Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's first quarter 2023 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 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Adia Dixon, Potbelly Senior Vice President and Chief Legal Officer. Please go ahead.

Good afternoon, everyone, and welcome to our first quarter 2023 earnings call. Our presenters today are Bob Wright, our President and Chief Executive Officer, and Steve Sirilis, 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 2023 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 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. 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 investment 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.

Thank you, Adia. Good afternoon, and thank you for joining our call today. Before we get into this quarter's results, I would like to begin by thanking our Potbelly team for their hard work and commitment to our unique brand. Potbelly employees are instrumental in providing a differentiated and welcoming environment for each of our customers. I'm so proud of our team. From our frontline associates to our support center employees, it is the continued efforts of our people that drove our success in the period. I will begin on slide three with a high-level overview of the first quarter. I'm particularly proud of our results despite continued economic uncertainty and the return of typical first quarter seasonality. We enjoyed strengthened traffic across our portfolio, notably exceeding pre-pandemic traffic levels as a company. Traffic was supported by further recovery in our CBD shops, which continue to serve as a tailwind for our business. strength in airport shops, as well as strong engagement with our digital marketing promotions. Marketing was a major contributor to our traffic and sales performance, notably the implementation of targeted digital advertising, special offerings, and growth in our perks loyalty program. We also enjoyed success with our limited time only menu items, digital only promotions this quarter, which I will speak to in greater detail shortly. We continue to make progress and achieve important milestones towards our franchise-focused development goals in the quarter, with agreements for 30 new shops. We also signed our first re-franchising deal for eight shops in New York City. In line with our previously stated re-franchising strategy, our New York City agreement was accompanied by a 13-shop SDAA, or Shop Development Area Agreement, to further establish our brand in the market. We're very excited by our franchise momentum to date, as well as the health of our pipeline. We also continue to see the benefits of an ever sharper operational focus on the fundamentals, which resulted in notable improvement in associate and manager staffing and turnover, leading to increased throughput and customer satisfaction scores. Finally, we expanded PDK or Potbelly Digital Kitchen implementation into 12 additional locations during the quarter, and continue to see the improvements in our associate experiences driven by their ability to more easily handle the growing digital business coming through our second production line, and improvements in our customer experiences driven by orders ready on time, accuracy, and food quality scores. Additionally, we were able to capture labor efficiency with these improvements, and finally, The digital inline order-taking function of PDK is unlocking additional throughput where we previously had capacity constraints during peak periods. I'd like to turn to slide four to provide a high-level overview of our financial successes in the quarter. Performance metrics included quarterly revenue was $118.3 million, and AUVs were $23,881, driven by robust customer traffic in the period. Shop-level margins for the quarter grew to 12 percent, a 700 basis point improvement year over year. Same-store sales grew by 22.2 percent, driven by aforementioned exceptional strength in traffic. And lastly, we reported adjusted EBITDA for the quarter of $5.6 million, an increase of $7.8 million year over year. Turning to slide five, I'll walk you through our digital marketing successes for the first quarter. we enjoyed another outstanding quarter of performance with our digital efforts. 39% of sales were attributed to digital channels, meaningfully contributing to our AUV and revenue expansion in the period. Additionally, our strategic marketing focus continued to support traffic-driven sales growth. In the period, we launched our digital-only Meatball Madness campaign, as well as fan-favorite LTOs, including the Cubano Sandwich and our Red Velvet Cookies. We were excited to announce the return of the Potbelly underground menu and promoted three unique meatball sandwiches you can't find on a regular menu. The promotion drove customer excitement and perks engagement supported traffic growth. Overall, our marketing and LTOs continue to drive traffic, value, and excitement for our customers. And we remain keenly focused on food and marketing innovation to further expand these promotional efforts in the coming quarters. With that, I'll now turn the call over to Steve to detail our financial performance for the first quarter. Steve?