Q2 2019 Earnings Call
Thank you for standing by this is the conference operator, welcome to Potbelly Corporation second quarter fiscal 2019 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
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I would now like turn the conference over to Matt Revord, Chief Legal Officer. Please go ahead Sir.
Good afternoon, everyone welcome to our second quarter earnings call before we get started I'd like to note that certain comments made in this call will contain forward looking statements regarding future events or future financial performance of the company.
Any such statements, including our outlook for 2019 or other future periods should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1985.
These forward looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date.
Forward looking statements involve significant risks and uncertainties events or results could differ materially those presented due to a number of risks and uncertainties.
Additional detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward looking statements and other information will be given today.
Can be found in our most recent annual report on Form 10-K under the headings risk factors and Mdna.
And in our subsequent filings with the Securities Exchange Commission, which are available at <unk> Dot Gov.
Our presenters there Alan Johnson, our Chief Executive Officer, John Fitzgerald, Our Chief Financial Officer.
After our prepared remarks, we'll open the call for your questions I'll now turn the call over to Alan.
Thank you, Matt and good afternoon, everyone and thank you for joining us today.
I'm going to spend some time discussing how all strategic efforts to reposition potbelly outperforming.
And then let Tom provide more specific details on our second quarter results.
Let's start with a few high level results for the second quarter.
Same store sales were down 4% driven by weak traffic trends.
While the softer traffic ended all results this quarter contained a number of important points of progress as we continue to transform our company.
Tom will give you a deep breakdown of these results in his presentation.
But I'd like to start today's discussion most strategically.
And reiterated the key pillars that are driving our strategy.
And we have as we have said before turnarounds require an exceptionally high level of focus in patients.
More specifically.
We need to focus on the right things.
We need to test.
Tweak retest and make smart decisions on what we launch.
And what we don't.
But improving same store sales and traffic trends is our number one priority and we believe we are on the right Paul.
And there are a number of new initiatives that are starting to take hold.
The four pillars of our strategy to improve comps and traffic all.
One menu optimization.
By fall. This is the area that we have made the most progress on.
We need to continuously make sure our menus working hard to drive profitability.
To grow off premise in digital.
Our off premise and digital channel consists of catering pickup and delivery.
Well, we have made a lot of progress in these channels, we feel like the new initiatives rolling out well allow us the opportunity to drive even more growth by creating better convenience for our customers and more platforms to service their needs.
Three improve retention.
This is one of the most important components of our strategy.
And the one that is linked to our traffic trends.
Food.
Gross share of all tall good customers.
This it revolves around improving our unaided awareness and finding the right mix of message media and creative to build awareness and to retain customers.
Does the full pellets, we are continuing to focus on to drive improvements in comp and traffic.
Separate from that is the fifth pillar of our strategy is to focus on a more aggressive use of franchising to drive strategic geographic growth.
I'm sure. Most of you saw the press release, we put out last week outlining a significant progress on these efforts last quarter.
I'll spend some more time discussing a franchise progress.
But before I do.
Let's take a similar approach.
As last quarter and talk through the initiatives that are clearly working.
And does that need more time to perfect.
As I said before.
Well many optimization work has been one of the most successful ethics about turnaround.
And we continue to see very positive customer feedback.
The bundling option.
To either pick you'll pay or having a meal deal where you can add chips in a drink continued to make up a meaningful percent of all transactions.
This quarter's check growth was up significantly.
With over 80% of that growth coming from an increase in the number of units per transaction.
In past years.
Most of the check growth came from charging more.
Rather than getting customers to buy more when they visit.
We still have a number of initiatives that we are testing in the back half of the to help drive traffic menu optimization is a process of continuous learning.
Well, we test and refine products like innovative LTL was.
For example, we have traditionally focused on check building LTL was.
And while the number of those initiatives have proved successful.
We have made a conscious decision to shift some of our focus to traffic building LT OWS.
We are testing some of these drastic LTL was in the third quarter.
With the intent to roll out the successful ones in the fourth quarter and early Q1 next year.
I would also like to commend shift Rhino Michelin starred shift on the delicious and inspiring creations. He has put together since joining the potbelly team and we're very excited to share his new menu creations as we move throughout the year.
Another area of our business that is working is off premise and digital initiative.
Sales for this business were up 10.1% in the quarter.
And comprised 20% of comparable sales.
All three channels of all off premise and digital business.
Namely catering pickup and delivery were up year over year.
Our off premise and digital channels have produced positive same store sales comps.
For seven consecutive quarters.
18 months ago, we were way behind in our off premise in digital offering.
We made a commitment to catch up and I believe we have made substantial progress.
To that point I believe potbelly is now one of the most convenient and easiest to transact sandwich options in the market today.
For sure we have more work to do.
But the changes from where we were 18 months ago or dramatic and seven consecutive quarters of positive comps is confirmation that this part of our strategy is working.
I'm proud of our team for embracing this challenge and executing with excellence.
In a sense of urgency to pave the way for accelerated growth in this critical channel.
As it relates to our catering business the largest of our off premise and digital channels. We are excited to tell you. We have recently launched a refreshed catering site just a few weeks ago.
Previously, we had shoes wanted to catering tab onto our website, which required the customer to build the order themselves.
The new Soc provides a seamless experience, allowing users to more easily find what they're looking for by offering catering bundles and making it much easier to order and pay for cost and with fewer clicks.
We spend a lot of time talking with customers about ways to improve the site and the new such as a number of additions including recommendations based on your party size and shutting what's popular right now to spur ideas to easily and intuitively build the order and drive Chick.
Turning to the second of the off premise and digital channels pick up.
As of today.
We now have pickup Rex in all of our shops.
Having these risks allows delivery drivers to walk into the store and grabbed the OTA without having to wait in line, we'll all skin associates, if they order is ready.
[noise] this saves them time.
And allows for the food to be delivered quickly as well.
The risks also benefit of pickup customers.
They also no longer need to ask if the order is ready.
They simply walk in to the shelves grabbed the OTA and enjoy.
Customers remark, how convenient and easy it is to order.
And to pick up from the designated pickup shells.
We've made it much easier and convenient for our customers and our results show it.
Confirming this part of our strategy is also working.
Now moving to delivery.
The third off premise and digital channel.
We are excited to announce that we rolled out our national partnership with door Dash in the first week of July .
We tested the platform in two markets and we saw great results.
Now we have now we are officially on the door dashboard could place in each of our markets. So if a customer logs onto door dash and searches for savages Potbelly will show up.
Well they can search for us directly by name.
We know that customers are loyal to the app that they use and we believe door dash is an excellent partner to help expand our presence in the all important delivery channel and to build our brand awareness.
Whilst we don't breakout our results of our off premise and digital channel in the initial weeks since our launch the growth rate of our delivery business has increased nearly 10 times.
From where it was year to date prior to the national door Dash launch.
We'll be working with Doe dash on the in the third and fourth quarter to take advantage of promotional windows funded by door dash to introduce potbelly today customers and enhance our presence in the site.
Before I transition to Tom I want to give you a comparison aware off premise and digital channels, where a year ago versus where they are today.
[noise] delivery.
Last year, some shops delivered some of the time.
Now all shops deliver every hour they open.
And you can order potbelly Vod door dash in all of our markets.
Pick up last year, we did not have any place.
For the customer to pick up the order.
They had to wait in line to get the orders.
Now every shop has dedicated Rex, which makes it very easy for our customers and our dashes.
Catering.
Last year.
We did not have a catering or orientated platform and therefore pricing a catering order was time consuming and often frustrating.
Now we have a site that we're proud of and it's focused on the catering customer.
It makes it easy to order and helps build the chick with suggestive selling.
Now you can order on the Potbelly website.
On the Potbelly App.
And on the door dash yet.
Providing a seamless customer experience.
You can order ahead, you can pay in advance.
And can easily pick up your order in the shop, we'll have it delivered either by all drivers or dashes from Doe dash.
If you want potbelly to cater you know the velocity improved experience on our new website.
That's substantial progress.
The important point I want to make here.
Is that all off premise and digital momentum.
Has mostly occurred in the last few weeks and therefore didnt impact our first half results in a meaningful way.
We launched our catering website two weeks ago.
Pick up rigs were officially launched in all our shops three weeks ago.
And we launched Autodesk partnership five weeks ago.
The first half of the year laid the foundation with a lot of heavy lifting.
But we're excited to see how these initiatives perform throughout the second half of the year and then obviously support some of the improved outlook that is implicit in our guidance.
So that's a great summary of a number of proactive steps that were taken.
There are clearly working.
And while we are encouraged by the amount of progress we have made.
And the number of things moving in the right direction. There is still a very important issue that we need to address.
The biggest headwind for US right now is traffic.
While the number of Potbelly pigs, registrants increased from 1.3 million registrants to nearly 1.5 million.
And we are very proud of the base that we have built a PICC registered only make up 17.3% of our sales.
We need to focus on reminding our loyal followers why they love us, creating innovative ways to get all the lapsed customers back.
And acquiring new customers.
Therefore, we are shifting our marketing message in the second half to do just that in both email and social messaging.
Additionally, through our loyalty program, we now have insights and data that can be leveraged to help to drive improved retention.
Historically most of our promotional messaging was only directed to oppose registrants.
By primarily promoting to that one audience.
You potentially could be training your customer to wake up for a promotion.
Our focus now is on finding the right balance between marketing and promotions.
That will drive comps and build brand awareness.
Look as an example, you've seen us off the office to Mrs weakened teaches week.
Where we brought cost a promotion to a much larger audience.
The goal is to create promotions that are more efficient and incremental than what we have done in the past.
The soft traffic is also being a challenge in growing our share of the target customer.
The two clearly go hand in hand.
Relying on customers coming more often and spending more each time certainly has its benefits.
But attracting new and lets customers who are getting elsewhere for lunch is a huge focus for us going forward.
We continue to work to find the proper balance between mix media and creative that resonates with our customers.
In the first month of the second quarter.
We invested a lot in advertising and marketing.
Results were positive, but not commensurate.
With our level of investment.
In April we put a hold on our innovative marketing investment to reassess what we can do differently.
We have a number of tests planned through the rest of the year.
And we'll keep you updated on our progress.
As we discussed in our last call in June we launched a summer of smiles three month loyalty program to test our virtual punch card approach, where you see five dollar reward when you spend $50.
Well, we don't have the full view of the results until the program and we are already seeing encouraging results through the first six weeks.
One important outcome.
Is that we saw a 53% decline in the time between purchases for up to eight members.
That means the test program is driving frequency a very good thing indeed.
This is something we have not seen for some time and proof that we are beginning to see measurable progress I look forward to sharing more results on our next earnings call.
Switching gears I want to briefly update you all on our shopper the future.
As some of you may have seen we provided a few renderings of what the new store would look like.
Latest investor presentation, and we would encourage everyone to take a look.
The new shop is a complete redesign from the bottom up.
Based on extensive customer research that as a whole new look and feel but still uniquely potbelly.
There are few key elements of the new shop of the future design that I would like to highlight.
First customizable order and pay in one place at one time.
Today, some customers find our ordering prices confusing and sometimes frustrating.
As I've said before.
Currently we have customers to open the mental wallet a few times.
During today's ordering process the new design requires customers to open the mental wallet only once just before the open the physical world.
Second.
They will be one consolidated menu board directly above where the customers will order and pay this is what we have today with the menu boards are scattered throughout the shop.
Third navigation will be vastly improved whereas will be obvious way you go for pickup this is ordering to Eaton takeout.
Fourth transparency customers will be able to see the food as it's being lovingly made by one of our team members.
This is a big plus and allows customers to see the quality and freshness of the ingredients, we use to make great sandwiches.
Finally.
The dine in atmosphere is a very important aspect of our brand and experience.
The new shop, we'll be comfortable and relaxed to eat in something that is not true at most of our direct sandwich competitors.
The new store experience will be more intuitive and easier for pickup customers and delivery drive is to find the orders without disrupting the dawning customer.
Further the shop will also improve the ordering process and gets customers through the line fausta.
As we have shared before the new design will reduce the capital investment by 25% compared to the current model.
And reduce the payback period for a new company shop or franchisee by one year.
We expect the two shopper the future Remodels to open in Chicago area in Q4.
Let's shift to another strategy that will help us increase our geographic reach and drive future growth and Thats franchising.
We have made tremendous progress during the first half of the year on these efforts and some of those you may have seen we recently announced that we have signed three franchise agreements that when fully built out over the next several years.
Will nearly double our U.S. franchise footprint.
These multi unit development deals will be for a total of 38 units spanning thus vegas.
Tampa and the Carolinas.
Importantly.
In the past six months, we have signed up as many shops as we have in the previous eight years since we began franchising in the us.
Our new partners are experienced operators bode very well capitalized.
As everyone knows in this business once you get some momentum in franchising the effect really begins to snowball.
And what is highly encouraging about these three agreements.
Is that each individual deal exceeds our previous franchise record a full shops.
Thus, we believe we are at a significant turning point in our franchising business.
We continue to have positive conversations with accomplished and experienced franchisees, who are beginning to see our turnaround initiatives take shape.
Our enhanced menu expanded off premise and digital business and shop for the future are really resonating and we feel like the proof of our transformation lives here.
It's great to see growing franchise momentum and we believe we will see more success in 2020 and beyond with this low capital approach to future growth.
Before handing the call back to Alan for his closing remarks.
All comparisons are versus the comparative prior year period, unless otherwise stated.
Starting with the top line total revenues decreased 4.3% to $105.6 million in the second quarter.
Driven predominantly by a 4.0% decrease for our company operated shops.
Breaking down same store sales our average check grew by 2% driven by a combination of price and mix.
As a reminder, in Q2 last year, we delivered virtually flat comps at minus 0.2%.
Which was a 340 basis point improvement from the prior quarter.
There was also the first time, we had seen flat comps in six quarters.
This year, our second quarter comps were up 70 basis points compared to the first quarter of this year.
And our two year stack was up 410 basis points.
Compared to Q1 s two year stack.
Same store traffic was 90 basis points better than the first quarter and our two year traffic stack was 440 basis points.
Better compared to the first quarter's two year stack for traffic.
Our traffic gap to Black box also improved from Q1's minus 1.2% to negative 0.7% in the second quarter.
In the quarter, we opened three new shops, all of which were use franchise shops.
We also closed two company owned shops for a total of nine year to date as well as to use franchise shops.
As part of our strategy to hone our focus on the turnaround of our core business and exit international markets.
This quarter, we closed six international shops, leaving one remaining international shop, which is in the middle East.
We expect to close that shop in the second half of this year.
Our sharp our shop level margin for the second quarter was 16.6% of company operated sales as compared to 18.8%.
Cost of goods as a percentage of sales was 27.0% in the second quarter, an increase of 80 basis points, primarily due to traffic driving investments and product mix.
For the quarter labor was 30.6%.
An increase of roughly 100 basis points, driven by wage inflation and sales deleverage.
Occupancy expense was 14.5% in the second quarter, an increase of 80 basis points due to sales deleverage and inflation in certain occupancy related costs.
Including lease renewals real estate taxes and common area maintenance.
Other operating expenses were 11.3% in the quarter, a decrease of 40 basis points due to our focus on expense management.
Our general and administrative expenses were approximately $13.8 million in the second quarter or 13.1% of total revenue.
An increase of 90 basis points.
The increase was driven primarily by our increased advertising expense.
Adjusted DNA, which excludes store closure costs CEO transition costs.
Restructuring costs and proxy related costs in which we believe is the better indication of the core gionee expenses in our business.
Was $12.2 million in the second quarter and 11.6% of total revenue.
Adjusted DNA was up $1.1 million in absolute dollars relative to last year.
Our adjusted EBITDA was $6.8 million for the second quarter compared to $11.5 million.
The decrease was driven by the decline in same store sales are increased advertising investments as well as labor and occupancy inflation.
During the quarter, we had income tax expense of zero point $2 million, our adjusted net loss for the quarter was zero point $5 million.
Or two cents per diluted share as compared to adjusted net income of $3.3 million or 13 cents per diluted share.
In the second quarter, we repurchased approximately 351000 shares of potbelly common stock in the open market.
For a total of roughly $2.3 million at the end of the second quarter, we had $39 million available from our board authorized program for repurchases.
Our capital expenditures came in at approximately $2.7 million in the quarter and our balance sheet remains strong with a cash balance of $18.1 million at the end of the second quarter and zero debt.
As we look forward, we want to fund the investments in our turnaround while ensuring.
We maintain our target cash balance of $15 million to $20 million on the balance sheet.
Our Q2 results were generally in line with our internal forecast and thus we are reiterating the same store sales and profit profitability guidance. We gave you last quarter.
For 2019, we currently expect flat to low single digit decrease in company operated comparable store sales.
Adjusted EBITDA of between $25 million and $30 million, including the impact of ads C 842.
Cost of goods sold to be between 26.5 and 27.0%.
Labor as a percentage of sales to be between 31.5% and 32.3% of sales.
Adjusted DNA expense to be between 42 million and $43 million.
And 15 to 22 shop closures, including nine to 12 company operated shop closures.
We are slightly lowering our outlook for total shop openings from 12 to 18 to 10 to 15.
We also expect four to five company operated shop openings. This year a reduction from the previously communicated six to eight.
We remain focused on balancing the initiatives to profitably drive same store sales and traffic with tight cost control.
I will now turn the call back over to Alan for his closing remarks.
Thanks, Tom.
In closing I'd like to repeat that we strongly believe that our turnaround efforts are starting to take hold.
While many optimization continues to be a bright spot in our turnaround as exemplified by the fact that this quarter's check growth improved significantly.
We have a number of LTL is that we plan to roll out through the end of the year and we're excited about all of them.
Our off premise and digital channels have undergone a significant transformation over the last year and more so over the last few weeks.
We expect to see strong contribution from all three of our platforms here, including catering pickup and delivery.
Lastly, our franchise initiatives are gaining momentum.
We closed on three new franchise agreements.
That will nearly double our us footprint and are continuing to have positive conversations with experienced and accomplished franchisees.
With that I would now like to conclude our prepared remarks, and turn the call over to the operator for Q and a.
Thank you.
We will now begin the question and answer session.
To join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.
If you are using a speakerphone please pick up your handset before pressing any case.
To withdraw your question. Please press Star then two we will pause for a moment as callers join the queue.
The first question comes from Nicole Miller with Piper Jaffray. Please go ahead.
Thank you and appreciate the update this afternoon, if you could talk a little bit about the topline performance, maybe what were some of the things that you did in the quarter.
That had the upside that you did expect or Dan maybe something that went the opposite way think that you know were in your control that you saw was expected things that were extenuating circumstances, and I'm thinking a little bit along the lines with the industry benefiting from I've kinda or digital orders, where you you really have a unique opportunity and relationship with the customer on the catering side. So just broadly on the top line and then as it relates to delivery and catering in particular thanks.
Thanks Nicole.
HM.
Certainly I think the.
The one thing that would pretty much exactly as we thought it was many optimization the bundles that we mentioned before a very successful.
You saw the lift in the CIC the mix has held up.
Two the same levels slightly lower than.
The levels before it's about 24%.
This slight decline was driven by the fact that at the same time, we had an LTL, which was the chicken mozzarella sandwich, which is not available as a take or pay options menu optimization work.
Very much luck, we sold it would.
Off premise and digital again seven consecutive quarters of positive comps, we were expecting that.
And that held up it's about 20% of all business and I think.
The one thing that changed in the quarter significantly was the amount of progress that the team made relative to the first quarter and by that I mean, we launched a new website, we launched the pickup shelves, we launched the marketplace on door dash.
We closed the franchise deal was that doesn't affect the top line and nonetheless.
Yes, something that we had hoped and it signaled in the last earnings call. So I think we proved that a lot of progress could be made in the quarter.
I think the other thing so its a them.
I'm sorry.
The other thing I just want to mention is we also signaled that we wanted to launch a new loyalty overlay, which we did with your summer perks and well you know that is not fully.
Complete yet after six or so weeks, we saw a significant improvement in the window between purchases and I think that was a pleasant surprise, but.
Just one more insights to come from that.
And on that last point could you talk to us a little bit about how you build up your consumer profiles and is it a loyal coming that guests coming back a valued that's coming back or an infrequent guests come more often or do guests altogether. Thank you.
Yes, I think I have to wait until the completion of the program and you know six weeks in.
I want to make sure that I don't give a false read obviously, we are encouraged by us because anything we can do that shortens the window means retention and if you remember correctly, maybe towards the <unk> last earnings call, namely the wonderful insights indicate that when you get a customer to come X times in 91 days the retention doubles and so it's very important that.
We find that a way to get that loyalist to become more loyal and to come that one extra Tom.
And just a final question on like your prepared commentary around the franchise agreements congratulations on that what's the timeframe I think you mentioned it would double your store base. If you could talk us through the regions on a timeframe that'd be very helpful. Thank you.
Yes, certainly so three deals for 38 shops over the softer seven years.
The three territories our Tampa.
Carolina and.
Las Vegas.
[noise].
Thank you and again congratulations on those new agreements.
Thank you and you know what's pretty.
I'm glad you appreciate that because the team has really worked very hard and when I look at the caliber of the franchisees.
I'm really excited I mean, one of the franchisees is a very large.
Pizza franchisee who has deep.
Restaurant experience and really knows how to particularly.
And harness the off premise business. So these are well capitalized very well experienced.
Franchisees and quite frankly, I look forward to actually learning a lot from them.
The next question comes from Sharon Zackfia Who's with William Blair. Please go ahead Sir.
Hi, This is Matt on for Sharon.
And given the improvement in second half comps that's implied in your guidance could you maybe flush out a little bit more what's going to be the primary driver of that I mean, you mentioned the door dash relationship as well as a ramp up in email and social marketing things of that nature. So if you could just maybe rank those and detail exactly what the entail does that help.
You will sit in the.
Yes in a in order of the biggest impact number one opens in digital or the catering, which soft I mean, we've seen.
Did you get that customer spends 10 times more per transaction than the walk in customer the door dash marketplace.
Yes, we've seen a tenfold lifting all growth.
Since.
Going on to dish the pickup shelves when the customer wants speed and convenience critically important if you can provide that they'll go somewhere else. So all of those in the last five weeks.
The second most important one that in terms of impact is a phase two of our menu optimization. We made a conscious decision on this occasion to launch a 48 shop test, where we testing a traffic driving LTL something we have not done before something that we're excited about its only one week in actually this is the second week.
And so I look forward to sort of reading those results and depending on how that performs rolling that out.
And then the third biggest impact would be perks retention, which I just.
Onset for Nicole but.
Retention is critical and I'm glad to see that we are seeing some momentum here with a 33% reduction in the repeat window.
Net pretty much lines up I mean, I'm, assuming you're talking about.
Top line growth because we also have shopper the future, which is very important to get that open and get those learnings.
Under our belt, so that we can.
Plan for 2020.
Okay understood and then.
I guess, just given the magnitude of the implied increase.
Or the implied improvement in the second half would you be willing to share what trends have been like quarter to date on comps.
Yeah, Matt its Tom were.
You know in the last couple of quarters Weve.
We've given a little peak into the subsequent months.
Just based on what was happening in Q1 with weather in Q2.
In early Q2 with the marketing program so.
You know the way I'd frame. It up is we don't want to continue that pattern to go into great detail, but I'd sum it up by saying you know Q2 is quite close to our projection it was a slight beat.
July was also in line with our expectations on the top line.
So and we're very optimistic by what we're seeing in our off premise and digital channels and the other elements of our business that are working.
Alan mentioned.
So as a result, we felt comfortable affirming our previous guidance.
Okay. Thank you good luck.
Thank you.
The next question comes from Gregory Francfort, whose with Bank of America. Please go ahead Sir.
Hey, thanks, Thanks for the questions just.
Maybe going back to kind of the guidance for the year and looking at EBITDA I think implied math is that to get the low end of the EBITDA range, you kind of have to do flattish year over year EBITDA in the second half and I think the first Aspen down 40% to 50% and is there a.
Comp level that is necessary because how how should we think of what kind of comp you would need to deliver to hold kind of flattish.
EBITDA growth in the second half.
Yeah, Greg it's Tom Thanks for the question so actually to hit the low end of the range. It would be a a minus 10% on a second half adjusted EBITDA.
So as we look at our comp.
Range that we provided plus the the other cost controls that were implementing.
And have implemented.
We see.
That we fall within the range and therefore, we affirmed our guidance. The other change I would just call to mind is we had the pretty significant increase in advertising in the in the second quarter, which obviously affects the first half that you're quoting and that is much more comparable year on year, which for us is a big number.
In terms of our base. So when you when you rack and stack all the things that we guided to.
We we felt comfortable affirming the 25 to 30 million adjusted EBITDA full year.
You answered my follow up question, but so far I asked it but and then maybe just I'd second topic in terms of the relationship between.
Potbelly delivery employees and third party door Dash series I think they're called how is that going to work. When you have a delivery orders coming in you have someone on staff.
And that's I guess the managing the.
Relationship between kind of having a deliver delivery personnel as well as having third party personnel coming in and picking up orders is that something that you envision being a challenge to kind of manage through a from a management perspective.
Yeah, Greg Good question the way, we see it and it differs by shop based on on their on their mix of business, but we want our potbelly associates, primarily delivering the large catering orders that's an important part of of our brand experience, we believe and one that.
That we want to be the ones delivering it most often the second order of importance for lack of a better term or sequence is our delivery drivers will then deliver.
Orders that come through our site or through our App.
Any overflow that is picked up by dasher. So we know what our capacity is for our drivers and as soon as they are tapped out and sometimes it's as little as one in the shop, but no. That's it's not like anything what you see it Jimmy John's in terms of just the absolute number of drivers.
But once our drivers are tapped out then it sort of diverts over to ring up door dash to pick up the order and deliver it.
And then of course, it works differently on marketplace, where were not involved at all.
I just add to that.
One of the things that we're very cognizant of is.
Trying to increase our reach and penetration and I think the delivery model actually does that very nicely and we are beginning to see some proof of debt and the best.
Way I can demonstrate that is.
If you look at our delivery business in peace. Evan. This is all delivery business same time last year, a couple of things stands out all weekend mix, where we have capacity is actually growing by four rigs.
Our mid day mix, which is between lunch and dinner has actually grown three eggs.
But what's really exciting is we have a lot of potential at dinner and did not consumer spends a lot more.
And that dinner mix has grown five eggs.
And we truly do believe that that's a signal that those all highly incremental occasions that were it not for the combination of all the options that Tom laid out we wouldn't be able to capture that so I think thats really really important to keep in mind and I also remind you that the seasonality of.
AD delivery actually peaks in Q3, and Q4, particularly in all markets when bad weather.
Forces do sometimes to stay home.
I know that thank you for that perspective, and then maybe just one follow up can you talk about.
What you're expecting or seeing if it but it may be too early on the margin profile of the third party delivery orders and then what assumptions are going into that that calculation our expectation depending on if you're seeing it or if you're projecting it. Thank you very much.
Yes sure thing Greg.
So.
You know up obviously, the best margins for us are people coming into the shop, and either taking doing takeout or eating in the shop.
And the way we look at it is.
From there the shop is sort of fixed cost and then we look at the incremental margins associated with either our folks delivering it.
Or.
Das years, delivering it through orders.
Those orders that come through our app or marketplace.
And actually there's not a lot of difference between the margins of those three.
Delivery mechanisms for lack of a better term. So it's it's actually quite close and quite accretive. So again, it's not quite what it is in shop, but but certainly attractive and as Alan said, particularly with marketplace. We see the day part expansion as being highly incremental.
And so were quite enthused by that and that's all before door Dash has made any any promotional noise to.
Enhance our presence on their site.
Thank you very much appreciate it.
You bet.
We have time for one more question.
The next question comes from Stephen Anderson, whose with Maxim Group. Please go ahead.
Yes, good afternoon, I'm, just taking a look at your expectations for net store closures and you know I I did note some of the.
Progress you've made on off premise and all I won't ask you off the call about this too but you know the answer comps have been down 10 straight quarters restaurant level margin, but down 11 straight quarters wont be who view from knocking more aggressive with getting rid of some of the less the grass less productive stores and maybe gain focusing more on the more productive of restaurants and building from there maybe I'll have him as a template for store of the future.
Yes, Stephen it's Tom.
Yes. Good question I think in terms of the less productive stores, what we call our bottom.
Bottom 25, the good news is we've closed a lot of the ones that were really negative and as I think we've said on prior calls the unfortunate part is those shops were not built that long ago. So the.
The the checks to exit those leases are not small, but I think we've been measured and the good news is.
They've been you know modestly accretive to our our shop margins.
But more but more importantly, the the stores that are now in the bottom left as those bigger drains have been pulled away.
Are really not nearly as negative as the ones that weve pulled back on so you know and as we look across markets I think in a couple of markets where were subscale and then relatively unknown our comps are.
Our quite a bit more negative, but they're not really pulling the average down so but by any means.
And as as we look across our our results are are fairly consistent across the market. So.
I think the encouragingly the things that are working and the.
Particularly the momentum and off premise and digital and we have more initiatives for the back half of the year that should bode well for all of the shops, but we will continue to monitor the monitor that.
And be.
Are you willing to exit those shops, where economically it makes more sense and will help the overall averages in our in our business.
Some of the key metric you talked about are you talking about the some of the lesser known markets, where they don't have as much or presence I mean would you perhaps earmark those are perhaps for re franchising maybe yet.
So onto a franchisee I can't I notice your franchise.
[noise] agreements that you signed in the past week it maybe.
Looking at those as sort of a way to sort of build out the franchise system.
Yeah, that's absolutely right and we are we are we are open to Refranchising, we've had some discussions with folks on refranchising.
And and it has to be the right deal, but certainly I think that the good news is as our franchise development team is working with more experienced operators like the ones that we signed.
Who I think have a higher burden of proof on on signing up with us than a mom and pop franchisee would so I think that's also an encouraging signal.
But importantly, some of those one starter kits and they may want three four or 510 shops and in a market that they know well and they they believe they can.
Improved the the operations and the economics of the current jobs and then build more beyond that so we're we're very willing to engage in those discussions and and have the appropriate expectations on the on the.
On the Refranchising structure.
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As a final comment out what's your percentage of digital sales as of Q2.
Our total off premise and digital sales or 20%.
I would like to know for any of you don't break that out separately.
Yeah, and we don't we don't provide detail on the on the components. The three components, but importantly, all three are growing and there are lot initiatives in the second half that weren't baked in the first half.
Great. Thank you.
You bet.
This concludes the question and answer session I would like to turn the conference back over to Alan Johnson for any closing remarks.
Great. Thank you Ben Thank you again for your time today and your continued support and look forward to updating you all on our progress on the next inning in schools have a great evening.
This concludes today's conference call you may disconnect your lines. Thank for participating have a pleasant day.