Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's second quarter 2023 earnings conference call. Today's call is being recorded. This time, all participants have been placed in a listen-only mode. The lines will be open for your questions following the prepared remarks. On today's call, we have Bob Wright, President and Chief Executive Officer, Steve Gorillaz, Senior Vice President and Chief Financial Officer, and Will Atkins, Vice President, Controller of Potbelly Corporation. At this time, I'll turn the floor over to Mr. Atkins. Sir, you may begin.

Good afternoon, everyone, and welcome to our second quarter 2023 earnings call. By now, everyone should have access to our earnings release and accompanying investor presentation. If not, they can be found on the investor relations section of our website. Before we begin our formal remarks, I need to remind everyone certain comments made on 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 press release and investor presentation issued this afternoon, both of which are available in the Investors tab of our website. With that out of the way, I would like to turn the call over to Potbelly's President and CEO, Bob Wright.

Thank you, Will. Good afternoon and thank you for joining our call today. I'm extremely proud of what we've achieved this quarter. At a high level, we grew same store sales by 12.9%, driven mainly by traffic growth. Continued to take traffic share from the fast casual category each week through the quarter. Grew shop level margins by 300 basis points, including leverage across food, labor, and occupancy. and signed incremental development deals, bringing our total shop development commitments to 106 shops to date under our Franchise Growth Acceleration Initiative. We continue to make excellent progress executing our five-pillar strategic plan, and we're excited about what we can achieve in 2023 and beyond. Diving into more specifics, let's start with the Potbelly digital experience. We enjoyed another outstanding quarter of performance in our digital business, achieving our seventh consecutive quarter of record digital sales, driven primarily by strong performance in our Perks loyalty program. For the quarter, our digital business represented approximately 38% of our total shop sales. While the growth in this channel has been tremendous, we believe we are still in early innings of our digital journey and are excited about the major opportunities ahead to further grow our Perks penetration with our guests. Our operations and customer experience improvements continue to drive traffic and sales as well. We've seen year-over-year improvements in staffing, management, and associate turnover, and peak hour throughput yielding improved customer experience scores not only overall, but in the areas of speed, accuracy, food quality, and friendliness. Our associates and managers are participating in their business success through our tips and shop-level bonus and incentive programs driving engagement, and a strong sense of ownership. We also continue to be encouraged by the benefits we're seeing from Potbelly Digital Kitchen, or PDK, which are clearly showcased through the ongoing growth of our digital business and our ability to handle the incremental throughput, particularly during peak periods. Moreover, the improvements in the customer experience are equally important, evidenced by orders ready on time, accuracy, and food quality scores. We continue to expand Potbelly Digital Kitchen installations in existing shops, and we're excited to announce that PDK will be standard in all new franchise locations, further amplifying the rollout across the system. Strategic marketing continues to support our traffic-driven foundation to sales growth and is a large part of the success we've seen in the Potbelly Digital experience in recent quarters. We're excited to announce the return of the underground menu only available in our app. During the second quarter, we added our fourth underground menu item with the reintroduction of the Clubby, featuring roasted turkey breast, hickory smoked ham, crispy applewood smoked bacon, and provolone cheese, dressed with lettuce, tomato, and buttermilk ranch. The customer reception has been amazing, with the Clubby reaching our number one sandwich in the first few days, despite only being available in the app. All in all, our marketing and LTOs and digital-only promotions continue to drive traffic, value, and excitement for our customers while also serving as a continued growth driver for the Perks Loyalty Program and our digital channels. We remain keenly focused on food and marketing innovation to further expand these promotional efforts in the coming quarters. Moving to our Franchise Growth Acceleration Initiative, or FGA, Our new shop development pipeline continues to build as we further emphasize our franchise focus and build the organization's capability to support growth. We have a highly active and fluid pipeline of qualified Potbelly franchisee candidates, from initial leads all the way to our regularly scheduled discovery days. We were excited to share earlier this week the summary of one of our more active markets in the state of Florida. As part of our ongoing investment in our organization's capabilities, in June we announced the appointment of Lynette McKee as Senior Vice President of Franchising to oversee all aspects of franchisee market planning, franchise recruitment, and sales. We're excited for Lynette to build upon the progress that we've already made as we continue to build towards 2,000 units in the U.S. over the next decade. Already in her first few weeks, Lynette has begun to refine our targeted recruiting efforts, fine-tune our franchisee selection criteria, and she has advanced deals soon to be announced. Furthermore, subsequent to the end of the quarter, we welcomed Bryant Kyle, our company founder, back to the Potbelly family through the announcement of a 27-unit deal that includes 12 re-franchise shops and a 15-shop development agreement in Maryland. Brian has a keen understanding of the Potbelly vision and deep appreciation for the brand and what sets us apart. We look forward to his leadership in the franchise system and to him accelerating our growth momentum in Maryland as we continue to execute our strategic franchise and growth strategy across the US. Potbelly's unique brand combined with proven business fundamentals and an experienced team is the foundation of our ability to drive growth for the next decade. As we look ahead, There's still work to be done, but I'm incredibly pleased with our progress on all things franchising, from lead generation and franchisee selection to real estate and construction support. We're building a best-in-class franchising organization, and we remain committed to our long-term unit growth goals. We're highly encouraged by our progress thus far and look forward to sharing more updates this year as more SDAAs or Shop Development Area Agreements are finalized. Turning to our 2024 growth targets, our strong brand values, strategic marketing efforts, and continued execution of our five pillar strategy has built upon the momentum we've created in recent years. Achieving $25,950 per week during the second quarter or over $1.3 million on an annualized basis gives us increased confidence in achieving average unit volumes in excess of $1.3 million across the full year 2024. Our shop-level margin target remains at 16%, which will be driven by continued portfolio-wide top-line leverage, operational efficiencies, and cost discipline. And we remain committed to our target of 10% unit growth in 2024. Overall, we're very happy with where we stand relative to our 2024 targets, and we're focused on continuing to execute to achieve our near-term goals and build the foundation to achieve our 2,000-unit potential. Finally, I'd like to thank our Potbelly team for their hard work and commitment to our unique brand and the growth trajectory we're on. Potbelly employees are instrumental in providing a distinct and differentiated fast casual experience for each of our customers and ensuring they're satisfied and delighted from their first moment to their last bite. 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 quarter. With that, I'll now turn the call over to Steve to detail our financial performance for the second quarter.