Potbelly Corporation

Good morning, everyone, and welcome to Potbelly Corporation's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Ms. Adia Dixon, Potbelly's Chief Legal Officer. Please go ahead.

Good morning, everyone, and welcome to our third quarter 2021 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 statements 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 Management's Discussion and Analysis of financial condition and results of operation, and in our subsequent filings with the Securities and Exchange Commission, which are available at SEC.gov. During the call, there will also be a discussion of financial metrics that do not conform to U.S. generally accepted accounting principles, or GAAP. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued yesterday evening, both of which are available in the Investors tab of our website. I'll now turn the call over to Bob.

Thank you, Adia. Good morning, everyone, and thank you for joining us today. I hope you and your families have remained safe and healthy since our last update. As always, I want to begin by thanking our Potbelly family for their continued dedication, strong work ethic, and commitment. Our top priority is to provide our customers with a great, safe, and fun dining experience, and your loyalty makes this possible. 2021 has continued to exceed our expectations on a number of levels, including the most recent quarter. So let's get into the highlights and our expectations for the last quarter of the year. Beginning on slide three, starting with the top line, revenues totaled $101.7 million, an increase of 40% compared to the third quarter 2020, with same-store sales increasing by 33.7% as compared to the pandemic-impacted Q3 2020. Same-store traffic, which measures transactions, improved by 21.3% compared to a year ago. This improvement was largely driven by higher volumes across all of our channels, led by dine-in sales, which were up 15% sequentially, despite the impact of the Delta variant. Importantly, our sales and traffic were also driven by the continued implementation of our strategic initiatives during the quarter, namely our new menu rollout, which was launched nationwide in August. our new tech stack, which launched in early July, and our continued successful investment in digital media and marketing. Average unit volumes, or AUVs, were up 4% sequentially and have continued to trend in the right direction throughout the year. In fact, on an annualized basis, Q3 AUVs reached approximately $1,050,000. And it's important to note that we achieved these volumes despite the lagging recovery of our CBD and airport shops. In terms of performance by shop type, we saw continued strength across our urban, suburban, drive-through, and university locations, while our CBD and airport shops made meaningful progress towards recovery. As we said last quarter as well, these currently lagging shop types continue to trend in the right direction and offer further upside for Potbelly's overall growth moving forward. Top line strength led to positive EBITDA and adjusted EBITDA for the second consecutive quarter. We also had our third consecutive quarter of shop-level profitability, albeit slightly lower sequentially due to market-driven labor and other inflationary pressures. It's worth noting that despite the significant environmental margin pressures, we were able to keep the impact to only an 80 basis point degradation of shop profit quarter over quarter. Steve will cover this in more detail in his section later in the call. We completed the staffing of our executive leadership team with the appointment of David Daniels as our chief marketing officer in mid August. David brings over 20 years of direct restaurant and CPG experience leading some of the world's best selling brands. Still in his first few months, David is already making an impact on advancing the Potbelly brand vision, digital marketing and customer loyalty strategy that will drive further brand awareness and traffic growth, franchise and field marketing, as well as consumer insights and innovation. Turning to slide four, as I mentioned, in early August, we rolled out our new and improved menu to all of our shops nationwide. You can see the new menu layout here. Some of the key features include the addition of skinny-sized sandwiches across the menu, larger, original, and big sizes with more meat and more cheese, expanded pick-your-pair options, and some new sandwich offerings, including the all-new Chicken Club, Steakhouse Beef, and avo turkey with our hand-sliced fresh avocado. We're pleased to report that the launch is performing in line with tested results and delivering a very healthy blend of traffic and check growth. The social media response to the new menu has been extremely favorable, as you can see here. On slide five is a recap of the new tech stack that we launched in July, including new mobile app, website, digital ordering integration, and perks loyalty program integration. We touched on the tech stack a bit in our last quarterly call and can confirm that the benefits have made a positive impact on our results. And importantly, consumer reaction continues to be very positive. The new design is better aligned to our branding, more authentic, as well as more user-friendly for our loyal customers. On slide six, I'd like to highlight the success of our continued investment in digital media and marketing. Q3 advertising spend was 0.9% of revenue, an increase of 0.6% over the same quarter a year ago. We've leveraged our placements to highlight the very best aspects of Potbelly's experience, namely our high-quality menu offerings and our good vibes customer experiences. We were also able to market our customer-facing initiatives, such as the new menu and tech stack. Our test and control methodology confirms that we're driving awareness, traffic, and sales that deliver favorable returns. I'm confident that the power of the Potbelly brand, coupled with the outstanding customer experiences delivered by our associates, makes the continued investment in marketing an impactful part of our growth strategy going forward. I'll now turn the call over to Steve to provide more details on the financials and sales trends. Steve?