Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's Third 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 opened for your questions following the prepared remarks. On today's call, we have Bob Wright, President and Chief Executive Officer, Steven Cirilis, 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 third 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 on 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 for 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 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 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 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. Our third quarter results are a showcase of our five-pillar strategic plan working and our emphasis on driving Potbelly as a growth brand. During the quarter, we utilized our app and Potbelly perks to drive a positive shift in our comp trajectory. We've driven improvement in our comp momentum through the end of the third quarter and into the fourth quarter. We also delivered a 70 basis point year-over-year improvement in our shop profit margins, metered our G&A spend to aid EBITDA growth, and opened eight new shops as we further accelerate new shop development. Despite what continues to be a challenging consumer environment, we remain focused on emphasizing what we control and positioning Potbelly for long-term sustainable growth. The entire Potbelly team is committed to our mission to delight customers with great food and good vibes on our journey to be the most loved sandwich brand in every neighborhood we serve. Our strong customer satisfaction scores and operations metrics continue to bear that out. To our over 5,000 team members and franchise groups, without whom none of our accomplishments to date would be possible, I want to say thank you for your hard work and dedication. every day to making Potbelly truly special. As I stated, our success is rooted in our five-pillar strategy, so I'll structure most of my comments this afternoon around that framework. Turning to the drivers of our business, the first pillar of our five-pillar strategy has always been craveable quality food at a great value. And I'm proud to say that during the third quarter, we improved every facet of this pillar. Let's start with great value. As we spoke to previously in late July, we expanded our $7.99 everyday value combo, which includes a turkey, ham, or chicken skinny sandwich with chips and a drink across nearly all of our systems. Importantly, the introduction of the combo has done exactly what we intended with low frequency, less digital, primarily in-shop customers driving value perception, stated likelihood to return, and increased frequency with these important customers. Additionally, as I'll share in a few minutes, we continue to drive brand awareness, customer value options through digital promotions, and our perks loyalty program. Next, we'll discuss the craveable portion of this pillar. The third quarter featured several new and distinct innovations for our customers, as well as the return of a fan favorite cookie. We start with our new farmhouse chicken sandwich with all the ingredients of our classic farmhouse salad, including all natural chicken breast. Newskies, applewood smoked bacon, hard-boiled egg, cucumbers, and tomatoes, Swiss cheese, and topped with our new custom hot pepper ranch dressing. Of course, no meal is complete without one of our signature cookies or hand-dipped ice cream shakes. So we introduced our new blueberry muffin cookie, American apple pie shake, and toasted marshmallow shake, along with the return of our fan favorite s'mores cookie. The new and returning menu items were a hit with our customers, and importantly, they gave us credit for innovation and keeping our menu fresh with unique items. We haven't stopped. Already in the fourth quarter, we introduced the Smokestack Pork and Mac Sandwich featuring slow-cooked pulled pork, smoky barbecue sauce, and our signature mac and cheese. I'm proud to say that it's receiving rave reviews from customers, and it's mixing ahead of our expectations. And now I'll turn to the core menu quality. Potbelly is built on quality since 1977 and has quality embedded throughout our menu from our freshly prepared ingredients to our handmade-to-order hot toasted sandwiches. Also, our one-of-a-kind recipes made by our expert team members means that we take care to deliver a great meal every time. And we're never satisfied. We did research with our customers and it indicated that we had some gaps in our menu and trending areas like flavorful sauces and spicy offerings, as well as additional everyday heartier proteins. To address these areas of opportunity, next week on Monday, November 11th, we're adding some new innovations to our core menu aimed at giving customers even more reasons to choose Potbelly, as well as more ways to customize their experience. I'm excited to share that we're introducing two new signature sandwiches, both made with our new slow-cooked pulled pork. The new sandwich additions to our core menu are the Cubano, which is a fan-favorite LTO that earned its place onto the everyday menu, and the Sweet Heat BBQ Pork. We're very excited to have this new protein added to the menu, broadening the appeal of our trademark sandwiches. We also have two new proprietary signature sauces, that address craveable spicy flavors, including hot pepper ranch and sweet heat barbecue, both custom-made with our signature award-winning Potbelly hot peppers. And we also have two additional sauces that customers have asked for on the Potbelly menu, including roasted garlic aioli and red wine vinegar. Finally, we've updated and expanded our available sandwich toppings to include cucumbers and roasted red peppers. Our operations team and franchisees have been training our associates for the last week on these changes, and they are genuinely enthusiastic about the rollout next week. We believe this focus on our core menu will expand our customers' options with even more flavor and customization and expand our appeal to an even broader customer base. We're not done yet. Consumption of non-carbonated cold beverages have increased substantially in the industry. To capitalize on this, we recently completed a system-wide rollout of Potbelly craft refreshers at the end of September in partnership with Tractor Beverage Company. In keeping with our brand, these beverages add more interesting and flavorful options for our customers beyond traditional fountain drinks and have a better-for-you profile as they are organic and non-GMO. Importantly, the rollout is meeting our expectations for customer satisfaction and is driving additional beverage incidence rates. In addition to craveable quality food at a great value, the fourth pillar of our strategic plan calls for digitally driven awareness, connection, and traffic. During the quarter, our digital business represented over 38% of our total shop sales, an increase of approximately 100 basis points versus last year. As we mentioned in recent quarters, we continue to see a shift within our digital mix to Potbelly-owned channels. And again, during the third quarter, expansion of Potbelly-owned channels represented the entire 100 basis points of year-over-year improvement in our digital mix. Our Potbelly Perks loyalty program continues to be a significant driver of our business and is central to our digital strategy. Once again, this quarter, Every frequency cohort of customers in our perks loyalty program saw increased frequency, proving that our digital and perks promotional activity, as well as our base program where members redeem their coins for perks, is driving value for these important customers. In the end, our focus on executing our winning digital strategy is a cornerstone of growth at Potbelly. Let me now update you on our fifth pillar, franchise-focused development, and in particular, our Franchise Growth Acceleration Initiative. During the third quarter, we continue to make significant progress across all phases of our unit growth funnel. Importantly, and I've spoken about this before, the infrastructure we have built is showing advancing progress and gives me increased confidence in our growth for the coming quarters and years. Franchise recruitment and lead generation continues to build, especially with our in-market and in-person recruiting efforts. We're also having great success converting those franchise candidates to franchisees through deal signings. We're pleased to increase our total year-to-date franchise shop commitments to 86, an increase of 32 relative to last quarter, bringing our total open and committed shops to 695 shops across 33 franchise groups. And I'm proud to say that our franchisees are meeting their development commitments, which strengthens our expectations of continued growth through the remainder of 2024 and into 2025. Lastly, during the third quarter, we open an additional eight shops for a total of 15 openings year to date through the third quarter. We've already opened two additional units in the fourth quarter as well. With our current development pipeline, we expect to open nine to 11 total shops in Q4, resulting in another quarter of accelerated development and a total of 24 to 26 shops for the year. As we close in on the last few weeks of 2024 development, there are some shops that have experienced short-term impact to their development timelines. And I want to be clear, these are small delays and these shops will be opening soon. 2024 is shaping up to be our best unit growth year since 2017. And we'll end the year with a record number of franchise shops representing approximately 22% of the system. We anticipate our unit growth to further accelerate from here. Finally, our new 2024 shops continue to perform well in this evolving consumer environment. We believe the success of these shops is a sign that our market planning and real estate systems are working. And you're seeing the early tangible results of the growth engine we've been building on our path to 2,000 units in the United States. I assure you that we are just getting started. With that, I'll now turn the call over to Steve to detail our financial performance for the third quarter.