahead, Jeremy.

Jeremy Hamblin: So I was saying great execution in Q2 on labor. I know you probably have probably some additional initiatives that you're still working on, but wanted to just get a sense for the sustainability of that. You noted that the labor costs were a little bit lower than you expected, but you know where you kind of go from here and the ability to sustain that.

Jeremy Hamblin: Yeah, sorry. So I was saying, great execution in Q2 on labor. I know you have probably some additional initiatives that you're still working on, but wanted to just get a sense for sustainability of that. You noted that the labor costs were a little bit lower than you expected, but

Speaker Change: you know, where you kind of where you go from here and the ability to sustain that.

Steven Cirulis: Steve can tear it down a little bit. Okay, sorry. Go ahead, Steve.

Steven Cirulis: Yeah, sure. Steve can tear it down for you. Listen, we're... Okay. Sorry.

Steven Cirulis: Thank you. Sorry, it was a little choppy on my end, but listen, we're proud of the way that we were able to manage labor in Q2, and a lot of these things are ongoing efforts. We had a 240 basis points improvement in labor versus last year, a lot of that driven by efficiency work from our operations team and our COO. Our hours-based labor guide, we continue to find new ways to wring efficiency out of that.

Steven Cirulis: No, thank you for that. Sorry, it was a little choppy on my end, but listen, we're proud of the way that we were able to manage.

Steven Cirulis: Labor in in Q2 and a lot of these things are ongoing efforts, you know, we had a 240 basis points improvement in labor versus last year.

Steven Cirulis: A lot of that driven by efficiency work.

Steven Cirulis: from our Ops team and our COO, our hours-based labor guide. We continue to find new ways to ring efficiencies out of that.

Steven Cirulis: We also optimized some of the overtime spend that we saw. We also added some new effects from trimming and optimizing some of our hours of operation. We were having inefficiencies in our labor. That was well over half of the benefit that we saw in the quarter. We had some, you know, because we had slower sales; obviously, we had less of a bonus accrual there as well.

Steven Cirulis: We also optimized some of the overtime spend that we saw, we also added.

Steven Cirulis: and some new effect from trimming and optimizing some of our hours of operation where we're having inefficiencies.

Steven Cirulis: in our labor. That was...

Steven Cirulis: That was well over half of the benefit.

Steven Cirulis: that we saw in the quarter. We had some, you know, because it's lower sales, obviously we had less of a bonus accrual, there as well. So those things will continue to pay dividends into Q3, but we'll also even get better at it. I think we've had several quarters in a row where we said, hey, I'll always base labor guy, we continue to get efficiency out of that. So we expect to do that.

Steven Cirulis: So those things will continue to pay dividends into Q3, but we'll also get better at them. I think we've had several quarters in a row where we said, hey, our hours-based labor guide, we continue to get efficiency out of that. So we expect to do that as well. And, you know, when we brought in Pat Walsh as our chief human resources officer last year, he created a lot of programs at the field level to help us optimize things like training and inefficiencies in hiring and things that also give us just a benefit overall on the labor side. So those are additional things that are going to play into our favor throughout the year. So it is not a one-time benefit. We don't expect to continue expanding and working harder to continue.

Steven Cirulis: as well and you know we've

Steven Cirulis: When we brought on Pat Walsh as our Chief Human Resources Officer last year, he has

Steven Cirulis: created a lot of programs at the field level to help us, you know, optimize things like training and inefficiencies in hiring and things that also give us

Steven Cirulis: just a benefit overall on the labor side. So those are additional things that are going to play into our favor throughout the year. So it is not a one-time benefit. We don't expect on expanding and working harder to continue to get labor optimization.

Jeremy Hamblin: Great, thanks for taking the question. Jeremy, thank you.

Jeremy Hamblin: Great, thanks for taking the question. I'd love to.

Jeremy Hamblin: The only thing I would add to that, because as an operator at heart where I grew up, you want to keep watching the customer experience when you're managing labor. The third rail, of course, is to start to take it out of the experience itself, and that's why we added in our prepared remarks speed, taste, friendliness, overall satisfaction, overall satisfaction, both with digital and with in-shop orders, all improved. And so that's really the best combination.

Jeremy Hamblin: Jeremy, thank you. The only thing I would add to that, because it's, you know, as an operator at heart where I grew up, is you want to keep watching the customer experience when you're managing labor.

Jeremy Hamblin: The third rail of course is to start to take it out of the experience itself and that's why we added in our prepared remarks to speed, taste, friendliness, overall satisfaction, overall satisfaction, both with digital and with in-shop orders, all improving.

Jeremy Hamblin: We're able to be more efficient. There's always a system's layer, it's kind of boring, sort of look at wage management and you know, keep and turn over down and all those things that give us that stability. But yeah, I think, you know, but for a little bit of that bonus tailwind, we'd love to start right back at those checks again. That still gives us a lot of leverage just with the brand name.

Jeremy Hamblin: And so that's really the best combination. We're able to be more efficient. And there's always a systems layer gets kind of boring. Start looking at wage management and, you know, keeping turnover down and all of those things that give us that stability. But yeah, I think, you know, but for a little bit of that bonus tailwind, we'd love to start writing those checks again.

Jeremy Hamblin: That still gives us a lot of leverage with the brand now.

Jeremy Hamblin: Got it. Thanks. Good luck for the rest of the year.

Jeremy Hamblin: Got it. Thanks. Good luck the rest of the year.

Speaker Change: Thank you. Thanks.

Operator: 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 Mr. Bob Wright for his closing remarks.

Speaker Change: 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 Mr. Bob Wright for closing remarks.

Robert Wright: Thank you, operator, and thank you all again for your time this evening. We look forward to talking to you again soon. I hope you all have a great night.

Robert Wright: Thank you, operator, and thank you all again for your time this evening. We look forward to talking to you again soon. I hope you all have a great night.

Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.

Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.

Robert Wright: The other, you know, qualitative commentary I offered was that our franchisees are on track with their development schedules. That's a major sign of optimism for us about the ability to continue to be on track. And just as importantly, the shops that we're opening are averaging better than anticipated, so that's really important to us. Franchisees offer us their own forecast of what they expect to do, and we're seeing our new openings beat their forecast and beat the system average.

Robert Wright: So our ability to open new shops that are on time and performing as well as we'd like them to perform, and we expect them to do so, it just goes really well for the future. Great. Last one for

Robert Wright: I'm actually pretty excited about some of the things that we're screening in that screening. And we screen them, of course, with customers, and the customers were very excited about some of the things that are in there. So yeah, you should expect to see us do some more and do some other things quickly, to be honest with you.

Steven Cirulis: Of course, our 799 combo that features a skinny, you know, plays a part in some of that mixed shift as well as some of the discounting, right, that we did in the quarter. But we're proud of the fact that even in this environment, we were able to put forth a sense of a sales game when a lot of folks are struggling out there.