Q1 2025 Potbelly Corp Earnings Call
Speaker Change: Good afternoon, everyone and welcome to Potbelly Corporation's first quarter 2025 earnings conference call.
Speaker Change: Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the prepared remarks.
Bob Wright: On today's call, we have Bob Wright, President and Chief Executive Officer, Steven Cirulis, Senior Vice President and Chief Financial Officer, and Adiya Dixon, Senior Vice President, Chief Legal Officer and Secretary of Potbelly Corporation.
Bob Wright: At this time, I'll turn the call over to Adiya Dixon. Please go ahead.
Speaker Change: Good afternoon, everyone and welcome to our first quarter 2025 earnings call. By now, everyone should have access to our earnings release and accompanying investor presentations. If not, they can be found in the investor section of our website.
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 2025 or any other future periods, should be considered forward-looking statements within the meeting of the Private Security's Reform Act of 1995.
Speaker Change: These forward-looking statements are not guarantees a future performance, nor should they be relied upon as representing management's views as of any subsequent date.
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 detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information that we'll be given today can be found under the risk factors heading in our filings with the Securities and Exchange Commission, which are available at SEC.gov.
Speaker Change: During the call, there will also be a discussion of some items that do not conform to US generally excepted accounting principles or gap.
Speaker Change: Reconciliation of these non-GAAP measures to their 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.
Speaker Change: Thank you Adiya, good afternoon, and thank you for joining our call today. I'm excited to outline a strong start to 2025 here at Potbelly. Our finish to the first quarter continued to showcase Potbelly as the growth company that we've become.
Speaker Change: We delivered system-wide sales growth, positive same store sales, growth in our franchising efforts, as well as another quarter of strong profitability.
Speaker Change: Before we dive deeper into the results, I'd like to personally thank all of our Poppilly team members from our frontline associates.
Speaker Change: To our support center employees as well as our franchisees and their teams for making all of this possible. The combination of our year's long consistent strategy and the team's tenacious focus on execution and success is at the heart of our growth.
Speaker Change: They're the backbone that make Potbelly the most love sandwich brand in every neighborhood.
Speaker Change: Like I said, I'm very pleased with how we close the quarter, as the negative impacts of January and February weather abated, the underlying demand of the Potbelly brand was on full display.
Speaker Change: We delivered same-store sales growth of 0.9% for the full quarter, well ahead of our expectations with a March cop growth exemplifying what we know this brand is capable of.
Speaker Change: In addition, through our team's discipline approach to managing both shop-level and corporate costs, we were able to drive year over year shop-level margin expansion to 13.7%.
Speaker Change: and posted a healthy corporate profitability with adjusted EBITDA of $5.5 million, again well above the high end of our guidance.
Speaker Change: Our first quarter results are a testament to the underlying strength and trends of our business, including consumer demand for potbelly.
Speaker Change: We're taking the actions necessary to drive accelerated growth now and into the future. First, driving comp sales growth through menu innovation and investments in our customer facing digital assets, as well as data and analytics.
Speaker Change: 2. Growing and modernizing our shop footprint particularly through accelerated unit openings by our franchisees. And lastly, exercising prudent cost controls to ensure that we achieve balanced growth while also pushing incremental flow through to our corporate earnings.
Speaker Change: Let's start with menu innovation. On our last call we talked about more flavor offerings with the introduction of two new signature sandwiches as well as two new proprietary signature sauces. As you can see from our first quarter performance, our customers responded positively.
Speaker Change: To keep the excitement going, in mid-April, we launched another exciting addition to our iconic core menu of sandwiches with the all-new prime rib steak sandwich. Our first ever steak sandwich added to the permanent menu.
Speaker Change: Our customers have been asking us for craveable steak sandwich for a while, and we believe we have delivered.
Speaker Change: We loaded the sandwich with high quality prime rib and the perfect complementary ingredients including melted Swiss cheese,
Speaker Change: It's a delicious sandwich, and our customer reception has been very encouraging.
Speaker Change: To complement our legendary sandwich lineup, we also introduced two new items to our menu earlier this year with the all-new Chili Mac, which brings together our famed chili and our signature mac and cheese and the banana pudding shake. We believe these innovations expand our appeal to an even broader consumer base.
Speaker Change: The innovations you've seen over the past six months are just the early outputs of our stage gate development process, and I'm excited to bring this level of focus to our menu, including some potential future items that are currently in test.
Speaker Change: Our efforts in menu innovation are consistent with our three-part value delivery. The intrinsic value of our poor menu is all the better with these exciting new menu items.
Speaker Change: We also continue to support our everyday value layers with picture pair 799 skinny combos and meal deals, and we continue to use our digital channels as our primary method to drive promotional value, especially with our most loyal customers. Thank you very much.
Speaker Change: Our balance use of these three layers of value help us meet customers needs in all the ways they use potbelly [inaudible]
Speaker Change: Speaking of digital, I'm once again very pleased with our digital efforts this quarter.
Speaker Change: Our digital advertising, consumer facing digital assets, and our Potbelly Perks loyalty program all work hand in hand with our menu innovation to derive top line growth. I'm very pleased to report that the combination of these digital programs continue to perform well.
Speaker Change: Our digital business represented over 42% of our total shop sales during the first quarter, an increase of approximately 200 basis points versus last year.
Speaker Change: As we look ahead, we're making incremental investments in two main areas of digital, consumer facing digital assets and data and analytics.
Speaker Change: Ultimately, we believe these investments will not only make us more attractive in this competitive space but also more efficient and effective in our digital marketing efforts.
Speaker Change: I want to continue to emphasize that operational excellence remains critical to the success of Potbelly, and it couldn't be prouder to see this unfold display as our operations team rally to deliver the strong end to the quarter.
Speaker Change: We see year-over-year improvements in management and associate staffing and turnover, yielding improved overall customer experience scores, as well as specific measures for speed, accuracy, food quality and friendliness.
Speaker Change: Our operations and people teams take a continuous improvement approach not only to execution, but to the systems that support our growing franchise organization.
Speaker Change: Our mission to delight customers with great food and good vibes is rooted in our ability to scale our unique potbelly service. We're confident that the quality and experience of our operations will prove a long-lasting competitive advantage of who we strive to be the most loved sandwich brand in every neighborhood.
Speaker Change: Now, let's turn our attention to our Franchise Growth Acceleration Initiative. During the first quarter we continue to make significant progress across all phases of our unit growth funnel.
Speaker Change: If you recall, we announced on our last call that we would open at least four new restaurants during the first quarter, and I'm pleased to report that we delivered on that promise.
Speaker Change: These new shops are in two different states and were developed by three different franchise partners along with one company operated shop.
Speaker Change: Demonstrating our broad-based development efforts. More importantly, we continue to have a clear line of sight to open at least 38 new shops in 2025. For the second quarter, we expect to open at least six new shops.
Speaker Change: In addition, our franchise team continues to make great progress in filling our development pipeline as we build towards our goal of 2,000 units in the US.
Speaker Change: After adding 115 new shop commitments in 2024, we're thrilled to add 40 new shop commitments during the first quarter, bringing our total open and committed shop count to 766.
Speaker Change: Eclipsing 40 new shop commitments is the best Q1 we've ever had, showcasing our ability to attract high-quality franchisees interested in developing potbelly shops.
Speaker Change: Again, Potbelly is a franchise-focused company and I'm proud to be working alongside these great franchise partners who are as passionate about Potbelly as we are.
Speaker Change: We now have 104 franchise shops operating around the country. In addition, over 70% of our franchisees are developing new shops across 19 different states.
Speaker Change: Acceleration in new shop openings, developing franchisees, new franchisees signing new shop development area agreements, and existing franchisees adding to their development commitments only further strengthens our expectations of franchise growth acceleration in 2025 and beyond.
Speaker Change: We also believe we have the opportunity to drive compelling returns through limited investment with select company market densification and smart investments in our existing shops with targeted remodels.
Speaker Change: Specifically regarding remodels, we carry some older assets in our shop portfolio and have witnessed refreshing initiatives to deliver strong ROI at other brands.
Speaker Change: We believe we have constructed sensible test parameters and are encouraged by early progress. Of course, we will evaluate returns among tiers of remodel investment and always consider such investments versus other potential uses of capital.
Speaker Change: In summary, our performance to close the quarter truly demonstrates what the Potbelly business model is capable of when our five pillar strategy is firing on all cylinders. And we intend to utilize this momentum to take potbelly to the next level of growth in 2025 and beyond.
Speaker Change: With our focus on driving top line growth through many innovation and investment in digital, accelerating franchise unit development and smart cost management, we believe Potbelly is primed to capitalize on the immense opportunity ahead of us.
Steve: With that, I'll now turn the call over to Steve to detail our financial performance for the quarter.
Thank you, Bob, and good afternoon, everyone.
Steve: Q1, 2025 showed improvement in shop level margin continued strong performance of our franchise shops.
Steve: And ongoing disciplined management of G&A.
Steve: Diving in further company operated shop revenue increased approximately one 3% year over year to $109.0 million.
Steve: While franchise revenue increased approximately 38% year over year to $4 $7 million in the first quarter.
Steve: This increase was driven by a 26% increase in franchise units.
Speaker Change: Average weekly sales were approximately $24550 and as Bob mentioned company operated same store sales were up 9% in the quarter above the high end of our expectations.
Speaker Change: The same store sales growth was attributable to an increase in average check up one 1%.
Speaker Change: Partially offset by a 0.2% decrease in transactions.
Speaker Change: A higher average check included an approximate increase of two 8% and gross price.
Speaker Change: Including an effective <unk>, 6% price increase during the quarter.
Speaker Change: In addition, the shift of Easter to the second quarter.
Speaker Change: Drove a 40 basis point benefit to the first quarter comp.
Speaker Change: Turning to expenses food beverage and packaging costs were 26, 1% of shop sales, a 110 basis point improvement versus the prior year period.
Speaker Change: This was driven primarily by slight commodity deflation of 40 basis points in the quarter.
Speaker Change: Labor expenses were 34% of sales.
Speaker Change: 40 basis point increase versus the prior year period.
Speaker Change: This was primarily due to lapping the previously mentioned settlement payment benefit from Q1 last year.
Speaker Change: Occupancy was 11.0% of sales a 10 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 continue to outperform prior year.
Speaker Change: Other operating expenses were 18, 8% of sales a 40 basis point increase versus the prior year period due to lapping. The previously mentioned Q1 2020 for settlement payment benefit.
Speaker Change: Shop level margins were 13, 7% an increase of 20 basis points versus last year.
Speaker Change: General and administrative expenses, which are best viewed as a percentage of system wide sales as they are used to support every one of our shops.
Speaker Change: Were eight 8% an increase of 20 basis points year over year, driven by investments to build and scale our team in support of development.
Speaker Change: As well as increased bonus accrual aligned with our year to date performance.
Speaker Change: We.
Speaker Change: Courted a slight net loss of $62000 for the quarter.
Speaker Change: An improvement of $2 $7 million over the prior year.
Speaker Change: As the prior year was negatively impacted by the write off of debt issuance costs from our refinancing.
Speaker Change: Adjusted net income was $43000, a $186000 decrease versus the prior year period.
Speaker Change: We believe the strength of our balance sheet debt structure.
Speaker Change: And the liquidity under our credit facility provide us the flexibility to fund our growth.
Speaker Change: Eric initiatives participate in our share repurchase program and align with our broader capital allocation strategy.
Speaker Change: During the first quarter.
Speaker Change: We're just approximately 117000 shares of our common stock.
Speaker Change: For a total of approximately $1 $1 million.
Speaker Change: We anticipate repurchases throughout the three year program approved in 2024.
Speaker Change: Before I turn to guidance I'd like to address the topic that has come up more frequently due to the recent economic policy changes the impact of tariffs and the possibility of a more challenged consumer environment.
Speaker Change: As you know this is a very fluid situation, we're keeping close tabs on the news of the day as we estimate the impact to our supply chain and consumer demand.
Speaker Change: While we may see some modest pressure on our build costs. If the current tariffs remain in place we're no less confident in our long term growth plan and believe our unit level economic model remains very compelling.
Speaker Change: Regarding the consumer in our customer base, specifically as we said last quarter during non weather weeks, we've seen solid consumer demand for potbelly.
Speaker Change: While we recognize there's always uncertainty we believe our strategic plan continues to create a compelling option for consumers in a competitive marketplace.
Speaker Change: Finally, I would now like to provide you with the following guidance items for.
Speaker Change: For the full year 2025, we.
Speaker Change: We are reiterating our guidance and anticipate the following.
Speaker Change: Same store sales growth of one 5% to two 5%.
Speaker Change: Unit growth of at least 38 openings.
Speaker Change: Adjusted EBITDA of approximately $33 million to $34 million.
Speaker Change: Incorporating our quarter to date results for the second quarter of 2025, we.
Speaker Change: We anticipate the following.
Speaker Change: Same store sales growth of one 5% to two 5%, which includes approximately 40 basis points of pressure from the Easter holiday shift.
Speaker Change: Unit growth of at least six units.
Speaker Change: And adjusted EBITDA of 8.25 million to $9 $75 million.
Bob Wright: With that I'll turn the call back over to Bob.
Bob Wright: Thanks, so much Steve.
Following the extensive work we've done over the past four years to rejuvenate this beloved brand I'm proud to be able to call Potbelly a growth company again.
Bob Wright: The litany of comp growth drivers at our disposal gives us great confidence in the future more specifically, we have developed an industry, leading digital platform, including our rapidly expanding potbelly perks loyalty program in the past year, we have reintroduced menu development to the brand and have seen great success, including the recent prime rib sandwich.
Bob Wright: And we continue to enhance our catering channel with revamped bundles and packaging as it continues as a growth driver for our business.
Bob Wright: And this doesn't include any potential benefit from the other initiatives. We are currently testing.
Bob Wright: All these combined give us great confidence in our ability to continue to drive comp growth over the long term.
Bob Wright: On new shop growth, we have substantially improved our shop level margins in deliver 2024 shop level margins of over 15%.
Bob Wright: We reengineered, our prototypical design last year to create operating efficiency better service, our digital business, while also reducing the required lease space needed to build new potbelly shops and.
Bob Wright: We built a world class franchise sales team that has helped us grow our future committed sharp pipeline to over 300 shops.
Bob Wright: Combined with a clear line of sight into delivering at least 38, new shops in 2025, and an approved shop pipeline for 2020 six that is stronger than the 2025 pipeline at this point last year, we continue to be confident in our ability to deliver upon our 2000 shop long term potential and delivered double digit.
Bob Wright: Annual new unit growth.
Bob Wright: We expect the culmination of these efforts across comp growth and unit growth along with prudent management of our corporate cost have the potential to deliver outsized EBITDA growth for many years to come.
Bob Wright: While we do not believe we're currently getting credit for being a growth company. Our focus continues to be on delivering results that leave no doubt that potbelly is a compelling long term growth story.
Bob Wright: With that we're happy to answer any questions. Operator, please open the line for questions.
Bob Wright: We will now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad. If you were using a speaker phone. Please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question is from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Jeremy Hamblin: Thanks, and congratulations on the strong results I wanted to start with same store sales for a second and just as we can get maybe a little bit color of what you think might be driving the outsized performance. So youre lapping tougher compares here in Q2, you have a negative.
Jeremy Hamblin: You know drag from.
Jeremy Hamblin: The Easter shift and yet you're expecting compares.
Jeremy Hamblin: To be quite.
Jeremy Hamblin: Quite a bit better than than Q1, and that's really you know kind of the opposite of what we're seeing in the industry, where many other concepts are seeing sales falter.
Jeremy Hamblin: I wanted to get an understanding of what you think might be driving.
Jeremy Hamblin: Driving that is it the new menu items is that the primary driver.
Jeremy Hamblin: Is it.
Jeremy Hamblin: A shift in your kind of digital marketing or is it kind of having better value offering now than you did a year ago.
Unnamed Respondent: Yes. Thanks for the question, Jeremy we were pleased as well and you're right to peg, our Q2 guidance, even with the pressure that Easter brings in in April versus the benefit that it gave it in Q1.
Unnamed Respondent: And I'll tell you, that's where our comps are in line with that quarterly guidance. So we feel very good about kind of that momentum that we started in the <unk> in the first quarter and how we're continuing to see that.
Unnamed Respondent: The important thing is the question part of your question around drivers. So you did hit on some of them, we definitely believe that.
The menu innovation that we brought forth last year and then you saw.
Unnamed Respondent: Let's bring some more here with this primary steak sandwich, but.
Unnamed Respondent: You know, even the things that maybe aren't sandwiches, but you'll see some innovation with us with our Chile promotion during the first quarter are our butter Brickle Cookie was a was a big success, we added the banana pudding shaped to the permanent menu and Chilean back to the permanent menu as well and those have been really well received.
Unnamed Respondent: And supported by our customers.
Unnamed Respondent: But it's kind of a 123 punch to so yes, the value efforts that we put in last year. We think those continued to deliver and as I mentioned in our prepared remarks there.
Unnamed Respondent: Have a three pronged value approach that we just keep pushing on the intrinsic value of the menu itself.
Unnamed Respondent: Where do you see things like our permanent menu items that are just great sandwiches, they bring value because what you get for what you pay really hits the mark with our customers then there's the everyday value with those 799 skinny combos remember, there's only three sandwiches you get there, but it's starting to be understood that something customers can count on.
Unnamed Respondent: Pick your pair is still a significant part of our everyday value and then of course, the promotional value through our promotional activity.
Unnamed Respondent: Are a lot of people watching potbelly see the big things that we do across the brand. So if we do a bogo during the quarter. It you move that promotional code you can get that regardless of how you access the brand.
Unnamed Respondent: But I do believe we're getting smarter and more effective and efficient at some of the other promotional activity that you don't see unless you're in our parks environment or the digital environment and so we're very pleased with how that continues it's why we talk about continuing the investment in those consumer facing digital channels too because it unlocks our.
Unnamed Respondent: <unk> to be better at that and continue to drive that traffic.
Unnamed Respondent: And overall I think these things are coming together to make a big difference we even.
Unnamed Respondent: Even our R. Meatball madness promotion for the second year. This year during March Madness, we have meat ball madness and that reinforces things that are.
Unnamed Respondent: And are becoming stronger for us like our underground menu.
Unnamed Respondent: As I mentioned in our remarks, we we don't tend to promise a lot. We just we try to keep delivering.
Unnamed Respondent: And that same stage gate development funnel that has brought us some of the products that we have rolled out we were still working that and we've got some other things and tests that we will see how it goes and test, but we believe we have continued ability to push on a number of those same fronts. As we go through the remainder of this quarter and into the rest of the year.
Unnamed Respondent: Yeah.
Speaker Change: Great. Thanks for the color and then I wanted to switch gears and talk about your franchising initiatives. So as you said sold 40, new locations in the quarter second best quarter I think ever.
Speaker Change: And you're doing it in a really challenging macro backdrop with the tremendous amount of uncertainty. So wanted to see if you could provide a little bit of color. There I think kind of related to this you did sell looked like four units to re franchise for units.
Speaker Change: But just wanted to get a sense for as you have these conversations with potential franchisees.
Speaker Change: You did improved unit level economics, I mean, given the uncertainty in the macro I would I'm surprised by just how strong the franchisee was in the quarter any color.
Speaker Change: Yes.
Speaker Change: No look.
Speaker Change: Core of attracting franchisees is having a great brand.
Speaker Change: They do they do look very very carefully at the other franchisees that have already joined the system certainly the management team and the field teams that we deploy and then of course unit level economics, both the Opex and the.
Speaker Change: On the investment economics that Theyre looking at and they they continue to like what they see they also they also are a favor of the positive in favor of the positive trends that we continue to show. So these these year over year quarter on quarter margin expansion.
Speaker Change: Deliveries that we're able to provide.
Speaker Change: And we always talk about our company shops, because it's such a big part of the portfolio and they are as they talk to and discuss the potential of joining the system with existing franchisees they get even more color.
Speaker Change: The fact that those franchisees are enjoying that same expansion and in many cases off of a an expense base that's lower than ours, we've talked very publicly about the burden that we carry an occupancy cost because of the fleet of shops that we have so many of them in CBD is expensive markets expensive rents and traditionally much larger.
Speaker Change: Potbellies then we're building today.
Speaker Change: So they're doing their homework and they start checking those boxes across all of those things and you add to that the last piece is that this is still a brand.
Speaker Change: Got those volumes those margins and the investment economics that that still has white space that they can sign up for for exclusive development.
Speaker Change: I mentioned last year with 115, we're proud of that number pleased but not satisfied as kind of the tone that we shared and we continued to share that we saw the pipeline of interest.
Speaker Change: Seeding the deals that were that were sold during 2024, and we expect 2025 to be a good year, we still see that pipeline of interest strengthening and it's rooted in those.
Speaker Change: Those core decision criteria that franchisees spring.
Speaker Change: Thanks for all the color I will hop out of the queue.
Jeremy Hamblin: Thanks, Jeremy.
Speaker Change: The next question is from Mark Smith with Lake Street Capital markets. Please go ahead.
Mark Smith: Hey, guys.
Speaker Change: For Mark Smith.
Mark Smith: Hi, Alex.
Mark Smith: Alex Hey, guys.
Speaker Change: First one for me you know you've highlighted ongoing growth in the digital ordering and loyalty penetration could you just update us on trends in the Potbelly App orders versus third party delivery and whether you're seeing continued migration toward your own channels any new initiatives planned to.
Mark Smith: Further drive that mix in 2025.
Speaker Change: Yes.
Speaker Change: First of all as we said, we we were better than 42% digital total and in our quarter, which is a which is a really strong quarter for us and we're pleased with another 200 basis point improvement over last year.
Speaker Change: We didn't breakdown the channels in first party versus third party and certainly even the digital orders that are that are order for pickup in catering, but all of those things are driving that growth year over year.
Speaker Change: I think the important part of your question is one of the things. We're excited about we started talking about it at the end of the year last year that the two primary categories for investment for us are in technology and in our facilities because the face of this brand has delivered in large part by the shops themselves. So on the technology side.
Speaker Change: We said that we are making another significant investment this year in our consumer facing digital assets. So we're not trying to be cryptic with that language, but that is the app. That's the web and it's the perks loyalty program. Our current perks loyalty program just eclipsed the year.
Speaker Change: Since we put out the enhancements where you could you could trade in your coins for various menu items that used to only be a sandwich and we continue to see that working really well for us but.
Speaker Change: The interface itself that we're making the investments and this year, it's going to make that even easier and even better and then the underpinnings of the data and analytics platform work that we're doing means that we can we can be smarter about how we access all of that data and we can be even more discrete with the way, we communicate with a smaller and smaller.
Speaker Change: Groups of customers that it really behaves very differently.
Speaker Change: We absolutely believe that the broad based digital advertising and social media work that we do is the best way to bring people to the digital environment, but then once we get them in.
Speaker Change: All of this work that we're doing on the engines the core and the Martech stack to support it means that we can bring them in and move them up and through that frequency funnel.
Speaker Change: Even better in the future. We believe then than we are doing today.
Speaker Change: That's great and then last one for me just switching back over to the franchisee incentives could you provide some more color on the uptake of the 50 50 incentive program.
Speaker Change: Since its rollout specifically how much interest have you seen from both new and existing franchisees and then are you observing a meaningful acceleration there.
Speaker Change: And in terms of timeline and then additionally are there any particular markets or regions, where this initiative is gaining the most traction.
Speaker Change: First of all it's early days for the large area developer agreement and.
Speaker Change: Their version of that $50 50 incentive but we're into you know we've now had the original 50 50 incentive for a couple of years.
Speaker Change: It is very meaningful to the franchisees and they love the idea that if they can meet or exceed their development schedule that they can benefit a little bit from that and just a reminder for everybody.
Speaker Change: <unk> 50, 50, as you can get half off of your Iff's for opening on time or early and you can get half off your royalties for the weeks that you do open early there's no downside for us because they are ahead of schedule, even 3% for those weeks is still money, we hadn't considered as part of the development agreement and.
Speaker Change: And 3% for them can be meaningful.
Speaker Change: <unk> said early days on the large area developer version of that that franchise agreement. The thing that we baked into their development agreement if they sign up for 15 units or more.
Speaker Change: We bake that commitment of that incentives through the entirety of the franchise agreement that development agreement.
Speaker Change: It's valuable because the larger more financially savvy franchisees that are going to sign up for significant investment to grow out of market.
Speaker Change: They're gonna look forward deeper into their development schedule and say, okay. If I can get started now I may not get much off from my first one or two or even three sites, but by the time I get to sites number nine or 12 or 13 14 15, if they can get ahead of schedule by a year or two or some have even told us. They are looking at they think they can beat some of those.
Speaker Change: Later shops by two or three years.
Speaker Change: They are they are factoring in that potential benefit into their capital allocation modeling and and yes, it's getting their attention.
Speaker Change: How that's how these these true multi unit developers are thinking on a on a multi year timeline and they they think they can get way ahead. So.
Speaker Change: It's the type of thing that should build.
Speaker Change: And I would tell you that as we've seen some of those larger more financially savvy franchisees.
Speaker Change: Show interest in the company.
Speaker Change: This is a big deal, especially because it's us recognizing how they think about the business and how they can gain some benefit down the road.
Speaker Change: I think it'll help us.
Speaker Change: Oh, that's excellent thanks for taking my question guys.
Speaker Change: Youre welcome.
Speaker Change: The next question is from Matt Curtis with William Blair. Please go ahead.
Matt Curtis: Hi, good afternoon.
Matt Curtis: I guess I was a little surprised to see your commodities be slightly deflationary in the first quarter given that I think your guidance calls for 2% to 3% inflation for the full year. So maybe you could just update us on any changes to your inflationary expectations. This year for both commodities and labor.
Matt Curtis: Hi, Thanks, Matt Yeah, it's it's.
Speaker Change: One of those situations, where we're all hearing the word tariff and there's a lot of uncertainty that's out there I think for a business like ours, we have a few advantages as it relates to tariffs number one.
Speaker Change: The tariffs don't seem to be as directed at that food products right.
Speaker Change: And we have I think they also have the benefit of having a diverse food basket like we've discussed in the past.
Speaker Change: Yeah.
Speaker Change: And are holding to our overall inflation rate for the year.
Speaker Change: Food and paper, because we feel like.
Speaker Change: With the benefit that we got in Q1 slightly deflationary, we will see some we will see some inflation come back natural inflation come back in as it relates to the tariffs.
Speaker Change: Watch it on a daily basis, we collaborate with our distributors and of course setting in place the potential to do things like others might.
Speaker Change: Try to mitigate things should they should they come.
Speaker Change: Aggressively at us.
Speaker Change: We get again don't have a lot of exposure to those things that are going to be.
Speaker Change: Potentially tariffs hard.
Speaker Change: On the food side.
Speaker Change: We feel like the back half is going to be.
Speaker Change: A little bit different than the front half, but nothing at least that we can foresee given the current tariff climate.
Speaker Change: It's really going to take us off our full year Mark.
Speaker Change: So that that's important for you as you think about it and we always have I think some contingencies in place should things should things move on us as it relates to labor inflation, that's moving at about the same.
Speaker Change: At about the same rate that we anticipated when we last spoke a quarter ago, which is kind of in that kind of low 2% range.
Speaker Change: So that's also good for us to see as we kind of live through that tough inflationary period on labor.
Speaker Change: A couple of years ago.
Speaker Change: Okay understood and then Relatedly.
Speaker Change: Could you maybe update us on what's your pricing expectations are for the rest of the year ideally by quarter.
Speaker Change: Yes of course.
Speaker Change: We always maintain what we've discussed before Matt around kind of the philosophy that we're going to try to keep pace with.
Speaker Change: Input cost movements, and we're going to we're going to do.
Speaker Change: Keep our pricing increases kind of related to that and thats reflected in the way we've talked about price for the year. So in the in the first quarter. Our total gross price was up about.
Speaker Change: Two 8% and that was mostly carry over from the prior year.
Speaker Change: We had about two 3% lap from last year. So we had a price increase in <unk>, which was a modest one about one 2% and thats, what we will keep for the rest of the year is something in kind of the mid ones.
Speaker Change: We have another price increase kind of summer time that'll be again sort of in that mid mid ones and another one in the fall.
So the full the full year gross will probably be just north of 3%.
Speaker Change: Which again keeps us pretty close to those inflation numbers that I described and of course, we reserve the right to.
Speaker Change: To change that should we need to given the environment and what might evolve. If you remember last year, we issued our third price increase which happens in the fall.
Speaker Change: As in the consumer was.
Speaker Change: Telling us there is some challenging components to the way that they're managing their visits and so we supported them by not raising price in that last and that last go around but this year, where we are.
Speaker Change: Moving fast to that plan that we outlined at the beginning of the year with with no major changes.
Speaker Change: Unless we do see things like I said on the tariff front or on the on the consumer front.
Speaker Change: Okay got it and then I can.
Speaker Change: Yes.
Last one for me.
Speaker Change: You guys didn't directly talk about PDK.
Speaker Change: Today, but.
Speaker Change: I think you're expanding.
Speaker Change: Portfolio.
Speaker Change: Kitchens.
Speaker Change: The system wide by the end of the year.
Speaker Change: Is that still on track and basically how much improvement have you noticed a PDF locations.
Speaker Change: TDK locations on things like throughput and labor costs so far.
Speaker Change: Sure Yes.
Speaker Change: Yes.
Speaker Change: Go ahead Bob.
Bob Wright: Yes, I was just going to say on the on the on the rollout first of all I think we did mentioned this last quarter. So not much of an update this quarter to that plan, but PD CX is what we're calling the new the newest version of PDK because it comes with a new Pos.
Bob Wright: So we are we're not just kind of finished rolling out PDK, but we're changing out the Pos and installing that kitchen system that gives us that digital advantage and there are some additional advantages with the new.
Bob Wright: Combination of the toast Pos and.
Bob Wright: Q S. Our automation back office, so both of those products, where NCR in the past.
And Thats nothing against NCR, It's just that the future move that we're doing we've got that slated.
Matt Curtis: Matt to be half of the shops have the company shops.
Matt Curtis: This year half of the company shops can be retrofitted next year franchisees would be slightly behind that because they've got some newer shops in place and there's no need to rush the the replacement of those.
Matt Curtis: And then predominantly all of our new shops, this year will rollout with that new system as well.
Matt Curtis: So to the benefits.
Matt Curtis: And that's in our capital plan too by the way, Steve can talk about that too if you'd like but.
Matt Curtis: To the benefits of it we're still seeing when we roll it out we're getting about five hours of labor savings almost instantly because of how we configure the labor guide to take advantage of the efficiency on the backline.
Matt Curtis: This digital efficiency really that streamline the back line and so we'll have we'll have that roughly 100 locations. We ended the year with plus 175 gets converted and then the rest of the system will be converted next year.
Matt Curtis: While on throughput.
Matt Curtis: It's early but and we didn't we didn't bake any of that upside into our plan. This year, but we are looking at the advantages of the handhelds.
Matt Curtis: The new version of that solution.
Matt Curtis: It could.
Matt Curtis: It could be very beneficial to the inside flow and you know obviously, our ops team is working to extract as much of that as possible.
Matt Curtis: We've always talked about having this device we call them a lot.
Matt Curtis: The PTC ex comes with <unk> as well, but they have more functionality and there are more flexible for us to do some more things with the service line. So more to come on that but we are we are excited to look forward to the end of next year and having a completely new in shop digital system.
Matt Curtis: Okay got it.
Speaker Change: I guess, Bob since you opened the door all I'll step through what do you anticipate for Capex This year.
Matt Curtis: Yeah.
Bob Wright: Sure. Thanks, Matt I think I'll I'll jump in on it in terms of how we're thinking about the overall.
Matt Curtis: The overall envelope.
Bob Wright: Pretty close to.
Bob Wright: In a position of around $30 million for our Capex budget this year.
Bob Wright: We think about it in terms of multiple multiple areas right one is technology.
Bob Wright: Talked earlier about the business being 42% plus digital and that requires.
Speaker Change: Continued innovation as well as well as maintenance and Bob mentioned the re platforming you had mentioned the ability that we're going to have to add features and functions to the web and app.
Their opinions of AR.
Speaker Change: Really exciting.
Speaker Change: Data and analytics capability that that's coming our way later this year, but that's a component of how we think about it you've just talked about pdx right. So that kind of restaurant technology that.
Speaker Change: Isn't exactly customer facing but certainly benefits to customer in terms of throughput and the customer experience.
Speaker Change: And then we spend capital.
Speaker Change: On our on our facilities radar our asset base and then that is.
Speaker Change: Consisting of things like.
Speaker Change: Routine maintenance that tends to be a large part of our overall capital envelope, but then we also.
Speaker Change: As we've discussed in prior conversations.
Speaker Change: We've earmarked some capex to rejuvenate some of our more tired assets.
Speaker Change: And some of the remodel work that we're doing we mentioned that we have three remodels sizes kind of akin do our sandwich menu.
Speaker Change: With the skinny the original in the Big and we're testing some of those as we speak.
Speaker Change: So that'll be a portion of our capital spend in and as we've discussed to where where it makes sense there'll be new unit development for us on the company side.
Speaker Change: Targeted to densify some of our target company market. So.
Speaker Change: It's really a fairly straightforward story as it relates to how we want to push that capital and so far so far where where are our biggest and most important philosophy around all of this is that we're going to put on.
Speaker Change: Our capital in places that we're going to we're going to see returns above our cost of capital.
Speaker Change: Okay, great. Thanks, again and best of luck.
Speaker Change: Thanks, Matt Thanks, Matt.
Todd Brooks: Next question is from Todd Brooks with the Benchmark company. Please go ahead.
Todd Brooks: Good evening guys congratulations.
Speaker Change: Thank you.
Todd Brooks: Yeah, let's talk to you.
Todd Brooks: Wanted to talk about innovation and as we think.
Todd Brooks: Goodbye.
Todd Brooks: Two strong quarters of innovation and customer response to it.
Todd Brooks:
Todd Brooks: As Youre looking internally, where you are in different parts of <unk>, how would you characterize the year from a <unk>.
Todd Brooks: <unk> innovation engine and what we should see on the product newness side, how do we think about <unk>.
Todd Brooks: Munis against all the newness that you brought in Q4 last year and then.
Todd Brooks: How operationally are we managing the menu so that we don't get kind of item, we're able to keep the efficiency in the box.
Todd Brooks: Yes, thanks for the question.
Todd Brooks: The process is rooted in what we see in the consumer insights and our own customer insights for where we think that there are opportunities to make sure our menu best reflects and.
Todd Brooks: Best reflects what would be best for our business and for them and that's where these things have been coming from and it takes a while to develop them and then test them and you know we have to be really judicious with that too because we don't have hundreds of millions of dollars like some really large companies have to put that testing in place.
Todd Brooks: I would tell you that that.
Todd Brooks: It continues to be a focus for us to to support that LTE Oh cadence that we've had in the past we want to continue to do that we've done it with cookies and with shakes and with sandwiches to near.
Todd Brooks: Here recently as we described last year that focus on the core menu was addressing things that we thought were gaps on the core menu and.
Todd Brooks: And we wanted to take the time to develop a great solution too.
Todd Brooks: And we've now added two whole muscle proteins that are really ringing the bell with with what we think customers are looking for from a sandwich expert like us.
Todd Brooks: And still taking advantage of all the great things that our potbelly.
Todd Brooks: That banana, putting shake is we used to have a banana shake it was not consistently delivered to our satisfaction, so having a banana shake.
Todd Brooks: It's something that that makes sense to us, but I'll tell you the customer reception for that has been terrific and that's it that's.
Todd Brooks: That's a premium shake item that we put in place too.
Todd Brooks: Hi.
Todd Brooks: Wouldn't expect that Youll see us add a new protein every quarter. That's that's obviously, probably a an unrealistic expectation, but we do have.
Todd Brooks: Some more menu items things that we have in test and we'll read those tests and decide if we want to expand the.
Todd Brooks: The second half of your questions of course.
Todd Brooks: The thing we got to really watch out for is first of all can we integrate these items into our menu and not disrupt operations.
Todd Brooks: And particularly not put barriers in the way of throughput.
Speaker Change: As you're talking to my operations, where it's at that point.
Speaker Change: We made love the product, but if it slows the line, even if we do sell incremental copies of those products.
Speaker Change: Then, but we hurt throughput, we don't get the benefit from it.
Speaker Change: So every one of these is designed with it that set up the <unk>.
Speaker Change: Natural consumer and operational hurdles that they must clear those are quite typical in that cup stage gate process.
Speaker Change: The culmination of the additions and something we've got to watch for two and we do what most companies do we watch.
Speaker Change: Product mix and the velocity of that mix.
Speaker Change: Certainly the quality and the waste and consumer reception for it and we will make adjustments.
Speaker Change: Many of the things that we did Todd way back when we rebuilt the menu.
Speaker Change: Put in place the foundation to be able to build on top of it like we're doing today. So the sizes. The portion of the consistency of that Fortunately for proteins and the alike makes it easier for us to train our line workers.
Speaker Change: Add these products and it makes sense and I will tell you. This is something you don't often think about when you think about how difficult. These jobs are but when.
Speaker Change: When you when you look at it through the other land do you think about how exciting it is our employees love delivering new flavors and new things to their customers because the customers are enjoying the visit the job is more enjoyable.
Speaker Change: And so far I think we've struck that balance really really well.
Speaker Change: We will be careful.
Speaker Change: Going to be really careful but I'm excited about the work.
Speaker Change: That's all great color. Thanks, Bob and then my second and final question.
Speaker Change: If you talked about the digital investments this year and as we think about perks.
Speaker Change: If we fast forward a year somewhere in the Q1 call in 'twenty six.
Speaker Change: What are we talking about from a park standpoint, as far as different capabilities, how much more enhanced.
Speaker Change: Personalization efforts are with the data and analytics.
Speaker Change: Capabilities that you're looking to build out what's kind of the return in 2006 and these investments in 'twenty.
Speaker Change: Yes. Thank you I think most of it will be things, we see and we will be talking to you about those things that we see what we don't want to do is reengineer, what the customer sees in their basic perks loyalty program.
Speaker Change: And so the big move for US a year ago was very consumer facing.
Speaker Change: Coins that you accumulate and you can redeem those points for all the various items you've asked us in the past about the patterns that we see for different types of customers redeeming for different items and so on.
Speaker Change: What we're talking about now with the investment in those consumer facing digital platforms will unlock additional capabilities for the customer to use their they are familiar perks program in ways that they they can't yet do it today. They don't know that we have and expose them to that but you will be I love your question.
Speaker Change: Fast forward a year what are you going to hear from US we're going to talk to you about all.
Speaker Change: The new ways that customers were able to access their perks account and engage with it use it work with it redeemed for their coins in ways that bring in additional visits.
Speaker Change: See the underpinnings of this is that when someone converts coins to an item a perk.
Speaker Change: That park.
Speaker Change: Really often turns into a visit.
Speaker Change: And that's where you know that's our secrets unlocking that additional.
Speaker Change: Traffic with those perks customers.
Speaker Change: The other thing is on the promotional level. There are things we can't do with the current foundation that we'd like to unlock with the future structure that we're building that allow us to be much more discrete with our promotional activity.
Speaker Change: They're very large brands have already done this but in our size and scale I think we're going to be out on the front of this our ability to they call them they used to call them segmented.
Speaker Change: Groups or campaigns I think the new language in the digital World is.
Speaker Change: Automated customer journeys, because automation is making its way over here and things that we can more discreetly talk to smaller groups of customers in a way that really resonates with them.
Speaker Change: And when you can do that well you actually can do it more efficiently, meaning discount less to get more activity.
Speaker Change: And those are those are the types of areas of focus that these investments should be able to deliver for us down the road.
Bob Wright: That's great. Thanks for the color Bob.
Speaker Change: Youre welcome.
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.
Bob Wright: Thank you operator, and thank you all for your questions and certainly your time this evening.
Speaker Change: Here from US, we're very enthused about our first quarter and are very pleased with where we are in the year and we thank you all for your engagement and your time and we look forward to talking to you again soon have a great night.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].
Speaker Change: Uh huh.
Speaker Change: [music].
Speaker Change: Yeah.
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