Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's first quarter 2025 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, Stephen 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 first quarter 2025 earnings call. By now, everyone should have access to our earnings release and accompanying investor presentations. If not, they can be found in the investor section 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 2025 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. I'm excited to outline a strong start to 2025 here at Potbelly. Our finish to the first quarter continued to showcase Potbelly as the growth company that we've become. We delivered system-wide sales growth, positive same-store sales, growth in our franchising efforts, as well as another quarter of strong profitability. Before we dive deeper into the results, I'd like to personally thank all of our Potbelly team members, from our frontline associates to our support center employees, as well as our franchisees and their teams for making all of this possible. The combination of our years-long consistent strategy and the team's tenacious focus on execution and success is at the heart of our growth. They are the backbone that make Potbelly the most loved sandwich brand in every neighborhood. Like I said, I'm very pleased with how we closed the quarter. As the negative impacts of January and February weather abated, the underlying demand of the Potbelly brand was on full display. We delivered same-store sales growth of 0.9% for the full quarter, well ahead of our expectations, with a March COP growth exemplifying what we know this brand is capable of. In addition, through our team's disciplined approach to managing both shop level and corporate costs, we were able to drive year-over-year shop level margin expansion to 13.7%. and posted a healthy corporate profitability with adjusted EBITDA of $5.5 million, again, well above the high end of our guidance. Our first quarter results are a testament to the underlying strength and trends of our business, including consumer demand for Potbelly. They further demonstrated that deepening relevancy with our customers and continued operational excellence are critical to our success. We're taking the actions necessary to drive accelerated growth now and into the future. First, driving comp sales growth through menu innovation and investments in our customer-facing digital assets, as well as data and analytics. Second, growing and modernizing our shop footprint, particularly through accelerated unit openings by our franchisees. And lastly, exercising prudent cost controls to ensure that we achieve balanced growth while also pushing incremental flow-through to our corporate earnings. Let's start with menu innovation. On our last call, we talked about more flavor offerings with the introduction of two new signature sandwiches, as well as two new proprietary signature sauces. As you can see from our first quarter performance, our customers responded positively. To keep the excitement going, in mid-April, we launched another exciting addition to our iconic core menu of sandwiches with the all-new prime rib steak sandwich, our first-ever steak sandwich added to the permanent menu. Our customers have been asking us for a craveable steak sandwich for a while, and we believe we have delivered. We loaded this sandwich with high-quality prime rib and the perfect complementary ingredients, including melted Swiss cheese. house-made caramelized onions, and roasted garlic aioli, oven-toasted to perfection at 500 degrees. It's a delicious sandwich, and our customer reception has been very encouraging. To complement our legendary sandwich lineup, we also introduced two new items to our menu earlier this year with the all-new Chili Mac, which brings together our famed chili and our signature mac and cheese, and the banana pudding shake. We believe these innovations expand our appeal to an even broader consumer base. The innovations you've seen over the past six months are just the early outputs of our StageGate development process. And I'm excited to bring this level of focus to our menu, including some potential future items that are currently in test. Our efforts in menu innovation are consistent with our three-part value delivery. The intrinsic value of our core menu is all the better with these exciting new menu items. We also continue to support our everyday value layers with pick-your-pair, $7.99 skinny combos, and meal deals. And we continue to use our digital channels as our primary method to drive promotional value, especially with our most loyal customers. Our balanced use of these three layers of value help us meet customers' needs in all the ways they use Potbelly. Speaking of digital, I am once again very pleased with our digital efforts this quarter. Our digital advertising, consumer-facing digital assets, and our Potbelly Perks loyalty program all work hand in hand with our menu innovation to drive top line growth. I'm very pleased to report that the combination of these digital programs continue to perform well. Our digital business represented over 42% of our total shop sales during the first quarter. an increase of approximately 200 basis points versus last year. As we look ahead, we're making incremental investments in two main areas of digital, consumer-facing digital assets and data and analytics. Ultimately, we believe these investments will not only make us more attractive in this competitive space, but also more efficient and effective in our digital marketing efforts. Now, I want to continue to emphasize that operational excellence remains critical to the success of Potbelly, and I couldn't be prouder to see this on full display as our operations team rallied to deliver a strong end to the quarter. We see year-over-year improvements in management and associate staffing and turnover, yielding improved overall customer experience scores, as well as specific measures for speed, accuracy, food quality, and friendliness. Our operations and people teams take a continuous improvement approach, not only to execution, but to the systems that support our growing franchise organization. Our mission to delight customers with great food and good vibes is rooted in our ability to scale our unique potbelly service. We're confident that the quality and experience of our operations will prove a long-lasting competitive advantage as we strive to be the most loved sandwich brand in every neighborhood. Now, let's turn our attention to our Franchise Growth Acceleration Initiative. During the first quarter, we continue to make significant progress across all phases of our unit growth funnel. If you recall, we announced on our last call that we would open at least four new restaurants during the first quarter, and I'm pleased to report that we delivered on that promise. These new shops are in two different states and were developed by three different franchise partners along with one company-operated shop. demonstrating our broad-based development efforts. More importantly, we continue to have a clear line of sight to open at least 38 new shops in 2025. For the second quarter, we expect to open at least six new shops. In addition, our franchise team continues to make great progress in filling our development pipeline as we build towards our goal of 2,000 units in the U.S. After adding 115 new shop commitments in 2024, we're thrilled to add 40 new shop commitments during the first quarter, bringing our total open and committed shop count to 766. Eclipsing 40 new shop commitments is the best Q1 we've ever had, showcasing our ability to attract high-quality franchisees interested in developing potbelly shops. Again, Potbelly is a franchise-focused company, and I'm proud to be working alongside these great franchise partners who are as passionate about Potbelly as we are. We now have 104 franchise shops operating around the country. In addition, over 70% of our franchisees are developing new shops across 19 different states. Acceleration in new shop openings, developing franchisees, new franchisees signing new shop development area agreements, and existing franchisees adding to their development commitments only further strengthens our expectations of franchise growth acceleration in 2025 and beyond. We also believe we have the opportunity to drive compelling returns through limited investment with select company market densification and smart investments in our existing shops with targeted remodels. Specifically regarding remodels, we carry some older assets in our shop portfolio and have witnessed refresh initiatives deliver strong ROI at other brands. We believe we have constructed sensible test parameters and are encouraged by early progress. Of course, we will evaluate returns among tiers of remodel investment and always consider such investments versus other potential uses of capital. In summary, our performance to close the quarter truly demonstrates what the Potbelly business model is capable of when our five-pillar strategy is firing on all cylinders – and we intend to utilize this momentum to take Potbelly to the next level of growth in 2025 and beyond. With our focus on driving top-line growth through menu innovation and investment in digital, accelerating franchise unit development, and smart cost management, we believe Potbelly is primed to capitalize on the immense opportunity ahead of us. With that, I'll now turn the call over to Steve to detail our financial performance for the quarter.