Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's third quarter 2023 earnings conference call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and 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 Cerullis, Senior Vice President and Chief Financial Officer, and Adia Dixon, Chief Legal Officer and Secretary of Potbelly Corporation. At this time, I'll turn the call over to Adia Dixon. Please go ahead.

Good afternoon, everyone, and welcome to our third 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 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 an 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, Adia, and good afternoon, and thank you for joining our call today. We delivered strong third quarter results demonstrated by solid top line improvement and 8% same store sales growth. Notably, our traffic growth remained a strong contributor as we continue to take traffic share from the fast casual category each week through the quarter. We also grew shop level margins through continued leverage across food and labor costs, resulting in a 400 basis point improvement year over year. I'm proud to say that these results were driven by the cumulative effect of our discipline strategy and execution over the past many quarters, driving our confidence in the sustainability of the results we've achieved thus far. we remain focused on achieving the long-term growth potential of this amazing brand. As we look forward to the end of the year and into 2024, we will continue to execute against our five-pillar strategic plan to achieve traffic-driven profitability and unit growth. This includes craveable quality food at a great value, people creating good vibes, customer experiences that drive traffic growth, digitally-driven awareness and connection, and franchise-focused development. With that, let me update you on our ongoing initiatives that support these pillars, starting with the Potbelly Digital Experience. We're pleased with another quarter of outstanding performance in our digital business, driven by meaningful progress in our perks loyalty program. All in all, our digital business represented approximately 37% of our total shop sales during the quarter, an increase of approximately 150 basis points relative to the same period last year. Importantly, we also continue to see a shift in our digital business away from third-party channels and towards Potbelly-owned app, web, and perks-originated orders. We are committed to serving our customers with the occasions that best meet their needs each time they visit Potbelly, including our unique in-shop fast casual dining experience and through the variety of order occasions delivered by the Potbelly digital experience. During the quarter, we were thrilled to see growth in both verticals. Turning to our Potbelly Digital Kitchen, the rollout of PDK to our existing shops is progressing as planned, and we will continue the deployment of PDK across our system of existing shops as a standard in every new franchise location. More importantly is the benefit of PDK to our operations, which are clearly demonstrated not only by the ongoing growth of our digital business and our ability to handle the incremental throughput, particularly during peak periods, but also operating efficiency and improvements in the customer experience from orders ready on time to accuracy of food and quality scores. Importantly, we continue to leverage the throughput learnings from PDK and shops yet to be rolled out in our ongoing effort to drive traffic. Our traffic-driven foundation to sales growth continues to be supported by our marketing initiatives, including LTOs and digital-only promotions designed to drive traffic, value, and excitement for our customers. During the quarter, we introduced our latest underground menu item with the Lucky 7 sandwich, uniting all seven meats from two of our most popular sandwiches, the Italian and a rec. Overall, our underground menu introductions available only on the Potbelly app. continue to be among the most searched menu items in our digital channels. As we look ahead, we will continue to focus on food and marketing innovation to further drive growth of our Perks Loyalty Program and digital channels. Lastly, let me share some exciting updates to our Franchise Growth Acceleration Initiative, or FGEA. As we mentioned on our last call, during the quarter, we signed a 27-unit deal in Maryland through a partnership with our company founder, Bryant Kyle. During and subsequent to the end of the quarter, we signed multiple additional new development agreements, including a 40-unit deal that is comprised of four re-franchise shops and a commitment to develop 36 new shops in both Ohio and Florida. Our shop development commitments now total 150 shops to date. I'm proud of what our franchising team has accomplished in such a short period of time. We remain focused on achieving our 10% unit growth in 2024. We continue to have a highly active and fluid pipeline of qualified Potbelly franchise candidates. And when combined with our unique brand and proven business fundamentals, we believe we have the foundation and the right team in place to drive long-term growth. Looking forward, we will continue to emphasize our franchise focus and build the organization's capability to support our franchise growth as we head towards 2,000 units in the US. We look forward to sharing additional updates on our next calls as more SDAAs or shop development area agreements are finalized. Finally, let me reiterate how proud I am of our Potbelly team. Their hard work and commitment to our unique brand have resulted in a strong third quarter performance. And they do so by carrying out our mission to delight customers with great food and good vibes, creating a distinct and differentiated fast casual experience for each of our customers from their first moment to their last bite. With that, I will now turn the call over to Steve to detail our financial performance for the third quarter.