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spk02: Everyone, and welcome to Potbelly Corporation's second quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the call over to Ms. Adia Dixon, Potbelly Senior Vice President and Chief Legal Officer. Please go ahead.
spk00: Adia Dixon, Potbelly Senior Vice President and Chief Legal Officer. Good afternoon, everyone, and welcome to our second quarter 2022 earnings call. Our presenters today are Bob Wright, our President and Chief Executive Officer, and Steve Surlis, 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 the remainder of 2022 or any other future period, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. 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 Form 10-K under the headings Risk Factor and MD&A. 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 some items 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 this afternoon, both of which are available in the investors tab of our website. I'll now turn the call over to Bob.
spk05: Thank you, Adia. Good afternoon, all, and thank you for joining us today. I'd like to begin our call today by thanking our Potbelly employees for their continued hard work and commitment to our company. Our people are the heart of our brand. It is their positivity, diligence, and strong work ethic that allows Potbelly to operate as the top quality food brand we promise our customers. I'm incredibly proud of our team and look forward to seeing what we accomplish together as we continue growing. Of course, we know our customers are navigating an ever-changing economy filled with challenges, and we are very happy to continue providing an unparalleled customer experience and value for their money. We'll begin with slide three, which provides a high-level summary of the quarter's results and our views on the broader operating environment. We continue to view our five-pillar strategy as our roadmap to success. Our strategy leverages superior quality food at an excellent value, while elevating our associate experience to set us apart for everyone that visits, providing bring-you-back customer experiences, building brand leadership in all our digital channels, and accelerating growth through franchising and re-franchising efforts. The five-pillar strategy has been the backbone of Potbelly's story from the beginning of the pandemic through the company's recovery and now growth. We've driven significant revenue and profitability improvement as well as record AUVs in the quarter by executing against this strategy. Additionally, our business has proven flexible and resilient in the face of broader macro environmental challenges. We've seen notable improvement in staffing trends, maintained disciplined spending, and continue to drive strong top line growth and expansion in shop level margins. Looking forward, we are highly encouraged by our ability to continue delivering value to our customers, and we remain on a positive trajectory to achieve our long-term growth objectives. Slide four headlines our financial achievements that Steve will cover in detail later in our call, but I'm proud to share we had a very strong quarter. We drove revenues of $116 million in the quarter. We achieved record AUVs of nearly $23,000 per week. grew same-store sales by 17.2% in the quarter, continued our strength in digital business at 36% of sales, and I'm very proud to share that we drove positive net income of $0.6 million and adjusted EBITDA of $5.8 million. We've been clear and consistent about our focus strategy. Today, I'm excited to highlight with additional clarity how the fundamental growth engines of operations, marketing, and development are leading us to achieve such strong performance and why I have confidence that it will continue. To this point, and turning to slide five, I'd like to highlight our recent marketing activities in the quarter that have become an integral part of our business strategy. These efforts always maintain focus on the elements that differentiate our unique brands, starting with our food. Our customers loved our innovative LTOs, including the successful rollout of cold brew shake, Cubano sandwich, and lemon cheesecake cookie, which have contributed to increased sales and daily transactions. Importantly, we maintained our investments in digital marketing and paid social campaigns as the primary means of marketing not only our LTOs, but broader brand awareness and traffic-driving advertising. In addition to traditional brand awareness and traffic driving methods, we also accelerated targeted digital-only promotions like our one-day-only buy-one-get-one-free or BOGO offers, which resulted in increased perks downloads, perks engagement, as well as incremental perks revenue dollars and daily transactions. Lastly, I'm very excited to announce we recently launched updated branding with a refreshed appearance that better reflects the uniqueness of Potbelly. This includes returning to our heritage as Potbelly Sandwich Works. You can already see our updated logo and colors on our website at potbelly.com and, of course, in today's presentation. Our online creative work will begin incorporating this updated branding later in Q3. The results of our marketing programs and initiatives are highly encouraging, and we have confidence they will be growth drivers into the future. Moving to slide six, I'd like to discuss our progress on our Franchise Growth Acceleration Initiative. We are extremely pleased with the pace and quantity of our re-franchising and new shop development discussions, as well as the state of our current pipeline. To support our pipeline and deal progression, we've held two discovery days so far this year, the most recent having taken place just a few weeks ago. These events allowed a number of experienced potential multi-unit franchise owners to have individualized time with the management team and learn about the unique opportunities here at Potbelly. Alongside our discovery days, our dedicated franchise team is proactively researching and identifying attractive areas for Potbelly's continued development and market penetration through SDAs or shop development areas ready for sale to our franchisees. Additionally, we are continuing to expand our marketing and sales tactics, supported by the integration of franchising tools and systems. Our franchise-oriented goals remain our top priority, and we look forward to sharing specific re-franchising and franchising deal activity as we sign and close those deals. Turning to operations highlights on slide seven, Operations focus is not an area we've previously highlighted in great detail, but we think it's important to discuss the innovative momentum we believe we've established in our ongoing quest for streamlining and improving efficiencies. We view it as a vital part of driving company growth. We're making in-shop investments with the intention of enhancing customer satisfaction through optimized workflows. We've also implemented internal control measures, including new shop-level financial reporting systems, an improved hours-based labor guide, and customer satisfaction monitoring, which allow for improvements to financials as well as the experience we offer our employees and our customers. We're making further improvements to our technology systems and tools to best support the customer experience, driving higher operational standards for the company, too. Additionally, we've begun testing a new in-shop tech platform through what we're calling our Potbelly Digital Kitchen, We believe this project has great potential to build on the customer-facing digital investments we've made over the last 18 months. Potbelly Digital Kitchen is designed to make processing our digital orders more efficient while also improving our traditional in-shop visits, bringing improved customer experiences, better speed of service and on-time orders, increased throughput, improved accuracy, and better food quality. Lastly, we are increasingly aligning our corporate staffing structure to support our franchise-oriented business model. These operational investments not only help us operate our own shops better and more profitably, but they also drive predictability of operation success and consistency, which is critical as we become a franchise growth company. I will now turn the call over to Steve to detail our financial performance in the second quarter. Steve?
spk04: Thank you, Bob, and good afternoon, everyone. Please turn to slide eight of the presentation, where we outline the progression of average unit volume, or AUV, as well as same-store sales throughout the second quarter 2022 and the month of July. We have continued to achieve substantive same-store sales growth, delivering an increase of 17.2% versus the second quarter of 2021. This growth was supported by the continuing recovery of our CBD and airport shops. As Bob mentioned, we are pleased to highlight record AUVs of approximately $23,000 in the quarter. July AUVs moderated slightly, but this is solid performance as it included the traditionally lower traffic July 4th holiday period. As you've heard from other restaurant concepts, there is some uncertainty about how customers will react to the dynamics of the economy. So far, our customers have demonstrated that potbelly remains a strong part of their eating out routine. Turning to slide nine, I'll walk you through our income statement and specific financial performance for the second quarter of 2022 compared to the second quarter of 2021. During the second quarter, total revenues were $116.0 million, an increase of 18.9% compared to $97.5 million in the prior year quarter. This was driven by a number of factors, including our strong same-store sales increases, successful digital advertising and promotions, LTO marketing efforts, and strategic pricing increases. Additionally, the continued recovery of our CBD and airport shops supported our top line expansion alongside healthy performance in our other shop types. We reported a positive net income of .6 million dollars, a meaningful increase compared to a net loss of 3.9 million in the prior year period. This is our first positive net income quarter since the first quarter of 2017. demonstrating the impact of our five-pillar strategy and strength of execution. Our adjusted net income was $1.5 million, compared with a net loss of $2.9 million in the second quarter of 2021. Our adjusted EBITDA was $5.8 million, over three times the $1.9 million in the year-ago period. This notable step up in adjusted EBITDA was driven by a combination of strong top-line performance, expanding shop-level margins, and disciplined cost management. DNA costs in the second quarter were $8.8 million, or 7.6% of total revenues, compared to $8.7 million, or 8.9% of total revenue, in the second quarter of 2021. The decrease on a percentage basis was primarily the result of top-line leverage. Food, beverage, and packaging costs, or F&T, were $32.8 million, or 28.5% of shop sales, versus $26.3 million, or 27.2% of shop sales in the year-ago period. The increase in F&P on an absolute basis was due to higher volumes as well as higher input costs, specifically protein, packaging, and paper products and bread. Managing the impact of persistently higher input costs remains a priority, and we are committed to protecting our margins and bottom line while providing value for our customers. For the full year, we expect to see up to 18% F&P inflation primarily driven by protein. It was higher than that in the second quarter, and we expect it to be at similar levels in Q3 and eventually moderate in Q4. Labor expenses were 36.1 million or 31.4% of sales compared to 32.0 million or 33.0% of shop sales in the year-ago period. The increase on an absolute basis is a result of wage increases in line with that of the broader industry over the trailing 12 months. Despite the higher wage environment, we have been able to decrease labor expenses on a percentage basis by 160 basis points due to top-line performance and the positive impacts from our labor-related initiatives, such as referral bonuses, the tipping initiative we implemented last quarter, and our hours-based labor guide. As we look forward, we anticipate moderating labor inflation rates across food and beverage as well as packaging. We continue to be encouraged with our ability to efficiently staff our shops in order to meet demand in the midst of a challenging operating landscape. Other operating expenses were $19.1 million or 16.6% of sales, compared with $15.6 million or 16.1% of sales in the year-ago period, largely driven by expenses that scale proportional to revenue, such as third-party delivery fees, as well as inflation and some fixed expenses like utilities and repairs and maintenance. Before discussing shop-level margins, I would like to remind everyone that beginning in Q1 2022, we elected to adjust and reclassify our margins to now carry certain advertising and marketing expenses based on a percentage of sales, aligning with the reporting structure of franchise-oriented organizations. Shop-level margins were 11.4%, exceeding our guidance range of 9% to 11%. This was a meaningful improvement compared to 9.7% in the year-ago period driven by top-line growth, the continued recovery of CBD in airport shops, and improved operational efficiencies. Our liquidity position at the end of the second quarter was $26.9 million, consisting of $14.7 million of cash on hand, plus $12.2 million available on our existing credit facility. Slide 10 highlights how our channel mix has evolved over the past year. We are pleased to see the percentage of sales attributed to our digital channels has remained relatively stable and ended the second quarter at 36%. This consistently strong digital contribution reinforces the positive response and customer engagement we have enjoyed as a result of our enhanced tech stack, individualized perks loyalty program and perks focused marketing deals, such as our digital and perks targeted BOGO promotion. Additionally, in-shop dining saw an increase of four percentage points sequentially as weather conditions improved and more customers returned to our shops. This was in line with expectations. As mentioned earlier, we are excited to highlight our strong AUVs in the second quarter as a significant achievement as we look out to our 2024 objectives. I'll conclude on slide 11 to discuss our 2022 priorities and guidance. In 2022, we remain focused on executing against our five-filler strategy, which we view as the foundation to continue delivering business expansion. Additionally, we continue to prioritize and strengthen our menu innovation, digital marketing activity to drive awareness and traffic throughout the brand. We believe our digital marketing platform allows Potbelly to enjoy greater guest acquisition rates as well as establish deeper brand loyalty with its patrons. These priorities will drive our path to achieving our 2024 long-term growth objectives. Additionally, we remain on track to deliver our previously provided 2022 guidance of record AUVs, double-digit growth in same-store sales, and shop-level margins in the low double-digit range. For the third quarter 2022, we are expecting total revenues of between $113 million to $118 million and shop-level margins of between 9% and 12%. Note, our guidance does not take into account the potential impact of re-franchising opportunities that could occur during the quarter. Additionally, subsequent to quarter end, we received forgiveness for our $10 million PPP loan, which will impact our third quarter 2022 financials. With that, I'll pass the call back over to Bob.
spk05: Thank you, Steve. Turning to slide 12, I'd like to remind you of the 2024 growth targets we unveiled back in March. First, AUVs of $1.3 million, which we've seen meaningful progress towards through our improving performance rooted in our commitment to enhancing the customer experience, investment in technology, operational systems integration, strategic marketing, and our differentiated menu. Additionally, we continue to enjoy recovery across our full shop portfolio, particularly that of CBDs while maintaining strength in our digital mix of business. Second, shop level margins of greater than 16%. I'm pleased with the progress, and I'm confident we can continue our march towards this goal with heightened sales leverage, careful management of supply chain and food costs, and stronger in-shop efficiency driving lower labor costs, including many of the systems I mentioned earlier in the call. Thirdly, re-franchising approximately 25% of our company-owned shops by the end of 2024. We've made significant progress towards this goal, and as I mentioned earlier, we will provide specifics around deals once they are signed and closed. And finally, we're working to achieve a franchise unit growth rate of at least 10% through our shop development area agreements, supporting our shift to a primarily franchise-oriented organization. We view our long-term U.S. shop total to reach 2,000 units and at least an 85% franchise system. which we believe we will achieve through the attraction of high quality franchisees interested in Potbelly's strong competitive advantage in the fast casual space. With that, I will now turn the call back over to the operator to address your questions.
spk02: Operator? We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is from Matt Curtis with William Blair. Please go ahead.
spk03: Thanks very much. Good afternoon. I guess the first question on your extension of targeted digital offers during the quarter, which seemed to go fairly well. I was just wondering, you know, I mean, you've talked in the past about leveraging the detailed check data you've been collecting from your new tech stack to deliver more personalized offers for Perks members. I mean, is there any data you can share around perhaps the sales lift or the percentage of offers that result in a transaction You know, I'm just trying to get some context around what the impact is.
spk05: Yeah, thanks, Matt. Yeah, we appreciate it. We have enjoyed some extended success with some of these digital targeted offers. And as you mentioned, many of them have been targeted towards everyone in the digital world, both web and app. We've narrowed that through the quarter occasionally to app and perks only. I should say perks only, which has gone really well for us. And we have continued this segmentation of our offers for our perks members based on their check level data and their frequency. We won't share for competitive reasons exactly how those levers are working for us. But what I can say is we've grown our perks population over 2.2 million perks members. And across all the fronts that would matter in terms of outcome, the mix of our sales that is perks-driven sales, the frequency of those perks transactions compared to non-perks transactions, the average check that we get on perks versus non-perks orders, and our ability to improve the frequency of the perks members within that environment is all improving because of these results. And, you know, candidly, we still think we've got a lot of dry powder here. We're We're a full quarter now into the segmented offers and the check level data and segmentation that we get out of that. We're learning about what works in terms of promotional activity and the algorithms that we use to target those consumers are learning with us, which is a great benefit. So we think there's a lot more we can do there. We're looking forward to not only growing just total perks members, but the contribution to the business.
spk03: Okay, great. Glad to hear it. I guess shifting to your promotions, I mean, you brought back the Cubano LTO, which seems to go well. I was wondering if you could talk about how often you plan to run these in the future. I mean, I know in years past it used to be more of a seasonal thing. And then relatedly, what price points they're expected to be at. I know historically the LTO seemed to be a little bit more premium priced. The Cubano seemed to be more in the kind of mid-price to premium price range. So I'm wondering if that's kind of the target going forward, or maybe if you consider doing a more value-oriented LTO given the inflationary environment.
spk05: Yeah, great question. First of all, we've enjoyed bringing food innovation back. And you're right, we've gone back to the pantry on a couple of products that have worked well for Potbelly years ago. Even those, though, have some improved and slightly different ingredients. And if you think about them across the menu, what I think you see us doing is offering our customers our sandwiches in an LTO format. We've done the cookies as well, and we've now done the shakes. We have done some things with meal deals, but on a little more subtle basis. The thing that we're learning is that Each of these behave differently. So sandwiches provide a clear quality lift to the brand, and Cubano did that. Cubano performed really well. We tuned the price so that it fit the laddering and tiering that we did with the three-size menu last year. We don't want to create value disparity across the menu even when we do an LTO. We priced up the gyro a little bit, the one that we've run more recently, because it has some higher input costs. And we see those providing lift with a little bit of mix, but also with some of that check growth. Now, cookies behave differently, very differently. You know, customers are adding our cookies as add-ons, and we really like the add-on incidence that comes with them. We're getting a whole lot of love on social media for the various flavors we've introduced and how much people are creating videos about how much they like our cookies. And the LTO cookies are no exceptions. We're seeing similar behavior with the shakes. So I think what you're gonna see with us is a continued pulsing of LTOs so long as they benefit the customer, they don't disrupt the operations, and they bring positive advantage to the financials all across the board.
spk03: Okay, great. You know, shifting to the digital kitchen platform, that you're testing. I mean, you seem to be testing a variety of technologies designed to improve operations as well as, I would imagine, improve the employee experience as well. I'm wondering if you could be a little more specific about what kinds of things are being tested, as well as when you think they might be ready to be broadly deployed in the store space.
spk05: Yeah, I'd be delighted. That's part of the reason we added that to our prepared remarks. A lot of what we've talked about in the last year is what we've done with the tech stack, and most of the tech stack work was consumer-facing, the app, the web, and even the integration layers for perks and for all of our digital orders. We had always seen this down the pipeline. We were working on it a little more quietly, but we also know that in the shops, there's an opportunity for additional technology investments, whether they're through software enhancements that allow us to manage the business better, like I mentioned, some with our labor guide and the financial performance metrics that we have, the operation standards, evaluations, tools that we use. But specifically with Potbelly Digital Kitchen, what we've done is taken the advantage that Potbelly already had by having two make lines. We've talked about that a lot over the last couple of years. And digitizing both of those lines so that we can be even better at delivering the customer's expectations when they order digitally and even more successful with throughput and with customer quality when someone comes in the front door and goes through the front line. So our ability to receive, process, sort those orders, present them to our associates so that they can coordinate the orders, they can make sure that the orders are ready on time. We get the advantage of monitoring all of our shops that have those systems in place so that we can troubleshoot and coach where there may be gaps. And we can also use that data to continue to tune the labor guide and enhance the system itself. So We're excited to be at that point where we're doing some more digitization in the shop. We have it in more than a handful of shops now, and we're pleased with the results so far. We've got some additional testing to do, but we're at the point where we're going to be contemplating what the investment costs would be for a broader rollout and be in a position in the future to talk about why we believe that investment makes sense.
spk03: Okay, great. I guess shifting over to pricing and the commodity environment, do you expect to take more price in the balance of the year at this point? And maybe you could also just remind us what your cumulative price benefit is right now. And then I guess a third part of that question, sorry, is you could maybe remind us how much of your commodity basket has locked in for the balance of the year as of right now.
spk05: Sure. I'll let Steve help us with some of the pricing discussion, because like everybody in this space, we're all watching it very closely. We've tried to manage the balance on the commodity side really closely. If you look at third quarter, about 85% of our basket is locked, and it drops to about 60% when you get to fourth quarter. Normal times, you'd expect more of that to be the case, but Like a lot of brands, I think we're expecting some moderation in those supply chain pressures and those costs, so we want to make sure we've got the flexibility to take advantage of that when it happens. And, you know, we have taken two pricing raises so far this year, and we're prepared and flexible for one more. But, you know, in total so far, we're at, Just go ahead, Steve. Steve's dying to help me out here.
spk04: Yeah, I think it bears repeating, you know, our pricing posture is really specifically designed to try to offset inflationary pressures on our input. And we've been kind of moving along at a similar pace. I think we expect with our actions to be roughly the margin neutral after we're done. Bob said we have one more pricing increase that's contemplated. And our inflation is, you know, inflation, we feel on the commodity side has hit its peak, right? I know you probably heard that from other folks as well. The expectation is that Q3 is still going to be pretty high, but that we're going to start to come down more meaningfully in Q4. And with labor, we've seen labor certainly still high, but a little lower than what we expected. And Bob mentioned some of the things that we're doing on that side, our tipping program in particular, I think helped us moderate those wage increases. But Bob's right. We took a pricing action in P6, and we've got one more that's expected. So we haven't We haven't seen demand fall off as a result of the price increases. You've probably heard from others, there's some softening out there in the environment. But for us, we've been really careful about the way that we've thought about moving price to keep pace with inflation and balance that with customer value and demand. And so far, we've been pretty happy with the way we've been able to work that balancing.
spk03: Okay, understood. I guess to touch on your restaurant-level margin guidance for the third quarter for a minute, 9% to 12%, a smidge wider than it was last quarter, where it was 9% to 11%. I'm just wondering why there is. I mean, is that because of more uncertainty around inflation in the back half, or is it because you're less contracted in the fourth quarter or something else? If you could help us with that.
spk04: It's both of those, honestly. We were pretty excited about expanding our margins year over year to where we got them to 11.4. And as we look into the next quarter, like I said, we're still going to have that high inflation on the commodity side, hopefully with it coming down a bit later in the quarter towards Q4. So we just want to make sure that we've got the right kind of range in place so that if we start to see things change from where we expect them to be, that we've got room. But We fully intend on continuing to work on all the things that will help us expand the margin. Certainly, top line helps us, and we see demand continuing to be strong. Our ops team works hard on the labor side, and we've been able to manage that as well with other costs that are in the system in terms of other operating expenses. we're working toward the, and we always will work toward the high end of that range, and we'll work to beat it. But we wanted to make sure we had a realistic range for everyone to look at us through.
spk03: Okay, understood. And then I guess maybe if I can finish up with just a broader question on the state of the consumer right now. I mean, we've seen a lot of restaurant concepts talk about some demand impact from higher gas prices, and it seems like This has really been concentrated around weakening demand from lower-income consumers particularly. I'm just curious to see if you guys have seen any of that in your sales trends and if you care to comment.
spk05: Yeah, Matt, the – You're right. I mean, listen, one must conclude that the consumer and the customers are under pressure. The broad based inflation that they're experiencing is coming at them from all directions. We have some advantages, though. And as we've said, you know, our our our two pricing increases so far have certainly been pricing increases we've been able to take and haven't seen those directly impact the the demand from our customers in particular. The question really I think that you're getting at is kind of who is experiencing that pressure the most and how are they reacting to the pressure? You know, the jobs market is to their advantage. The savings that they had going into this inflation is to their advantage. And for many, the available credit that they had is to their advantage. Now, for us in the fast casual space and at Potbelly in particular, it's important for us to, you know, note that, that when you're earning $75,000 to $100,000 a year or more where the fast casual consumer really sits, they're just in a better position to withstand the pressure. We have another advantage that food at home inflation is still outpacing food away from home inflation. So those are all kind of the macro external things that we're processing it. At the end of the day, I think we all have to be ready for the pressure to be something that's kind of ever-present for the consumer, at least in the near term. So then you turn internally, and we focus on the things that we control. We're really happy that we installed the new menu that we did last year. That had the effect of installing a value layer into our menu that didn't exist before. And we see some very subtle movement within the menu patterns that suggest that people are still using Potbelly, but maybe adjusting, you know, very small amounts. But you can see a little more uptake on skinnies. And that's great because that means that that menu is working hard for us. We've intended to have that craveable quality and that great value throughout the menu. We added some expansion to our meal deals. So if If you do have an extra few pennies or a dollar in your pocket and you want to get chips and a bottled drink when you're ordering digitally, but you'd rather get the fountain drink when you're in the shop, you can take advantage of that. You can upgrade also to a shake if you want to do that, so there's some flexibility in those value meals. The promotional activity that we've put forth throughout the quarter, certainly you should see that as a reflection of our desire to make sure we're giving our customers as much value as possible, especially those digital and perks consumers. And they've responded really well. I just would like to add, too, and I know we've emphasized this in past quarters, the brand has typically significantly underspent our competitors in this space when it comes to marketing investments. And because we have two, sorry, we have during that period of time, and we've started to learn of ways that we can promote our brand without doing the discounting, we think we've got a lot of dry powder. These digital promotions are working really well.
spk03: Okay, great. Well, thanks very much, and congratulations on the continued improvement.
spk05: Thank you.
spk04: Thanks, Matt.
spk02: Thank you. We will now pass the call over to Lisa Fortuna from Investor Relations.
spk01: Lisa Fortuna Thank you, operator. This quarter, we are testing a new approach to complement the great questions that William Blair offers by taking questions from our investors. To collect these questions, the IR team reached out to several of our top holders this week and pulled together about four questions. Moving forward, any of our investors are encouraged to submit questions prior to our calls in the future. Our first question is related to the recent 13D. So the question being, do you have any comment on the recent 13D filed by D3 funds?
spk05: Yeah, thank you, Lisa. First of all, you know, we won't comment on quite a bit of it, but what I would like to say is we really appreciate D3 and their support for the stock. They've not been in the stock for a long period of time but are now a very significant holder of the stock, and we've included them in our investor communications from time to time since they entered the stock. We have great respect for their insights and, again, very much appreciate their support, and they've been buyers here for a while. As you mentioned, they just filed a couple of weeks ago, and everyone can find their 13D on our website or if you'd you know, get it directly through the SEC, that's fine too. If you haven't read it, I encourage you to read it. Because I, you know, I personally, we as a team appreciate the way they're looking at the near-term and the long-term value of the company. And we view their stated focus as something that's really well aligned with management's focus in our current strategy. So, you know, we look forward to working with them. And like all of our investors, maintaining an open and positive conversation communications relationship with them over time. So, yeah, happy to see what they're writing about us for sure.
spk01: Thank you. The next question is related to franchising. We've seen one franchise deal. Even if you can't name the partner names yet, where are you in the process? What does the pipeline look like? And where are you with regard to timeline for beginning to execute on the long-term strategy?
spk05: Yeah, we appreciate this question, too. As we mentioned in our prepared remarks, there's a tremendous amount of activity in franchising, far beyond the notion of trying to get to and consummate a deal. And yet I recognize that for investors, you're looking for something with more definity and finality when it comes down to those deals, because for a brand that really hasn't been a significant franchise growth brand, that ultimately is, you know, the proof is in those numbers. What I can say and reiterate what I said in a prepared remarks is that we are in very active discussions with a very healthy pace of a number of franchise candidates and candidly, at every stage of the franchising process, from initial lead and email communications with our sales teams, all the way through to quite detailed and specific deal terms on various deals that we're working on. Ultimately, you know, frankly, I understand the question is coming from, you know, how can we really accelerate that, and are we going to be able to Are we going to be able to meet our near-term and long-term goals of this level of franchise growth? I will tell you, with all the internal insight that I have, I feel quite confident that that's the case. There are a number of reasons, too. I just would like to say there are a number of reasons that we really can't talk about the deals until they're signed and closed, and some of them are internal decisions. We have people working for us in these refranchised potential markets, and we want to take care of them in the right way and honor that transition. In some cases, um, some of the refranchise deals could be in competitive bids and we need to make sure that we maintain all the right confidentiality around that. Um, and of course, um, we, uh, we wouldn't want to publish anything until we know we've got it signed and closed because we don't want to be in a weakened negotiating position. So, um, I'll add to this, too, just in terms of sort of breathing some confidence. The activity of this franchising effort is geographically dispersed. It includes re-franchising deals as well as new development deal work. It includes various sizes of potential franchise candidates as well as various sizes of franchise deals. And as I already said, it is at all stages of the process in all variations of these deals. So we very much look forward to our announcements. And I'll make this crystal clear too, Lisa, that when we have signed deals that are closed, we will announce them in due course and not save those all up for the next earnings cycle.
spk01: Thank you. Next question. Can you provide more color on the Reef Partnership and how it fits into the 2,000-unit goal?
spk05: Yeah, happy to. As I think most of our investors know, Reef is essentially a ghost kitchen food truck operating as a franchisee of the brand. And I'm a fan of their model. I think there's a reason that they've been able to grow the way they have. And when you look at the white space that we have at Potbelly, There's also reason to believe they could be a great partner for us because their model can grow quickly. When successful with a brand, we hope that we can see some of that success too. Where we are specifically is we're finalizing the menu and the equipment package that allows them to prove out the proof of concept in the first couple test locations. Once those steps are complete, getting those first couple vessels, they call them, up and running does not take very long at all. And I'm optimistic that we can get to those unserved customers. I'd like to address a part of the 2,000-unit goal, though. So specifically with regards to that 2,000-unit goal, we developed that goal with an understanding of what market holding capacity was for traditional potbelly units across the country. And I think that's really important for investors as you think about, you know, what are the volumes of our 2,000 units expected to be? What's the contribution from franchise royalties expected to be? And, hey, nontraditional development like Reef and other solutions, this is going to be great for us to help serve our customers and fill in the gaps also. But I wanted everybody to understand that the 2,000 units are really built on a traditional development model.
spk01: And then our final question is, do you see yourself in a favorable position operating in the fast casual segment as consumers start to watch their wallets, or are you noticing some pressure from the consumer?
spk05: Yeah, good question. It kind of builds off Matt's question, I think. And, you know, we are seeing consumers, you know, just try to manage their wallet. But like I said, we're not seeing it in our sales, and we're certainly not seeing the reaction that – that some have seen in sales decline. So we're pleased with where we're set. We're pleased with the typical income of the average fast casual consumer, as well as the potbelly consumer. And as I mentioned, we've been able to outpace the food at home inflation rates here in the restaurant space, which really helps us. You know, the momentum in the business is strong. Our ability to grow the business is strong. And, you know, specifically categorically, I think there's something really special about the fast casual business, and I would compare it not only to QSR like you asked about in your question, but casual dining as well. The gap in average check for fast casual is much larger when you compare it to casual dining than when you compare it to QSR. The gap to QSR is not nearly as large in terms of average check. The data that we've seen suggests that we operate in a fast casual average check that's actually below fast casual averages, which makes us all the more competitive to casual dining and especially for those QSR experiences where they want to have a nicer experience but don't want to step all the way to casual. So we believe we can catch the business on the way down when people are trading out of casual and and we believe we offer an incredible value upgrade from QSR. The business really sits in a great place for us, and we think it's a competitive advantage.
spk02: At this time, there are no other questions in queue. I'll now turn the call back to Bob Wright for any closing remarks.
spk05: Thank you, and thank you all again for your time today. We're pleased to have delivered a notably strong performance this quarter, and we remain highly confident in our business and growth momentum as we continue to navigate today's uncertain times. Potbelly is in the midst of its next phase of growth, and we're excited to continue progressing towards unlocking the brand's fullest potential. And just thank you all for your interest in Potbelly. We appreciate your support. Have a great night.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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