Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's fourth 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 the call today, we have Bob Wright, President and Chief Executive Officer, Steve 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 fourth 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 or the future financial performance of the company. Any such statements, including our outlook for 2025 or any other future periods, should be considered forward looking statements within the meeting 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, and good afternoon, and thank you for joining our call today. In 2024, we took yet another step toward achieving a long-term growth opportunity ahead for Potbelly. Our team did a tremendous job executing against our five-pillar strategies. We were especially pleased with our comp sales growth momentum to the end of the year, which exceeded our initial expectations. For the year, we reignited unit growth with 23 new shop openings during the year, added 115 units to our open and committed shop total, drove adjusted EBITDA growth of 15% through expanded shop margins and prudent corporate cost management, and developed the foundations for the long-term growth drivers that strengthened operations, and improved customer experiences, the relaunch of our Perks Loyalty program, and significant menu innovation work. While I'm thrilled with what our team has accomplished to date, I'm even more excited about what lies ahead for Potbelly. Through the first quarter thus far, we've been affected by the same unusual weather impacts you've heard about from our peers. Steve will further contextualize that a little bit later. That said, excluding the weather impacts, we are very pleased with the underlying strength and trends of the business and the consumer demand for Potbelly, which we believe sets us up well for the remainder of 2025. But before I dive into the specifics, I want to take a moment to say thank you to our over 5,000 team members and franchise groups. Without your hard work and dedication every day to make Potbelly truly special, none of our accomplishments to date would be possible. For 2025, you will see us further solidify our operations positioning Potbelly for growth both now and into the future. We will do this by focusing on several key aspects of our business. First, we will drive comp sales growth through menu innovation and investments in our consumer-facing digital assets, as well as data and analytics. Second, we will continue to grow and modernize our footprint through accelerated unit openings by our franchisees, as well as remodeling and market densification efforts on the company side. And lastly, we will continue to exercise prudent cost controls to ensure that we achieve balanced growth while also allowing incremental flow-through to our corporate earnings. With that, let's dive in, starting with our menu innovation work. As we spoke to last quarter, we conducted research with our customers and the results indicated that we had some gaps in our menu in trending areas like flavorful sauces and spicy offerings, as well as in additional heartier whole muscle proteins. To address these areas of opportunity in early November of last year, we added innovations to our core menu aimed at giving customers even more reasons to choose Potbelly and more ways to customize their experience. These innovations included the introduction of two new signature sandwiches, both made with our new slow-cooked pulled pork, one of which was our fan-favorite LTO, the Cubano, two new proprietary signature sauces that address customers' desires for more craveable and spicy flavors. Our new hot pepper ranch and sweet heat barbecue sauces are custom-made with our signature award-winning Potbelly hot peppers. And two additional sauces that customers have asked for on the Potbelly menu, including roasted garlic aioli and red wine vinegar. We also updated and expanded our available sandwich toppings to include cucumbers and roasted red peppers. We believe this focus on our core menu would expand our appeal to an even broader customer base, and I'm proud to say that we were right. First, we're very pleased with the mix of the new products and sauces. Also, customers have commented on the new pork sandwiches and that they are a specific reason to order from Potbelly. And the new sauces have delivered another level of flavor and customization to the menu. On the beverage side, consumption of non-carbonated cold beverages has increased substantially in the industry in recent years. To capitalize on this, we rolled out our Potbelly Craft Refreshers system-wide at the end of September in partnership with Tractor Beverage Company. In keeping with our brand, these beverages added more interesting and flavorful options to our customers beyond traditional fountain drinks. And they have a better for you profile as they are both organic and non-GMO. Importantly, the rollout continues to meet our expectations for customer satisfaction and is driving additional beverage incidence rates. Overall, we believe we have an opportunity to further drive growth in our business through menu innovations, and we're enthusiastic about the developments in our innovation pipeline across our menu, including our catering offering. We look forward to sharing more soon. Turning to digital, we remain pleased with our Potbelly Perks loyalty program and believe it is a core tenant of our success, both now and into the future. During the fourth quarter, our digital business represented over 40% of total shop sales, an increase of approximately 100 basis points versus last year. As you recall, in early 2024, we relaunched our enhanced perks loyalty program, but we're not standing still. Throughout 2025, you'll see us continuing to invest in two main areas of digital. The first continues to be our consumer-facing digital assets. While we already have a great digital experience today, we believe we can do better and we are investing in our consumer-facing digital to drive features and functions that make Potbelly even more attractive in this competitive space and ultimately drive top line. The second area of investment is in data and analytics. As we've spoken to previously, once customers are in our digital funnel, we have had great success moving them up the frequency curve quickly. And a big part of that is our ability to drive customer behavior. We believe continued investment in data and analytics not only advances this type of digital marketing, but it can make us more efficient and effective across other areas of the business going forward. Next, let me update you on our unit growth. 2024 was the year we planned to reignite our unit growth engine, and I'm proud to say we did just that. During the year, we opened 23 shops across 10 different states. We also added 115 new shop commitments to our pipeline, bringing our year-end total open and committed shop count to 727. As we look to 2025, we expect this momentum to continue. If you recall, we announced earlier this year ahead of the ICR conference that we already have 38 new shops in various stages of development for the year. We believe we've taken a prudent approach to this guidance and use these 38 new shops as our baseline for our unit growth expectations. Although it's possible to anticipate more new shops based on pipeline activities, we believe it's best to set expectations only on what we can clearly see and assess at this time. We also continue to see a very active pipeline of new franchise candidates driven by our overall success and our unit level economics. Moreover, the quantity, quality, and scale of our franchise candidates continues to improve, including larger franchisees. In support of these larger franchise candidates that can grow at a much faster pace, we were excited to announce a program earlier this week designed to incentivize them to build more shops and to build them faster. In addition to our accelerating franchise development, we're adding another layer to the Potbelly growth story by leaning into the development of additional company shops in some of our current geographies over the coming years. This includes a handful of company shops later this year, which are incorporated into our unit growth guidance. I want to emphasize that this is in addition to our accelerating franchise development, and we plan to do this for three reasons. First, We believe we have an opportunity to better leverage our existing infrastructure in existing company markets where we're currently generating above-system average returns and can further densify those under-penetrated markets. Second, given our strong unit-level economics and the strength of our balance sheet, we believe additional company shops are a good investment for the business and provide us with the ability to thoughtfully accelerate our company EBITDA growth in the coming years. And finally, we want to lead by example and develop shops utilizing our new prototype, continuing to improve on its cost and efficiency for us and our franchisees to ensure the returns meet our elevated expectations. Again, make no mistake, Potbelly is a franchise-focused company. While we plan to open up to 20 company-operated shops annually, including a handful later in 2025, We continue to expect the vast majority of new shops for the foreseeable future to be driven by our franchise partners and believe this additional layer of growth only accelerates our race to scale. In addition to new shops, we have the opportunity to drive returns through smart investments in our existing shops with targeted remodels. I'll caution you that we're in the early stages of this initiative. but we're planning to test four different levels of remodels this year and prove out their return profiles before considering a larger scale effort. In summary, I hope you see that our careful and targeted investments in technology and shop assets have the potential to further accelerate our growth and to benefit all stakeholders. With that, I'll now turn the call over to Steve to detail our financial performance for the fourth quarter and full year.