Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's first quarter 2024 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 Surlis, 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 first quarter 2024 earnings call. By now, everyone should have access to our earnings release and accompanying investor presentation. If not, they can be found in the Investors tab of our website. Before we begin our formal remarks, I need to remind everyone that 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 Another information that will be given today can be found under the risk factors heading 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 the 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 on 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. We are proud of our solid start to the year across multiple fronts. In terms of profitability, we successfully managed both restaurant-level and corporate costs, driving 150 basis point expansion to shop-level margins year over year to 13.5%. as well as strong corporate profitability with adjusted EBITDA of $5.7 million. This was made possible through the disciplined execution of our team members as we work to achieve our long-term sustainable growth. On the development front, our franchise sales team added 32 additional franchise commitments to our pipeline during the quarter, while our franchise development team helped open three new shops. Importantly, our momentum on both fronts continues into the second quarter. On the top line, we continued to outpace the fast casual segment and once again took traffic share for the quarter. That said, industry trends were marginally softer than we were anticipating, leading our results to be below our expectations and slightly below Q1 2023 COPs by 0.2%. As with industry trends, we saw some slight declines in transactions from our more infrequent customers. These customers tend to skew to more in-shop visits and slightly less digital. Importantly, though, as I'll share shortly, our digital marketing and promotional efforts, as well as our new perks loyalty program, drove growth. Those elements of our plan that we drive continue to build top-line sales, traffic growth, and profitability. We believe our less frequent customers will benefit from some additional value support over the coming months. As we look into the second quarter, we're back into positive low single digits and we plan to further accelerate traffic driven top line growth, leveraging our five pillar strategy with particular emphasis on tactics that build on our past success while expanding our appeal. Our focus is heightened in three areas. First and foremost, Potbelly's great food is the reason our brand is the favorite in so many neighborhoods. We plan to continue to enhance our innovation pipeline of hot toasted sandwiches, hand-dipped ice cream shakes, and our best-in-class baked fresh daily cookies. Next, recognizing that the very best Potbelly experience includes access to and the use of our digital assets, we plan to continue to push growth in perks member acquisition as a way to expose our newer customers to the best experience and value Potbelly has to offer and everyday value. It's clear to us that consumers of all income brackets and use our help managing their budget pressures. Our customers give us significant credit for our everyday value today, including our picture pair combinations and skinny-sized sandwiches. We've been developing additional ways to deliver value to both in-shop customers and those that engage more often with our digital platforms. Our intent with these expanded everyday value options is to provide an additional access point to the brand and build increased frequency. Now, turning to the drivers of our business, let's start with the Potbelly Digital experience. For the quarter, our digital business represented approximately 41% of our total shop sales, an increase of approximately 200 basis points versus last year, driven in large part by ongoing progress in our perks loyalty program. In January, as we spoke to last quarter, we further strengthened our digital platform with the launch of our enhanced Potbelly perks loyalty program. The upgraded perks program celebrates what our customers love the most about Potbelly, great food. Perks members can earn rewards faster than ever before and have more of our menu items available for reward redemptions by using a broader range of coins to do so. We're so proud to say that we're seeing the expected customer behavior under the new program and we consider the transition to be a big success. As we've said in recent quarters, we continue to see a shift in our digital business away from third-party channels and towards Potbelly's own app, web, and Perks-originated orders. We continue to view this as a positive shift. We saw strong growth in our Perks sales, orders, and active users during the quarter. In fact, Perks active members were up 36% year over year. While the Potbelly digital experience has been a significant area of growth for us in recent quarters and years, we are not standing still. When customers utilize our digital platforms, it not only ensures a better experience, but also allows us to more effectively communicate with and market to them. We maintain an extensive roadmap of digital enhancements aimed at continually improving our Potbelly digital experience to best suit customers' needs, expectations, and reduce friction while driving Potbelly brand awareness, customer engagement, and business results. Now, delighting customers with great food and good vibes is always the foundation for sales growth. And I'm pleased with our strong shop operations and the continued progress of our marketing initiatives in fueling our traffic-driven sales growth strategy. Beginning in the second quarter, we introduced the jalapeno popper chicken along with the dulce de leche cookie and the cinnamon churro shake. While the success of each of these promotions to date is encouraging, we're not stopping there. As we move through the remainder of the year, you should expect to see additional limited-time offers of our hot oven toasted sandwiches. fresh baked daily cookies, and hand-dipped shakes. In addition, we expect to bring back more underground menu items this year as well. Importantly, we know that today's consumers more than ever are looking for value when they choose to eat out. The first pillar of our five-pillar strategy has always been great food at a good value, and we've taken great care to protect our value position. We enjoy strong value ratings overall as well as from our digital and perks loyalty members who are among our most frequent customers. We believe we can do more. It's clear that less frequent customers are looking for everyday value options to support their pressured wallets. We have the tools and strategies to support this customer group by building on everyday value already in our core menu. Meal deal and pick your pair options and look forward to expanding on these offerings throughout the year. Now let me update you on our Franchise Growth Acceleration Initiative. Our franchising team continues to make great progress building towards our goal of 2,000 units in the U.S., And as I mentioned earlier, we are pleased to add 32 franchise shops to the pipeline during the first quarter, bringing our total to 642 open and committed shops. To put that in perspective, that equates to 26% growth versus the 508 open and committed shops in the first quarter of 2023. We believe our ability to consistently attract high-quality franchisees has been driven by three major factors. One, Potbelly is an incredibly strong brand with 47 years of success with our customers in markets all across the country. Yet, we still have significant multi-unit market development potential in areas like the South, the Southeast, and the West. Number two, we've invested heavily in our systems and tools that support franchising and franchisees, particularly in the areas of operations, marketing, and development. You see, franchisees see us as a franchise company through and through. And number three, last but certainly not least, franchisees are attracted to our strong unit level operating and investment economics led by a two-to-one sales-to-investment ratio with our system AUVs of approximately $1.3 million and an investment cost as low as approximately $650,000. Despite our investment costs already being compelling when compared to the industry, we are never satisfied. Our shops currently average approximately 2,300 square feet, and we're excited to announce the introduction of our new prototype shop that is now only approximately 1,800 square feet, an average reduction of 500 square feet, positively impacting leasing and construction costs of new shops. This new prototype is designed to be more digitally centric along with improved customer flows. Bottom line, we believe the new design simultaneously enhances the historic traditional in-shop experience and improves the digital experience for our customers and associates alike. Importantly as well, the prototype is flexible to support our growth in the varied lease spaces our franchisees are developing. In partnership with our design and engineering team, our franchisees will be able to fit the new prototype into each location they lease. And as a reminder, PDK, or Potbelly Digital Kitchen, is standard equipment in all new Potbelly locations as well. We believe this new prototype will bring additional flexibility and cost savings to our franchisees as they search for the optimal site to build Potbelly shops. Our brand design team and engineering teams have been working on the new prototype since last year, and we began shifting all our planning and permitting to the new design several months ago. In fact, our first franchise shop with the new design is expected to open this month in Arkansas. As we look at our development pipeline, the first quarter saw the opening of three new franchise shops. Importantly, our momentum is building as we expected into the second quarter. As we look to the full year, we have 30 units in various stages of the 2024 development cycle. We also have another 10 units in early stages of development that are expected to open in the later months of 2024 or in 2025. With the work of Adam Noyes and his development team, We expect our annualized fourth quarter run rate to put us in a solid position to achieve our long-term growth range of low double-digit unit growth annually over the coming years. With that, I'll now turn the call over to Steve to detail our financial performance for the quarter.