This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk03: Good afternoon, everyone, and welcome to Potbelly Corporation's fourth quarter and full year 2020 earnings conference call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Ms. Adia Dixon, Potbelly's Chief Legal Officer. Ms. Dixon, please go ahead.
spk01: Good afternoon, everyone, and welcome to our fourth quarter and full year 2020 earnings call. Our presenters today are Bob Wright, our President and Chief Executive Officer, and Steve Surilis, our Senior Vice President and Chief Financial Officer. Please note that we have provided a set of PowerPoint slides that will accompany our prepared remarks. You may access these slides on the investor relations section of our website. After our prepared remarks, we'll open the call for your questions. I'd like to call your attention to our cautionary statements on slide two and note that certain comments made in this call will contain forward-looking statements regarding future events or the future financial performance of the company. Any such statements, including our outlook for 2021 or any other future periods, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties, and events or results could differ materially from those 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 statement and other information that will be given today can be found in our most recent annual report on Form 10-K under the headings Risk Factors and MD&A, and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov. I'll now turn the call over to Bob.
spk05: Thank you, Adia. Good afternoon, everyone, and thank you for joining us today. I hope you and your families have remained safe and healthy since our last update. Let's start on slide three, and I'll provide a quick overview of last year. 2020 tested everyone around the world, and the restaurant industry was obviously significantly impacted. I joined Potbelly in the midst of the pandemic just a few months ago. I can tell you that great teams and great people rise to the challenge in the face of adversity, and I'm extremely proud of every team member of this organization for what we have collectively accomplished last year. Together, we demonstrated the resiliency, persistence, dedication, and creativity that made Potbelly truly unique. As we begin to pivot from being reactive and protecting our brand to being proactive and more deliberate in our efforts to drive profitable growth, It's those exact attributes and teamwork that will help us thrive. Clearly, our financial performance suffered in 2020, but we prioritized the things that were within our control, enabling us to respond and right-size the business throughout the crisis. This included aggressively controlling our costs, protecting our cash position, and prioritizing safety for both our employees and our customers. It also involved a significant pivot in the way that we service those customers as we focused on our digitally driven off-premise options like delivery, pickup, as well as drive-through. As the year progressed, we continued to invest further in our digital offerings with tremendous success, like our improved Potbelly Perks program. You'll hear about a number of new investments we plan to make later in today's call. Most of those initiatives were focused on the immediate needs of the business, but I think it's critical that our investors understand we also executed with strategic intent in 2020. This included numerous efforts to build a stronger foundation that will support more profitable growth as we exit this pandemic. It also included the rebuilding of our management team, which is almost complete. And it included the development of a new strategic plan, the components of which we'll share in full detail with you today. Let's discuss a few more specific outcomes of those strategic actions and where we stand as of today on slide four. There are really four critical takeaways from the actions we took to reposition the business in 2020. First, we built solid recovery momentum throughout the year, and barring a small hiccup from the extreme weather we had in February, have seen a continuation of those trends that Steve will talk you through in a few minutes. Our suburban locations have continued to trend positively, and we've seen positive comps with our drive-through and digital channels. We've opened nearly all of our closed non-CBD and airport shops now and have expanded our hours of operations in most shops to pre-COVID levels. Next, we fortified and enhanced Potbelly's foundation throughout the year. This included strengthening our shop base by closing 28 shops permanently and renegotiating 321 leases. This was a huge lift, and I think it's critical that I recognize not only the hard work that was done here, but also the partnership we have with our landlords who are willing to work with us through the pandemic and are clearly invested in our future. As a part of building a stronger Potbelly team, we also took a fresh look at our general and administrative and other costs to better align them to our smaller footprint and to industry norms. As a result, we completed our G&A restructuring in the fourth quarter, and have moved forward with over $3.5 million in annual corporate expense savings. Lastly, in terms of strengthening the organization, we welcomed a completely new leadership team in 2020. We have a handful of executive positions still to fill, but this team is energized and coming together quickly as we prepare to pivot to growth. With this new leadership team in place, our third strategic success exiting 2020 was our new traffic-driven profitability strategic plan. We outlined the foundation of this plan for you last quarter, and we began executing against it in earnest in the fourth quarter. Our fourth strategic success was more recent, but extremely critical. Last month, we fortified our balance sheet through the completion of a $16 million private placement, and we subsequently amended our credit facility to extend it forward an additional year. This was a critical need for the organization as it will support our business throughout the last steps of the pandemic-related recovery that's clearly still in progress. But more importantly, it will allow us to be front-footed and invest growth capital in our new strategic plan to accelerate our path forward and move quickly to achieving profitable growth. I'll conclude my opening remarks on slide five as I frame up how we expect this year to progress. Overall, we expect to see two very different halves of the year in fiscal 2021. The first half will hopefully see the virus wane and vaccines become more widely distributed as the weather improves. We've recently seen at least one state where we do business eliminate dining room restrictions altogether, and we'd expect most states to do this more gradually through the first half of the year. As this occurs, Our team will continue to test, develop, and refine the multiple traffic-focused initiatives that we've been working on. We'll finalize the rebuilding of our leadership team as well, and we'll continue to prioritize cash preservation and operating efficiencies. As Steve will outline, we have some legacy cash obligations to fulfill this year, but we still expect to be break-even at the shop level through the first half of 2021 and have ample liquidity to manage these cash expenses. As we proceed into the second half of the year, we, like you, hope to start seeing the impact of developing herd immunity. This should accelerate the lifting of dine-in restrictions and hopefully even eliminate them in most of our locations. As this occurs, we believe that many people will look to return to work in some fashion and begin to explore travel. And as a result, we'd expect to see our lagging locations in central business districts and airports catch up to the recoveries we've seen in our other shop types. Moreover, we'll be ready to capitalize on these trends as we will have achieved scale in our traffic-driven profitability strategic initiatives, and we'll have a fully developed and functioning team across the organization. There will likely still be a few shop-type gaps in the platform, as no one expects life to go back to exactly how it was, but our shop-level economics will be significantly strengthened in the second half. This is where the leverage of our primarily company-owned shop platform begins to benefit the company's economic model. Overall, there's an element of optimism that is present across the country, and that's certainly translating to our team here at Potbilly. To summarize, we have the right team, the right strategy, and a recently strengthened balance sheet that will support our strategic initiatives and help Potbilly emerge with a stronger platform that can grow more profitable than ever before. With that, I'd like to turn the call over to Steve to talk more specifically about our financial performance during the fourth quarter and full year. We'll close with an update on our traffic-driven profitability strategic focus and, importantly, the progress we have on these initiatives before we take your questions. Steve?
spk06: Thanks, Bob, and good afternoon, everyone. Please turn to slide six of the presentation, where you can see the progression of our same-store sales and average weekly sales for 2020 and year-to-date. through the beginning of March 2021. Starting with Q4, company-operated same-store sales declined by 19.7%. This was a 130 basis point improvement as compared to Q3, clearly positive momentum despite the nationwide resurgence we saw in COVID-19, which particularly impacted the month of November results. Breaking down same-store sales, our average check fell by 7 tenths of 1%, on a sales per entree basis, and traffic improved quarter over quarter by three percentage points. We've experienced steady improvement in comparable sales since May, and December was particularly strong with solid holiday traffic. Excluding November's slight step back, we saw sequential improvement over seven of the last eight months of 2020, which is a clear demonstration of the resiliency of the business and our ability to pivot to rapidly changing market conditions. In terms of volumes and average weekly sales per unit, we saw consistency throughout the second half of 2020, despite a strong surge in COVID-19 cases in Q4. Turning to performance so far in 2021, as you can see from the chart, we saw improvement in January, with same-store sales down just 15%, followed by softer-than-expected performance in February, which was down 22.4%, mainly due to severe weather impacts throughout the U.S., and in our markets in particular. The data for March so far is encouraging and shows meaningful improvement from February, tracking down 10.7% through March 7th. Importantly, our shop average weekly sales volume, while lower in January compared to the second-half trend in 2020 due to seasonality, is now accelerating. In fact, March-to-date volumes are trending ahead of the Q1 2020 previous high point on this chart. Overall, we expect to continue to see sequential improvement throughout each quarter of 2021, driven not only by the rate of vaccinations and increased dining room reopenings as pandemic conditions recede, but also by the traction from our strategic initiatives. Turning to slide seven, I'll walk you through our income statement and specific financial performance for Q4. Like we did last quarter, we're going to highlight our performance this quarter against the sequential quarter or Q3 of 2020. This should provide you with a better update on the recovery trajectory. During the fourth quarter, total revenues increased 3% sequentially to 74.9 million due to the reopening of temporary closures, increased shop hours, and sequential improvement in same-store traffic. Our general and administrative expenses were approximately 6.9 million in the fourth quarter, or 9.2% of total revenue, compared to 9.8 million in the third quarter, or 13.5% of total revenue. The decrease in G&A expenses reflects the impact of the company's focus on cost discipline, the partial impact of the G&A restructuring that was in process in the fourth quarter, and some one-time expenses from the third quarter that did not carry forward into the fourth quarter. That G&A restructuring and other cost reduction efforts were largely completed by the end of 2020 yielding an annual savings of approximately $3.5 million. Adjusted EBITDA loss was negative $6.9 million for the fourth quarter, a slight improvement compared to negative $7.3 million last quarter. The fourth quarter improvement was driven primarily by increased sales and shop-level cost controls. Cost of goods sold expenses were $21.2 million, or 28.5% of shop sales. compared to 20.7 million in the third quarter, or 28.7 of shop sales. The stability of COGS as a percent of revenue was primarily the result of higher sales during the quarter. Labor expenses were 27.2 million, or 36.5% of shop sales in the fourth quarter, compared to 25.8 million, or 35.8% of shop sales in the previous quarter. This increase was primarily driven by higher costs associated with holiday PPO schedules and compensation. Occupancy expenses were $13.3 million in the fourth quarter or 17.9% of shop sales compared to $13.9 million or 19.3% of shop sales in the third quarter. The decrease is primarily attributable to renegotiated rent and shop closures. Other expenses were $13.2 million in the fourth quarter or 17.7% of shop sales compared to 12.1 million or 16.8% of shop sales in the prior quarter. The increase was due to COVID-related costs related to temporary COVID closures as well as PPE and cleaning costs and higher third-party delivery expenses. On slide eight, I'll provide an overview of the full year 2020 as compared to 2019. Clearly, Potbelly was significantly impacted by the COVID-19 pandemic, given the business disruptions that resulted from government-imposed quarantines in Q2 of 2020, limiting our ability to fully operate. As such, I'm not going to walk through all of the numbers in detail, but rather will provide the high-level figures. Full-year 2020 sales decreased to 291.3 million from 409.7 million in 2019. Gap net loss was negative 65.4 million compared to negative 24.0 million in the prior period, and adjusted EBITDA was negative 32.7 million compared to 25.5 million in 2019. Turning to our balance sheet and liquidity position. As you know, we took swift action to reduce costs and preserve cash at the onset of the pandemic. Our second half 2020 weekly cash burn rate improved from the 0.50 million projection that we outlined in the second quarter of last year to 0.44 million, This improvement is primarily due to the timing of rent settlements and rent back payments that moved from Q4 2020 into Q1 2021. The back half of 2020 weekly cash burn rate is inclusive of the restructuring costs associated with our G&A work and salary repayments from Q2 and Q3. Our liquidity position at the end of 2020 was $44.6 million. which consisted of 11.1 million of cash on hand and 33.5 million available on our credit facility. This compares to 58.6 million a year ago. More importantly, however, is the progress we made last month when we successfully completed a $16 million private placement and amended our senior secured revolving credit facility of $25 million, which included extending the maturity to January 31st, 2023. These actions have significantly strengthened our balance sheet, providing Potbelly with the necessary flexibility to support our post-pandemic recovery, as well as to ensure that we have the appropriate growth capital to continue to execute against our various strategic initiatives. Turning to slide nine, here we show shot performance by type. Here again, we've tried to offer some recent transparency and have shown you the first three periods of 2021, as well as information throughout fiscal 2020. Overall, drive-through and suburban shops continue to outperform the other shop types, with drive-through above pre-COVID levels and suburban shops running very close to normalized run rates. Urban and university shops, while improving, remain below pre-COVID levels. Not surprisingly, our airport and CBD locations continue to lag behind the other location types. The other item I want to point out on this slide is the clear impact of the extreme weather that our country experienced recently. December's positive momentum carried into January. However, February's extreme cold and winter conditions temporarily interrupted our recovery progress in many of our larger markets. The good news is, as those winter conditions have subsided, we've seen a snapback and a continuation of the prior positive trends as represented by the partial month of March we've shown in this slide. Slide 10 is an excellent illustration of how our business has shifted over the past year. As you can see, Prior to the onset of the pandemic, the majority of our revenues, approximately 70%, were generated by diners enjoying potbelly offerings in our shops. As restaurant restrictions were put in place, we quickly shifted our business toward more digital offerings, which includes delivery and pickup options. We also leveraged the approximately 60 shops that have drive-thrus. As a result of that quick pivot, nearly 40% of our business is now digitally driven. This successful pivot was aided not only by our digital assets, but by the shop design that supports multiple customer experience channels. We believe over the longer term, we will see a blending of digital and in-shop service modes as we exit the pandemic. Potbelly's digital investments, our flexible shop design that includes two production lines and consumer excitement to return to dining rooms, sets us up to expand all of these sales channels. Moving to slide 11, we will discuss our outlook for 2021 and our observations so far during the first two and a half months. As Bob mentioned earlier, we anticipate 2021 to be a story of two halves, driven by external or business environment factors, as well as our Potbelly-specific action. While we are not providing quantitative financial guidance, we want to communicate a framework of expectations for the cadence of the recovery. Overall, we believe that our strategic initiatives combined with the anticipated economic recovery, will support improvement in our sequential same-store sales and top-line quarterly performance through 2021. We also expect to return to positive cash flow and enterprise profitability in the second half of 2021. Broadly speaking, we expect our first-half 2021 performance and improvement trajectory to track slightly above the second half of 2020, with the expectation that the recovery should accelerate starting mid-year. This goes hand in hand with improving consumer mobility trends and demand as COVID-19 cases decrease and vaccinations increase. As a result of the cash preservation measures we put in place during the pandemic, we entered 2021 with approximately 11 to 12 million in deferred cash expenses, the bulk of which are related to deferred rent that will need to be paid throughout the year, most of which will be weighted towards the first quarter. Summing up all of these moving parts, we are projecting shop-level profitability in the first half of 2021. Again, with the anticipated momentum of the recovery starting mid-year, the majority of the company's operating earnings and adjusted EBITDA will be delivered during the second half of 2021, and we expect both shop-level and enterprise-level profitability, as well as positive cash flow in the second half of 2021. With that, I'll pass things back over to Bob.
spk05: Thanks, Steve. Please turn to slide 12 where you'll see our brand position again. I shared this with you last quarter, and I think it's important that you understand what a great deal of work has gone into this. One of the best ways to summarize our brand position is by recounting the numerous conversations I've had with many of you, our investors. Those of you that aren't fortunate enough to live in an area with a Potbelly shop have often said to me, Potbelly is on my list of must-stops every time I visit Chicago. It's how many of you found our story as an investment, too. And that sentiment is really embodied in our brand positioning. Great, craveable, high-quality food served to you in a location you enjoy going to. In other words, in a place with the good vibes of a first-class dive. We're excited about this brand position, and we believe it will resonate both with our loyal and prospective customers as we move forward. Next, on slide 13, I'll review our traffic-driven profitability strategic focus, which has its foundation in our brand position. Our strategy, quite simply, is to bring to life the very best attributes of the Potbelly brand represented by our five pillars with a unifying objective of traffic-driven profitability. We shared this with you last quarter as well, and implementation has already begun for most of the initiatives with acceleration over the course of the year. There are five core pillars to our strategy, as you can see on the slide. But what I'd like to share with you today are how some of the more detailed initiatives that we're executing are coming to life under each pillar. So please turn to slide 14. Before I get into the details, I'd like to note that while there are investments associated with many of these initiatives, we built our plan with a focus on lower cost and higher profit impact ideas this year. For competitive reasons, we won't be able to go into a lot of detail on the locations and or the timing of the various testing, but we expect to leverage nearly all of these initiatives in the second half of 2021. Our first pillar is craveable quality food at a great value. We have great food, but to be successful in this highly competitive environment we're in, innovation and adaptability to consumer trends and feedback will remain critical. One of the first things we're doing here is continuing to simplify our menu. Through this work, we will continue to enhance our brand perception, achieve better throughput, and make for an easier customer experience, all of which should lead to improved traffic retention. This will include consolidating menu boards and fixing value with a wider price ladder. It will also include other product enhancements like offering smaller sandwiches and half salads outside of the pick-your-pair promotion. We're testing larger sized options with more meat, cheese, and toppings as well. While there are a number of new ideas, we also expect fewer skews making for a more efficient system and faster customer experiences. These ideas are already in the beta market testing phase, and with continued success, we have a plan to be live in the second half of the year. Moving to our second pillar, people creating good vibes. As I said last quarter, people are the heart of this business and create the unique experience our customers expect at Potbelly. We must continue to embrace our hire for attitude and train for skills mantra to bring in people who offer good vibes and love great food. But we also need to manage our labor more optimally and incentivize our people to align personal and team success with that of our own. To do so, we'll be shifting to a modern labor model with hours-based management to improve deployment planning for real-time performance monitoring and management. This platform is already through the testing phase, and we expect it to be fully live across all shops by the end of the first quarter. Our goal in this labor optimization effort is to deliver better customer and employee experiences while also reducing costs. On the incentive front, we have a number of new ideas, including the transformation of our bonus program to motivate top talent and drive performance. We're also creating ways to identify and develop instant win recognition to both motivate our shop level associates and to share new ideas across the organization. We've implemented a balanced scorecard at the shop level that aligns our incentives around driving traffic and profitable growth, including a share the wealth component to the plan, We believe we can significantly enhance our field leaders and their employees' careers with the organization, while at the same time better tying these successes with that of the organization and its goals. Both the field and the support center bonus programs incentivize traffic, top-line growth, and profitability, and ensure our teams win when we win. Moving to our third pillar, customer experiences that drive traffic growth. With our new COO, Adam Noyes, leading the effort, we are improving the customer experience while also building stronger unit level economics and shop margins. First, we've created cross-functional teams to identify a pipeline of savings ideas with an objective to improve shop level margins by 50 basis points without any negative effect on the employee or the customer experience. Importantly, the balanced scorecard I mentioned measures operation standards and customer satisfaction drivers across each service channel, along with employee engagement metrics at every shop, driving a focus on repeat customer traffic. This brings us to our fourth pillar, which is directly connected to the third and is focused on digitally driven awareness, connection, and traffic. Our relaunched and simplified perks program was a huge success in the second half of 2020. But there remains significant opportunity to better leverage this data and better understand our customers, increase their awareness of potbelly offerings, and ultimately drive traffic to our shops through targeted promotional activity. Therefore, we are currently redeveloping our app and our web interface to improve the customer experience, allow for easier reordering, and better tie in our perks loyalty program. This new experience is easier and more flexible for our customers and supports frictionless operations execution as we fulfill the customer's order, regardless of how they order or where they might choose to enjoy their meal. This is a huge step for Potbelly and is only the beginning of the journey as we more fully leverage technology to drive traffic, create efficiencies, enhance rewards, and grow our loyal customer base. We look forward to unveiling our new web and app to customers across the system in Q3. Lastly, our fifth pillar is focused on the next leg of our journey, and that's franchise-focused development. Ninety percent of our shops are owned by Potbelly today. And as I said last quarter, that is a tremendous advantage when you're turning around a business and positioning it for strong, profitable growth. but we are significantly underpenetrated across most of the United States, despite having such a recognized and high-quality brand. We can leverage what works to generate growth across both company and franchise platforms. Our recent slate of franchisees remain active and committed to developing over the next few years as originally planned. As the pandemic continues to wane, we expect the next wave of growth to come from leveraging Potbelly's operations, marketing, and shop-level economic model to create a competitive advantage against the other franchising options. We'll welcome three to five new franchise shops in 2021 and expect to see significant annual growth in that number as we work through 2022 and beyond. So, as you can see, the strategic initiatives that support our five pillars show a thoughtful plan that will leverage our core capabilities and enhance our future performance by focusing on proven traffic-driven profitability strategies. We're excited to share our journey with all of you and see our momentum build throughout 2021. With that, I will now turn the call back over to the operator so we can address your questions. Operator?
spk03: Thank you, and I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Joshua Long from Piper Sandler. Your line is now live.
spk04: Great. Thank you for taking the question and for the update today. I had a couple questions. Particularly, you want to start with the momentum that you've seen through the back half of 20 and here into the first part of 21. Exciting to see that and then also when you pair that up against what you've been able to do in terms of steady cost management there at the shop level. I was curious if you might be able to calibrate that as we've seen improvement from 4Q levels at kind of that just under down 20% to something now and then down mid-teens percent on a same-store sales basis. What does that look like at the shop level? I know you talked about getting to profitability in the first half of the year within some upside in the second half, but just from a modeling perspective, just trying to see kind of where maybe some of those pivot points are as sales start to improve.
spk06: Sure. Thanks for the question, Josh. You know, the amount that we're seeing is very exciting. And despite the slight step back there in our second period, seeing the way the business is moving in the third period here is great for all of us. As it relates to the shop level kinds of things that drive profitability, I mean, what we're obviously taking advantage of here as the top line improves is some of the occupancy leverage from some of that work that we did in the end of 2020. We still will have some work to do on COGS. I think Bob mentioned that Adam is working hard on continuing to find efficiencies everywhere we look. And so some of those things are are in place and those things are still to be built. We also, however, understand as we look at the shop, we've got labor efficiencies that we're building too. We have a new labor model that's in place and we're already seeing some benefit from that. As an example, we saw some weeks in period one where we had significantly lower volume, but we're using basically the same amount of labor that we're now using in P3 as a result of that model being deployed because it wasn't deployed in the first period. So we're seeing some benefit from that. We should see some benefit from that. On the other operating expense area, that one is going to move, I think, as it relates to COVID as a part of it. So we still have COVID costs that are in there. We had a lot of additional costs on things like PPE, gloves, and so forth that got really expensive there. toward the back half of the year of 2020. And obviously, you know, one of the things that also hits that line is third-party delivery fees for us. So we are – we expect to get some leverage from sales through some of those things, and we still have some additional work to do.
spk05: Yeah, Josh, I'll add to that. I think that, you know, the The first part of your comment about the sales trajectory is the one that continues to excite us. And so we mentioned during the call, we really do kind of see this as a story of two halves. So we've got the underlying recovery that we think is obviously going to drive some of the business for the industry as a whole. And then some of those initiatives that obviously we started working on towards the end of last year, there is a balance of top line, uh, driving initiatives and we're, we're seeing, um, some success with those. Uh, those are, you know, included in the operational, uh, drivers as well as, uh, some of the marketing and, and, uh, you know, the, the reopening of our shops that have been temporarily closed, but we see the lion's share of the activity, especially against the, the strategy really come to life in the second half. And, um, So, you know, when you look at this kind of head start coming out of winter and into March, it definitely feels like things are headed in the right direction and something we can be very excited about for some of the numbers we've been sharing with how we think the year shapes up.
spk04: Thank you for that. And then thinking about the cost management side, particularly the G&A savings that you called out, should we be thinking about you reinvesting against some of those, I think you called three and a half million on a run rate basis? you're going to reinvest against some of those so that we end up with something in line to slightly higher on a 2021 dollar basis when we get to the end of the year? Or do we look at that as really pulling costs out of the business such that we've created a new base, a new lower dollar base from which we can think about modeling 2021 and then out into 2022?
spk05: No, thanks for the chance to clarify. Yeah, that is, you know, we intended to restructure to create a G&A burden on the business that was lower than it was traditionally had been. And, you know, that's a net savings. One of the things we're excited about is, as you heard us discuss, some of the incentives that we put in place, things that go into taking care of and exciting the team that we have, fully funded bonus programs at the shop level, at the support center level. Those are some of the things that have been reloaded into our plans. still achieving that annual savings. So, you know, the short answer to your question is no, we were looking for a reset. We wanted to get the G&A on our business more in line with the first or second best quartile of performers in the space versus down at the bottom end, you know, third or fourth quartile where we were maybe even back as late as 2019.
spk04: Great. Thank you. I'll pass along and then hop back in the queue. Great, thanks.
spk03: Thanks, Josh. As a reminder, that's star one to be placed into question Q. Our next question today is coming from Matt Curtis from William Blair. Your line is now live.
spk02: Yeah, hi, good afternoon. Hi. Just getting back to Josh's first question, you know, given that you'll have the inflection into profitability mostly in the second half of the year, Can you talk about maybe what level of average weekly sales or comps that you need to actually get back into profitability?
spk05: Yeah, I'll let Steve dig into some of the more detailed numbers. But, yeah, we think that our average sales volume of down around, I'll call it 30%, you know, 25%, 35% range – or, sorry, up 25% to 35% gets us into that target range where we're looking for that shop-level profitability to build on and then get to the earnings for the company as a whole. And then, you know, I think that if you look at what it takes to be up over 2020, of course, some of these numbers are numbers we've not seen in the industry ever – But in a mid-double-digit range gets us to that inflection point at the company breakeven, adjusted EBITDA breakeven level.
spk02: Okay. So just to be clear, you said average weekly sales up 25% to 30% or so. That's year over year. And then in the double-digit range, positive on comps?
spk06: Yeah. So at the top level – At the shop level, we would need to see comps kind of in the low double digits to, you know, 20s would be in that zone. We would – and that revenue range puts us, you know, between, let's say, 125 and 175 on revenue. And this is – these are first half numbers, by the way. Because as Bob described, we're looking at the year that way. We still have some of the pandemic to run out, and the strategic initiatives really start to layer in in the back half as well. So that's how we tend to view these kinds of things.
spk02: Okay, got you. And then just turning to the lease renegotiations, it seems like you've made some more progress on that front. I mean, in the release it says you have about 320 total leases renegotiated now. It's up from I think it was something like 280 last time we heard from you. And so could you maybe give us an update on the total amount of annual savings going forward you're going to get from this?
spk06: Yeah, sure. I think, you know, we are almost done with all of that work there's still a few a handful i think there's about seven or so on leases that of of the 300 some odd that we touched here uh so it was a big effort and and we are we're excited for the results uh on a on a uh on a basis related to the the closures right um we will save about four million dollars in annual occupancy costs from closing those uh 28 uh 28 shops um the The lease savings kind of varies because in some of those negotiations, right, we extended term and we did some other things in there. But it also helps us in terms of abating our, I should say, avoiding some shop losses. It's about $15 million in shop losses that we will avoid as a result of going through all those lease actions.
spk02: Okay, I got it. Thanks very much for your time.
spk03: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Bob for any further closing comments.
spk05: Well, thanks, everyone, for your time today. We really appreciate you joining the call. We're excited about the future here at Potbelly, and hopefully you can hear that we believe we're just at the beginning of what the company can do to reach its full potential. Our team is motivated, we're committed, and we will achieve success, and we're confident that we've got the right team and the right strategy to make that a reality. Look forward to providing you with more regular updates, especially on those various initiatives as we move forward. And most of all, we appreciate your interest and your support for the brand. Have a great day, everyone.
spk03: Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Disclaimer