Potbelly Corporation

Good afternoon, everyone, and welcome to Potbelly Corporation's second 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 open for your questions following the prepared remarks. On today's call, 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 second quarter 2025 earnings call. By now, everyone should have access to our earnings release and accompanying investor presentation. 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 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 in the Investors tab of our website and at sbc.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 GAPs. 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. Our second quarter results continue to showcase the strength of the Potbelly brand, as our growth engine further accelerates. At a high level, our top-line sales momentum continued as we grew same-store sales by 3.2%, including positive traffic. And our shop expansion plans remain on track, with eight successful shop openings in the quarter, ahead of our Q2 expectations. Our team's disciplined approach to managing both shop level and corporate costs also led to year-over-year shop level margin expansion to 16.7% and helped us deliver an adjusted EBITDA of $9.6 million, reaching the high end of our guidance range. These strong results truly reflect the growth engine we've been building for the past five years, leveraging our five-pillar operating strategy across menu innovation, value, operations, digital, and shop growth. However, at the heart of our continued success is our team's unparalleled dedication and hard work. I would like to thank every member of the Pot Valley family, from our frontline staff to our support center employees, as well as our franchisees and their teams, whose commitment to excellence makes these achievements possible. As we look forward to the second half of the year, our focus will remain on actions that continue to support accelerated growth, both now and into the future. This includes driving comp sales growth through menu innovation and investments in our consumer-facing digital assets, as well as data and analytics. Growing and modernizing our shop footprint through accelerated unit openings, franchisee growth, market penetration, and remodels of our company-owned units. And lastly, exercising prudent cost controls to achieve balanced growth while also pushing incremental flow-through to our corporate earnings. Let me walk through some of these actions, starting with innovation. The menu innovation that we've introduced over the past year continued to be a driver of our top-line performance in the second quarter. As we previously mentioned, we launched an exciting addition to our iconic core menu in mid-April with the all-new prime rib steak sandwich, our first-ever steak sandwich added to the permanent menu. Importantly, customer reception continues to be tremendously positive. Our consumer insights and customer feedback work we did last year helped us understand where we could focus our core menu efforts, and we learned about the menu enhancements and additions that would be most appealing. Recall, the introduction of our prime rib steak sandwich was on the heels of our new slow-cooked pulled pork sandwiches introduced at the end of 2024. In addition, the launch of tractor beverages last year underscored our commitment to innovation across the menu, not just in our legendary sandwiches. Following the end of the quarter, in early July, we continued to elevate the Potbelly menu through the introduction of Potbelly-branded hot pepper potato chips as part of our partnership with Zapp's. These new chips feature the flavor of Potbelly's signature hot peppers and are available exclusively in Potbelly shops nationwide. We've also upgraded our salad dressings in partnership with Marzetti to enhance quality and flavor on our salad line. As we look ahead, we carry on testing additional areas of menu innovation through our StageGate development process, and we look forward to sharing information about the new menu innovation efforts that are currently in test in future calls. Importantly, our approach to menu innovations remain integral to our three-part value delivery. The intrinsic value of our core menu is all the better with these exciting new menu items, quality upgrades, and flavor enhancements. We also maintain support for everyday value layers with our picture pair options, 799 skinny value 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. Again, a balanced use of these three layers of value helps us meet customers' needs in all the ways they use Potbelly, while simultaneously driving profitable traffic growth. Moving to digital. Our performance during the quarter remains strong and a long-term driver of our top-line momentum. The seamless integration of our digital advertising, consumer-facing digital assets, and Potbelly Perks loyalty program combined with our menu innovations work cohesively to provide Potbelly with multiple sales layers to drive long-term sustainable growth. During the quarter, our digital business represented over 41% of our total shop sales, an increase of approximately 140 basis points versus last year. Building on this strong digital platform, I'm excited to share that in late June, we launched our new website and mobile app, rebuilding our digital platform from the ground up to deliver meaningful improvements to the customer experience. These enhancements, which were developed based on extensive user insights and customer feedback, represent a key milestone in our ongoing digital transformation strategies. Through these updates, we made ordering faster and easier than ever. We've introduced one-click ordering from the home screen, allowing our fans to instantly reorder their favorites, redeem rewards, and explore new menu items with ease. Our refreshed menu layout now showcases more items while incorporating a quick add feature that significantly speeds up the checkout process. We've also streamlined navigation with infinite scroll functionality that encourages digital exploration and makes browsing our full menu more intuitive than ever before. We've simplified the personalization process with visual cues that guide guests through their choices and a consolidated interface that puts all options on a single page. The checkout experience has been enhanced with tap-friendly tools that make it effortless to update, repeat, and remove items. Finally, we've made significant changes to allow our Perks loyalty members to effortlessly convert their coins for value-added menu items wherever they are in the experience with simple and intuitive visualizations. As we've mentioned, we're making incremental investments in both consumer-facing digital assets and data and analytics capabilities that we believe will not only make us more competitive but also more efficient and effective in our digital marketing efforts. Well, I'm very pleased with what we've accomplished with these recent updates. This represents just another step in our digital journey. We have additional enhancements in our development pipeline that will further personalize and streamline the customer experience, and we look forward to sharing more details on these exciting developments in future calls. Now, let me give you an update on our Franchise Growth Acceleration Initiative. Our team once again made meaningful progress across all phases of our unit growth funnel. Starting with unit openings, we are pleased to have opened eight new shops across our system during the second quarter, above our original expectation of six new shops. As we look ahead, we expect to open at least another eight new shops during the third quarter. More importantly, our future opening plans remain on track. And we believe we continue to have a clear line of sight to open at least 38 new shops in 2025, with all the remaining locations currently under development and driving our confidence in our development expectations for the third and fourth quarter. As a franchise-focused company, we continue to expand through franchise partners who share our passion for the brand. And thanks to the great work of our franchise team in converting high-quality franchise candidates to franchisees through deal signings, we added 54 new franchise shop commitments during the second quarter, our strongest quarter ever. This brings our total open and committed shop count to 816 shops, surpassing 40% of our long-term potential for at least 2,000 shops. The combination of new shop openings... Emerging franchisees and new development agreements and expanded commitments from existing partners continue to reinforce our confidence in accelerated franchise growth for 2025 and beyond. In addition, our remodel tests remain on track with five remodels completed through Q2 and several more nearly completed to date across all three tiers. With our various combinations of updated signage, exterior enhancements, interior updates, and furniture upgrades, I couldn't be more pleased with how we're able to update the overall Potbelly image to our customers' benefit while still maintaining that special Potbelly environment that remains a competitive advantage for us. While still too early to share details on traffic lifts and ROI, we are very pleased with the early test results and look forward to sharing more of those details in future quarters. In summary, we're very proud of what we accomplished thus far and excited for what the future holds for Potbelly. We've accomplished so much over the past five years, but we know that Potbelly is just getting started and believe we are well positioned 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 second quarter.