Potbelly Corporation

And welcome to Potbelly Corporation's fourth quarter and full year 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, Senior Vice President, 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 fourth quarter and full year 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 2024 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 under the headings risk factors in our 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. And now, I'll turn the call over to Potbelly's President and CEO, Bob Wright.

Thank you, Adia. Good afternoon, and thank you for joining our call today. I'm very proud of what our team accomplished in 2023. Our five-pillar strategy maintains our focus on what matters most to our customers and associates, while growing our brand to the benefit of our franchisees and shareholders. We strengthened the Potbelly brand with increased system-wide sales driven by 12% same-store sales growth, while simultaneously improving profitability with a 370 basis point improvement to shop margins, achieving 14.2% for the year. We made significant progress with our franchise growth acceleration initiative and ended 2023 with 612 open and committed shops. These development commitments support our target of approximately 10% unit growth in 2024, with growth rates increasing in the coming years. Finally, we fortified our corporate balance sheet by achieving a net cash position through the generation of positive free cash flow and the proceeds from our strategic refranchising efforts. As I mentioned, these successes began three years ago with the introduction of our five-pillar strategy and a unifying objective of traffic-driven profitability and unit growth. The following year, in March 2022, we introduced our three-year targets of achieving average unit volumes of $1.3 million, shop-level margins of 16%, and 10% annual unit growth. So how have we done? We currently generate average unit volumes of $1.3 million, have the opportunity to achieve 16% shop-level margins, and have visibility into reaching our 10% unit growth goal. With the achievement of our 2024 targets in sight, we think it is prudent to provide a view of what we believe we can achieve next. Specifically, we are introducing our new long-term growth ranges that we see as a framework we can sustain over time that also coincides with our path to a 2,000-unit system. We expect to generate the following long-term growth. Same-store sales growth in the low to mid single digits. Unit growth in the low double digits. Adjusted EBITDA growth in the low to mid double digits. We have historically proven that we like to set challenging but achievable targets aligned with how we operate the business. We believe this new long-term growth algorithm is an even better way to understand the power of the Potbelly Corporation as a growth brand in the coming years. Turning back to the fourth quarter now, we delivered strong quarterly results with solid top-line performance and 6.3% same-store sales growth. I feel like a broken record at this point, but again, this quarter, I'm proud to say that our strong sales results were driven primarily through traffic growth, demonstrating our ability to grow our traffic share within the fast casual category. In terms of profitability, our team successfully leveraged our food and labor costs against a strong sales trend resulting in 150 basis point improvement in shop level margins year over year at 15.7% for the quarter. And as I said in the past, these results were made possible through our discipline strategy and execution over the past many quarters as we have strategically rebuilt Potbelly for sustainable long-term success. Let us now dive into the specifics on how we plan to achieve our new long-term growth targets I laid out earlier, starting with the Potbelly digital experience. For the quarter, our digital business represented approximately 40% of our total shop sales, an increase of approximately 150 basis points versus last year, driven by continued progress in our Perks loyalty programs. Notably, we continue to see a shift in our digital business away from third-party channels and towards Potbelly-owned app, web, and PIRX-originated orders. Specifically on PIRX, our effort to increase PIRX loyalty program member acquisition and activation continues to bear fruit as we grew PIRX acquisition by an impressive 87% during the fourth quarter. In January, we further strengthened our digital platform as we launched our enhanced Potbelly Perks loyalty program. Our upgraded perks program celebrates what our customers love the most about Potbelly, great food. Perks members can now earn rewards faster than ever before and have more of our menu items available for rewards redemptions. Previously, perks could only be redeemed after 1,000 points were earned, which we believe could take too long and too many visits. Now redemptions can begin in only 200 coins. Not only that, we now also offer 12 different menu items for redemption, including entrees, sides, and desserts. Additionally, members can accelerate the rate with which they earn coins as their status moves from rookie to pro to boss level. We're excited by the reception thus far and have already seen substantial redemptions for the new menu options. And while digital is an area of strength for Potbelly, we're not standing still. Now, delighting our customers with great food and good vibes is always the foundation for sales growth. I continue to be so proud of our company and franchise operators' focus on customer experiences and throughput to drive top line. Additionally, our marketing initiatives continue to fuel our traffic-driven sales. As we look into 2024, we intend to sustain our traffic outperformance. To that end, we'll continue to strategically invest our brand marketing fund, which is expected to be over 20% larger versus 2023, benefiting from a full year of 3% contributions from company and franchise shops, as well as ongoing system-wide sales growth. We believe this full-court press on marketing will help us further drive growth of our Potbelly Perks loyalty program and digital channels, all designed to drive traffic, value, and excitement for our customers. With that, I'd like to update you on our franchise growth acceleration initiative. Our franchising team continues to be very busy at work growing our pipeline of qualified Potbelly franchise candidates as we make great progress building toward our goal of 2,000 units in the U.S. Historically, we've reported new shop commitments to date under the franchise growth acceleration initiative at the time of our earnings call. This number currently stands at 202 shops. Going forward, starting with our first quarter report, we'll begin speaking about shops committed year-to-date as of quarter end, which we believe gives investors a better view into the progress we are making in achieving commitments for the remaining approximately 1,400 locations still available in the U.S. To that end, under our new reporting framework, we are pleased to have signed several development deals in 2023. bringing our total year-end shop commitments to 188 shops. Combined with our 424 open shops, we are ending the year with 612 open and committed shops. We plan to continue reporting quarterly shop commitments as well as total open and committed shops as meaningful measures of unit growth progress. As we look at our development pipeline, we have visibility into achieving approximately 10% unit growth in 2024. Adam Noyes and our operations development team work closely with our franchisees to ensure minimal delays at all stages of the development process. That said, as we've spoken to previously, we expect our new shop openings in 2024 to be heavily weighted in the back half of the year as we ramp up development sequentially through the year. We look forward to sharing additional updates on both shop development area agreements and new shop openings as we go through the year. With that, I'll now turn the call over to Steve to detail our financial performance for the fourth quarter.