Potbelly Corporation (NASDAQ:PBPB) Q3 2023 Results Conference Call November 1, 2023 5:00 PM ET Company Participants Bob Wright - President, CEO Steve Cirulis - SVP, CFO Adiya Dixon - Chief Legal Officer and Secretary Conference Call Participants Todd Brooks - The Benchmark Company Jeremy Hamblin - Craig-Hallum Capital Group Mark Smith - Lake Street Capital Matt Curtis - William Blair Operator Good afternoon, everyone, and welcome to Potbelly Corporation's Third Quarter 2023 Earnings Conference Call. Today's ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ______________________________________________ x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 24, 2023 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____to ____ Commission File Number: 001-36104 ______________________________________________ Potbell ...

New Franchise Development Agreements Limited Availability Unavailable POTBELLY Q3'23 Guidance & FY'23 Outlook | --- | --- | |-----------------------|----------------------------------------------| | Average Weekly Sales: | Q3'23 Guidance \n $25,000 - $25,500 | | Same-store sales: | 7.0% - 9.0% | | Shop-level margin: | 12.0% - 14.0% | | Adj. EBITDA: | $5.0 million- $6.0 million | | | FY'23 Outlook | | | | | Average Unit Volumes: | Record levels | | Same-store sales: | High single-digit to low double-digit gr ...

Financial Data and Key Metrics Changes - Same-store sales grew by 12.9%, primarily driven by traffic growth [6][20] - Total revenues increased by 8.4% to $124.7 million [20] - Shop-level margins improved by 300 basis points to 14.4% [24] - Adjusted EBITDA rose to $8.0 million, a 140 basis point improvement year-over-year [24] Business Line Data and Key Metrics Changes - Digital business represented approximately 38% of total shop sales, an increase of 170 basis points year-over-year [21] - Food, beverage, and packaging costs were 28.0% of shop sales, a 50 basis point improvement [22] - Labor expenses decreased to 30.4% of sales, a 100 basis point improvement [22] Market Data and Key Metrics Changes - The company continues to take traffic share from the fast casual category on a weekly basis [6][20] - Each real estate type achieved same-store sales growth of at least high single-digit percentages [20] Company Strategy and Development Direction - The company is focused on executing a five-pillar strategic plan and expanding its franchise growth acceleration initiative [6][8] - The goal is to achieve 10% unit growth in 2024, with a target of 2,000 units in the U.S. over the next decade [15][18] - The company is enhancing its digital capabilities and expanding Potbelly Digital Kitchen installations [7][13] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving 2024 growth targets, citing strong brand value and strategic marketing efforts [17][26] - The company anticipates continued strength in same-store sales and shop-level margins [25][26] Other Important Information - The company reported net income of $2.2 million for the quarter, a $1.6 million improvement year-over-year [24] - General and administrative expenses were 9.2% of revenue, driven by higher bonus accruals and digital maintenance costs [24] Q&A Session Summary Question: What gives confidence in achieving 10% unit growth next year? - Management highlighted the number of shop commitments and the momentum built through the franchise growth acceleration initiative [28][29] Question: Why is system-wide sales a more applicable metric? - The transition to a more franchise-based organization necessitates reflecting the relationship between sales and the investment needed to support those sales [30][31] Question: How significant is the opportunity for nontraditional units? - Management sees nontraditional units as a long-term opportunity but emphasizes a focus on multiunit franchise agreements for predictable growth [32][33] Question: Clarification on the 2024 AUV target of $1.3 million - Management indicated that while current performance suggests exceeding this target, they prefer to wait for more data before solidifying the target [36][38] Question: Who are the competitors from whom Potbelly is gaining market share? - Management noted that while it's difficult to pinpoint specific chains, data indicates that Potbelly's growth is outpacing the fast casual segment [39] Question: How is the digital business performing in terms of Perks members? - Management expressed satisfaction with the growth of the Perks program, indicating that it contributes significantly to digital sales [42][43] Question: What is the composition of traffic and ticket? - Management confirmed that strong traffic growth is the primary driver of same-store sales, with a focus on customer retention and frequency [47][49]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ______________________________________________ x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 25, 2023 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____to ____ Commission File Number: 001-36104 ______________________________________________ Potbelly Cor ...

First Quarter 2023 Earnings Presentation -- May 4, 2023 -- In addition to historical information, this presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. Forward-looking statements, written, oral or otherwise made, represent the Company's expectation or belief concerning future events. Without limiting the foregoin ...

Potbelly Corporation (NASDAQ:PBPB) Q1 2023 Earnings Conference Call May 4, 2023 5:00 PM ET Company Participants Adiya Dixon – Senior Vice President and Chief Legal Officer Bob Wright – President and Chief Executive Officer Steve Cirulis – Senior Vice President and Chief Financial Officer Lisa Fortuna – Alpha IR Group Conference Call Participants Matt Curtis – William Blair Operator Good afternoon, everyone, and welcome to Potbelly Corporation’s First Quarter 2023 Earnings Conference Call. All participants w ...

[Report Overview](index=1&type=section&id=Report%20Overview) This section provides an overview of the quarterly report, including filing details and key company information [Filing Information](index=1&type=section&id=Filing%20Information) This document is a Quarterly Report on Form 10-Q for Potbelly Corporation, filed for the quarterly period ended March 26, 2023, with 29,150,046 shares outstanding - Potbelly Corporation filed a Form 10-Q for the quarter ended March 26, 2023[1](index=1&type=chunk) - The registrant is an accelerated filer[3](index=3&type=chunk) Common Stock Outstanding | Date | Shares Outstanding | Par Value per Share | | :--- | :--- | :--- | | April 23, 2023 | 29,150,046 | $0.01 | [Table of Contents](index=3&type=section&id=Table%20of%20Contents) This section provides an overview of the report's structure, detailing the financial information and other disclosures included in the Form 10-Q, with corresponding page numbers for each item [PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Potbelly Corporation, including balance sheets, statements of operations, equity, and cash flows, along with detailed notes [Condensed Consolidated Balance Sheets (Unaudited)](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20%28Unaudited%29) The balance sheet shows an increase in total assets and liabilities from December 25, 2022, to March 26, 2023, primarily driven by an increase in cash and cash equivalents and long-term debt Condensed Consolidated Balance Sheets (Amounts in thousands) | Item | March 26, 2023 | December 25, 2022 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $25,596 | $15,619 | +$9,977 | | Total current assets | $41,966 | $30,530 | +$11,436 | | Total assets | $250,889 | $245,171 | +$5,718 | | Total current liabilities | $65,806 | $68,939 | -$3,133 | | Long-term debt, net of current portion | $21,297 | $8,550 | +$12,747 | | Total liabilities | $246,533 | $240,898 | +$5,635 | | Total stockholders' equity | $4,589 | $4,477 | +$112 | | Total equity | $4,356 | $4,273 | +$83 | [Condensed Consolidated Statements of Operations (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20%28Unaudited%29) Potbelly Corporation significantly reduced its net loss for the quarter ended March 26, 2023, compared to the prior year, driven by a substantial increase in total revenues and improved operating leverage Condensed Consolidated Statements of Operations (Amounts in thousands, except per share data) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | Change (YoY) | Percent Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Sandwich shop sales, net | $116,947 | $97,431 | +$19,516 | +20.0% | | Franchise royalties, fees and rent income | $1,323 | $790 | +$533 | +67.5% | | Total revenues | $118,270 | $98,221 | +$20,049 | +20.4% | | Loss from operations | $(193) | $(7,383) | +$7,190 | NM | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | +$6,586 | NM | | Basic Net loss per common share | $(0.05) | $(0.28) | +$0.23 | NM | | Diluted Net loss per common share | $(0.05) | $(0.28) | +$0.23 | NM | - Total revenues increased by **20.4% year-over-year**, primarily due to sustained recovery in central business districts and airport locations, improved catering, successful marketing, and increased menu prices[93](index=93&type=chunk) - Loss from operations significantly improved from **$(7,383) thousand in Q1 2022 to $(193) thousand in Q1 2023**[10](index=10&type=chunk) [Condensed Consolidated Statements of Equity (Unaudited)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Equity%20%28Unaudited%29) The statements of equity show a slight increase in total equity from December 25, 2022, to March 26, 2023, despite a net loss, primarily due to stock-based compensation expense and proceeds from warrant exercises Condensed Consolidated Statements of Equity (Amounts in thousands) | Item | Balance at December 25, 2022 | Balance at March 26, 2023 | Change | | :--- | :--- | :--- | :--- | | Common Stock (Amount) | $384 | $386 | +$2 | | Warrants | $2,566 | $2,253 | -$313 | | Additional Paid-In Capital | $455,831 | $457,918 | +$2,087 | | Treasury Stock | $(115,388) | $(115,725) | -$337 | | Accumulated Deficit | $(338,916) | $(340,243) | -$1,327 | | Total Equity | $4,273 | $4,356 | +$83 | - Proceeds from the exercise of warrants contributed **$865 thousand** to equity during the quarter[12](index=12&type=chunk) - Stock-based compensation expense added **$911 thousand** to additional paid-in capital[12](index=12&type=chunk) [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20%28Unaudited%29) The company experienced a net increase in cash and cash equivalents, primarily driven by significant cash provided by financing activities, including new term loan borrowings, which offset cash used in operating and investing activities Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity | Q1 2023 (March 26) | Q1 2022 (March 27) | Change (YoY) | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(657) | $(7,739) | +$7,082 | | Net cash used in investing activities | $(3,216) | $(1,378) | -$1,838 | | Net cash provided by financing activities | $14,599 | $4,257 | +$10,342 | | Net increase (decrease) in cash and cash equivalents and restricted cash | $10,726 | $(4,860) | +$15,586 | | Cash and cash equivalents and restricted cash at end of period | $26,345 | $9,493 | +$16,852 | - Operating cash flow improved significantly, with net cash used decreasing from **$7.7 million in Q1 2022 to $0.7 million in Q1 2023**[116](index=116&type=chunk) - Financing activities provided **$14.6 million in cash**, primarily from **$25 million in new Term Loan borrowings**, partially offset by repayments and debt issuance costs[15](index=15&type=chunk)[118](index=118&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20%28Unaudited%29) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering the company's organization, accounting policies, revenue recognition, fair value measurements, debt, leases, equity, stock-based compensation, and commitments and contingencies [(1) Organization and Other Matters](index=8&type=section&id=%281%29%20Organization%20and%20Other%20Matters) Potbelly Corporation operates 373 company-owned and 53 franchised shops as of March 26, 2023, with a Franchise Growth Acceleration Initiative aiming to grow franchise units and refranchise company-operated shops - As of March 26, 2023, Potbelly operates **373 company-owned shops and 53 franchised shops** domestically[16](index=16&type=chunk) - The Franchise Growth Acceleration Initiative, announced March 2, 2022, includes plans to grow franchise units and refranchise company-operated shops[22](index=22&type=chunk) - The first refranchising transaction under this initiative was executed in the first quarter of 2023[23](index=23&type=chunk) Reconciliation of Cash, Cash Equivalents and Restricted Cash (Amounts in thousands) | Item | March 26, 2023 | December 26, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $25,596 | $15,619 | | Restricted cash, noncurrent | $749 | $— | | Total cash, cash equivalents and restricted cash | $26,345 | $15,619 | [(2) Revenue](index=9&type=section&id=%282%29%20Revenue) Potbelly primarily earns revenue from sandwich shop sales, which increased to $117.9 million in Q1 2023, and also recognizes franchise revenue, gift card breakage, and loyalty program income Revenue Recognized by Source (Amounts in millions) | Revenue Source | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Point in time sales | $117.9 | $97.9 | | Sales over time | $0.4 | $0.3 | - Gift card breakage income was **$0.2 million** for both Q1 2023 and Q1 2022, recognized within net sandwich shop sales[35](index=35&type=chunk) Contract Liabilities (Amounts in thousands) | Item | Beginning Balance (Dec 25, 2022) | Ending Balance (Mar 26, 2023) | Increase (Decrease) | | :--- | :--- | :--- | :--- | | Current Contract Liability | $7,008 | $6,553 | $(455) | | Noncurrent Contract Liability | $1,677 | $2,229 | $552 | Expected Revenue Recognition from Contract Liabilities (Amounts in thousands) | Years Ending | Amount | | :--- | :--- | | 2023 | $5,786 | | 2024 | $479 | | 2025 | $378 | | 2026 | $202 | | 2027 | $142 | | Thereafter | $1,795 | | Total revenue recognized | $8,782 | [(3) Fair Value Measurement](index=11&type=section&id=%283%29%20Fair%20Value%20Measurement) The company's current assets and liabilities, as well as debt, approximate fair value, with an impairment charge of $0.7 million recorded in Q1 2023 for underperforming shops - An impairment charge of **$0.7 million** was recognized for certain underperforming shops during the quarter ended March 26, 2023[41](index=41&type=chunk) [(4) Earnings (Loss) Per Share](index=11&type=section&id=%284%29%20Earnings%20%28Loss%29%20Per%20Share) Basic and diluted net loss per common share were both $(0.05) for Q1 2023, a significant improvement from $(0.28) in the prior year, with potentially dilutive shares excluded due to the net loss Loss Per Share Calculation (Amounts in thousands, except per share data) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | | Weighted average common stock outstanding-basic | 28,907 | 28,396 | | Weighted average common shares outstanding-diluted | 28,907 | 28,396 | | Loss per share available to common stockholders-basic | $(0.05) | $(0.28) | | Loss per share available to common stockholders-diluted | $(0.05) | $(0.28) | | Potentially dilutive shares (anti-dilutive) | 2,831 | 1,735 | [(5) Income Taxes](index=12&type=section&id=%285%29%20Income%20Taxes) The company maintains a full valuation allowance against all its deferred tax assets and did not provide for an income tax benefit on its pre-tax loss for the quarter - Potbelly Corporation maintains a **full valuation allowance** against all its deferred tax assets[44](index=44&type=chunk) - Income tax expense was **$105 thousand for Q1 2023**, down from **$177 thousand in Q1 2022**[107](index=107&type=chunk) [(6) Leases](index=12&type=section&id=%286%29%20Leases) Potbelly leases retail shops and office space under operating leases, with a weighted average remaining lease term of 6.54 years and a total lease cost of $13.4 million for Q1 2023 Operating Lease Terms and Discount Rate | Item | March 26, 2023 | March 27, 2022 | | :--- | :--- | :--- | | Weighted average remaining lease term (years) | 6.54 | 7.06 | | Weighted average discount rate | 8.37% | 8.06% | Components of Lease Cost (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Operating lease cost | $9,842 | $10,305 | | Variable lease cost | $3,541 | $3,462 | | Total lease cost | $13,383 | $13,767 | Maturities of Lease Liabilities (Amounts in thousands) | Period | Operating Leases | | :--- | :--- | | Remainder of 2023 | $31,133 | | 2024 | $40,930 | | 2025 | $38,145 | | 2026 | $34,247 | | 2027 | $28,662 | | 2028 | $22,128 | | Thereafter | $46,447 | | Total lease payments | $241,692 | | Less: imputed interest | $(57,985) | | Present value of lease liabilities | $183,707 | - Franchise rent income was **$0.1 million** for Q1 2023, with 8 subleases in effect[51](index=51&type=chunk) [(7) Debt and Credit Facilities](index=14&type=section&id=%287%29%20Debt%20and%20Credit%20Facilities) On February 7, 2023, Potbelly entered into a new $25 million Term Loan Credit Facility, maturing in February 2028, replacing its former facility and incurring a $0.2 million loss on extinguishment of debt Components of Long-Term Debt (Amounts in thousands) | Item | March 26, 2023 | December 25, 2022 | | :--- | :--- | :--- | | Revolving credit facility | $— | $8,550 | | Term loan credit facility | $24,688 | $— | | Unamortized debt issuance costs | $(2,141) | $— | | Less: current portion of long-term debt | $(1,250) | $— | | Total long-term debt | $21,297 | $8,550 | - A new **$25 million Term Loan Credit Facility** was entered into on February 7, 2023, replacing the former credit facility[53](index=53&type=chunk) - The company recognized a loss on extinguishment of debt of **$0.2 million** upon termination of the Former Credit Facility[53](index=53&type=chunk) - As of March 26, 2023, the effective interest rate on the Term Loan was **15.07%**, and **$24.7 million** was outstanding[55](index=55&type=chunk)[61](index=61&type=chunk) [(8) Franchise Growth Acceleration Initiative](index=15&type=section&id=%288%29%20Franchise%20Growth%20Acceleration%20Initiative) The Franchise Growth Acceleration Initiative aims to expand franchise units and refranchise company-operated shops, with 8 shops refranchised in Q1 2023 resulting in a $0.9 million loss on activities - The initiative includes refranchising approximately **25% of company-operated shops** over the next three years and executing area development agreements[62](index=62&type=chunk) - In Q1 2023, **8 shops were refranchised in New York City**, with a development commitment for **13 new shops**[64](index=64&type=chunk) Franchise Growth Acceleration Initiative Activities (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Number of shops sold to franchisees | 8 | — | | Loss on sale of company-operated shops, net | $(433) | — | | Adjustment to recognize held-for-sale assets at fair value | $(503) | — | | Loss on Franchise Growth Acceleration Initiative activities | $(949) | $— | [(9) Capital Stock](index=15&type=section&id=%289%29%20Capital%20Stock) Potbelly did not repurchase common stock under its $65.0 million stock repurchase program in Q1 2023, but 158,767 warrants were exercised, reducing outstanding warrants to 1,141,094 - No shares were repurchased under the **$65.0 million stock repurchase program** in Q1 2023, and there are no current plans for repurchases[66](index=66&type=chunk)[67](index=67&type=chunk) - **158,767 warrants were exercised at $5.45 per warrant** during Q1 2023, leaving **1,141,094 warrants outstanding**[68](index=68&type=chunk) - The company has an 'at the market' equity offering program for up to **$40.0 million**, but no shares have been sold under it as of March 26, 2023[69](index=69&type=chunk) [(10) Stock-Based Compensation](index=16&type=section&id=%2810%29%20Stock-Based%20Compensation) Potbelly grants stock options, RSUs, and PSUs, with RSU expense at $0.6 million for Q1 2023 and $4.4 million in unrecognized RSU expense remaining Stock Option Activity (Amounts in thousands) | Item | Shares (Thousands) | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding—December 25, 2022 | 473 | $12.22 | | Canceled | (49) | $9.52 | | Outstanding—March 26, 2023 | 424 | $12.53 | | Exercisable—March 26, 2023 | 424 | $12.53 | - No stock-based compensation expense was recognized for stock options in Q1 2023[71](index=71&type=chunk) Restricted Stock Unit (RSU) Activity (Amounts in thousands) | Item | Number of RSUs (Thousands) | Weighted Average Fair Value per Share | | :--- | :--- | :--- | | Non-vested as of December 25, 2022 | 908 | $4.25 | | Granted | 185 | $5.49 | | Vested | (111) | $8.18 | | Canceled | (43) | $6.31 | | Non-vested as of March 26, 2023 | 939 | $4.38 | - RSU compensation expense was **$0.6 million** for both Q1 2023 and Q1 2022, with **$4.4 million unrecognized** as of March 26, 2023[73](index=73&type=chunk) - PSU compensation expense with market vesting conditions was **$0.3 million** for Q1 2023[75](index=75&type=chunk) [(11) Commitments and Contingencies](index=17&type=section&id=%2811%29%20Commitments%20and%20Contingencies) The company is subject to various legal proceedings and manages commodity price risk for food products through forward and formula pricing protocols - Management believes the ultimate liability from legal proceedings will not materially impact financial position or results[77](index=77&type=chunk) - The company manages commodity price risk through forward and formula pricing protocols, typically for periods of **12 months or less**[78](index=78&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Potbelly Corporation's financial condition and results of operations for the quarter ended March 26, 2023, highlighting key business strategies, performance indicators, and a detailed comparison of financial results against the prior year [Forward-Looking Statements](index=18&type=section&id=Forward-Looking%20Statements) This section contains cautionary statements regarding forward-looking information, emphasizing that actual results may differ materially due to various risks and uncertainties, including the impact of COVID-19, economic conditions, competition, and operational costs - Forward-looking statements are subject to risks including COVID-19 impact, economic conditions, competition, and changes in commodity, energy, and labor costs[79](index=79&type=chunk) [Business](index=18&type=section&id=Business) Potbelly Corporation operates as a neighborhood sandwich concept with 373 company-owned and 53 franchised shops, guided by its 'Traffic-Driven Profitability' Five-Pillar strategic plan for profitable growth and franchise development - Potbelly operates **373 company-owned and 53 franchised shops** as of March 26, 2023[83](index=83&type=chunk) - The 'Traffic-Driven Profitability' Five-Pillar strategic plan aims for profitable growth through: Craveable Quality Food, People Creating Good Vibes, Customer Experiences, Digitally Driven Awareness, and Franchise Focused Development[81](index=81&type=chunk) - The Franchise Growth Acceleration Initiative targets refranchising **~25% of company-operated shops** over three years and developing new franchise units[82](index=82&type=chunk) Shop Rollforward | Item | Company Operated (Dec 25, 2022) | Franchise Operated (Dec 25, 2022) | Total (Dec 25, 2022) | Company Operated (Mar 26, 2023) | Franchise Operated (Mar 26, 2023) | Total (Mar 26, 2023) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Shops as of period start | 384 | 45 | 429 | 384 | 45 | 429 | | Shops opened | — | — | — | — | — | — | | Shops closed | (3) | — | (3) | (3) | — | (3) | | Shops refranchised | — | — | — | (8) | 8 | — | | Shops as of period end | 384 | 45 | 429 | 373 | 53 | 426 | [Impact of COVID-19 and Other Impacts on Our Business](index=19&type=section&id=Impact%20of%20COVID-19%20and%20Other%20Impacts%20on%20Our%20Business) The impact of the COVID-19 pandemic on Potbelly's financial results and operations significantly decreased throughout 2022, despite an increase in cases during Q1 2022 - The impact of COVID-19 on financial results and operations significantly decreased throughout 2022[84](index=84&type=chunk) [Key Performance Indicators](index=19&type=section&id=Key%20Performance%20Indicators) Potbelly assesses performance using key indicators: comparable store sales, number of company-operated shop openings, shop-level profit margins, and Adjusted EBITDA - Key performance indicators include comparable store sales, number of company-operated shop openings, shop-level profit margins, and Adjusted EBITDA[85](index=85&type=chunk) - Comparable store sales include shops open for **15 months or longer**, with **376 shops in Q1 2023**[86](index=86&type=chunk) - Shop-level profit (loss) margin is a non-GAAP measure evaluating shop-level productivity and efficiency[89](index=89&type=chunk) - Adjusted EBITDA is a non-GAAP measure providing a picture of operating results by eliminating expenses not reflective of underlying business performance[90](index=90&type=chunk) [Quarter Ended March 26, 2023 Compared to Quarter Ended March 27, 2022](index=21&type=section&id=Quarter%20Ended%20March%2026%2C%202023%20Compared%20to%20Quarter%20Ended%20March%2027%2C%202022) Potbelly Corporation demonstrated significant financial improvement in Q1 2023 compared to Q1 2022, with total revenues increasing by 20.4% to $118.3 million, driven by strong comparable store sales growth of 22.2% Key Financial Performance Indicators (Amounts in thousands, except percentages) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | Percent Change | | :--- | :--- | :--- | :--- | | Total revenues | $118,270 | $98,221 | +20.4% | | Loss from operations | $(193) | $(7,383) | NM | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | NM | | Comparable store sales | 22.2% | 24.4% | -2.2% pts | | Shop-level profit margin | 12.0% | 5.0% | +6.9% pts | | Adjusted EBITDA | $5,560 | $(2,279) | NM | - Total revenues increased by **$20.0 million (20.4%) to $118.3 million**, primarily due to sustained recovery in central business districts and airports, improved catering, and increased prices[93](index=93&type=chunk) - Company-operated comparable store sales increased by **22.2%**, contributing **$21.3 million** to revenue[93](index=93&type=chunk) - Food, beverage, and packaging costs increased by **19.5%** but decreased as a percentage of sandwich shop sales (**27.9% from 28.0%**) due to increased menu prices[94](index=94&type=chunk) - Labor and related expenses increased by **9.8%** but decreased as a percentage of sandwich shop sales (**31.2% from 34.1%**) due to sales leverage[95](index=95&type=chunk) - Occupancy expenses decreased by **3.9%** and as a percentage of sandwich shop sales (**11.4% from 14.2%**) due to lease concessions and sales leverage[96](index=96&type=chunk) - Interest expense, net, more than doubled to **$667 thousand** due to higher interest rates and increased average borrowings from the Term Loan[106](index=106&type=chunk) - Loss on Franchise Growth Acceleration Initiative activities was **$0.9 million in Q1 2023**, with no comparable expense in Q1 2022[102](index=102&type=chunk) [Non-GAAP Financial Measures](index=24&type=section&id=Non-GAAP%20Financial%20Measures) This section provides reconciliations for non-GAAP financial measures, including Shop-Level Profit (Loss) Margin and Adjusted EBITDA, both showing significant improvement in Q1 2023 Shop-Level Profit (Loss) Margin Reconciliation (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Shop-level profit (loss) | $14,031 | $4,920 | | Sandwich shop sales, net | $116,947 | $97,431 | | Shop-level profit (loss) margin | 12.0% | 5.0% | Adjusted EBITDA Reconciliation (Amounts in thousands) | Item | Q1 2023 (March 26) | Q1 2022 (March 27) | | :--- | :--- | :--- | | Net loss attributable to Potbelly Corporation | $(1,327) | $(7,913) | | Depreciation expense | 2,971 | 3,136 | | Interest expense | 667 | 327 | | Income tax expense | 105 | 177 | | EBITDA | $2,416 | $(4,273) | | Impairment, loss on disposal of property and equipment, and shop closures | 1,045 | 1,319 | | Stock-based compensation | 911 | 675 | | Loss on extinguishment of debt | 239 | — | | Loss on Franchise Growth Acceleration Initiative activities | 949 | — | | Adjusted EBITDA | $5,560 | $(2,279) | [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) Potbelly's liquidity is primarily supported by cash from operations, existing cash, and its new $25 million Term Loan, with total liquidity at $24.8 million as of March 26, 2023 - Primary liquidity sources are cash from operations, existing cash, and the Term Loan[113](index=113&type=chunk) Liquidity Overview (Amounts in millions) | Item | March 26, 2023 | December 25, 2022 | | :--- | :--- | :--- | | Cash balance | $25.6 | $15.6 | | Total liquidity | $24.8 | $31.4 | - Net cash used in operating activities decreased to **$0.7 million in Q1 2023** from **$7.7 million in Q1 2022**[116](index=116&type=chunk) - Net cash provided by financing activities increased to **$14.6 million in Q1 2023** from **$4.3 million in Q1 2022**, primarily due to the Term Loan[118](index=118&type=chunk) - Net cash used in investing activities increased to **$3.2 million** due to higher capital expenditures[117](index=117&type=chunk) - The Term Loan, entered on February 7, 2023, provides **$25 million**, matures in February 2028, and has an effective interest rate of **15.07%** as of March 26, 2023[119](index=119&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk) - The company is in compliance with all financial debt covenants[126](index=126&type=chunk) - No shares were repurchased under the stock repurchase program in Q1 2023, and no shares have been sold under the equity offering program[127](index=127&type=chunk)[128](index=128&type=chunk) [Critical Accounting Estimates](index=27&type=section&id=Critical%20Accounting%20Estimates) This section reiterates that the preparation of financial statements requires management to make estimates and assumptions, particularly for long-lived assets and income taxes, with no significant changes since the last annual report - Significant estimates include amounts for long-lived assets and income taxes[21](index=21&type=chunk) - No significant changes in critical accounting estimates since the last annual report[129](index=129&type=chunk) [New and Revised Financial Accounting Standards](index=27&type=section&id=New%20and%20Revised%20Financial%20Accounting%20Standards) The company reviewed recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on the condensed consolidated financial statements - Recently issued accounting pronouncements are not expected to have a significant impact on the financial statements[29](index=29&type=chunk)[130](index=130&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section refers to the Annual Report on Form 10-K for detailed disclosures on market risk, stating that there have been no material changes to the company's market risk exposures since December 25, 2022 - No material changes to market risk exposures since December 25, 2022[131](index=131&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that Potbelly's disclosure controls and procedures were effective as of March 26, 2023, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of March 26, 2023[132](index=132&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter[133](index=133&type=chunk) [PART II. OTHER INFORMATION](index=27&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) Information regarding legal proceedings is incorporated by reference from Note 11 to the Condensed Consolidated Financial Statements - Legal proceedings information is provided in Note 11 of the financial statements[135](index=135&type=chunk) [Item 1A. Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the Annual Report on Form 10-K for a description of business risk factors, noting that no material changes have occurred since December 25, 2022 - No material changes to risk factors since December 25, 2022[136](index=136&type=chunk) [Item 2. Unregistered Sale of Equity Securities and Use of Proceeds](index=28&type=section&id=Item%202.%20Unregistered%20Sale%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q1 2023, Potbelly Corporation purchased 41 thousand shares of common stock from employees to satisfy withholding obligations related to equity awards, with no shares repurchased under the publicly announced stock repurchase program Issuer Purchases of Equity Securities (Amounts in thousands, except per share data) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Value of Shares that May Yet be Purchased Under the Program | | :--- | :--- | :--- | :--- | :--- | | Dec 26, 2022 - Jan 22, 2023 | 3 | $7.47 | — | $37,982 | | Jan 23, 2023 - Feb 19, 2023 | 1 | $7.99 | — | $37,982 | | Feb 20, 2023 - Mar 26, 2023 | 37 | $8.19 | — | $37,982 | | Total | 41 | | — | | - **41 thousand shares** were purchased from employees to satisfy withholding obligations, not under the stock repurchase program[137](index=137&type=chunk)[140](index=140&type=chunk) - The stock repurchase program, authorized for up to **$65.0 million**, still has **$37.982 million** available[137](index=137&type=chunk)[140](index=140&type=chunk) [Item 3. Defaults Upon Senior Securities](index=28&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the current report [Item 4. Mine Safety Disclosures](index=28&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the current report [Item 5. Other Information](index=28&type=section&id=Item%205.%20Other%20Information) This item is not applicable to the current report [Item 6. Exhibits](index=29&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL documents - Exhibits include certifications (31.1, 31.2, 32.1) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[142](index=142&type=chunk) [Signature](index=30&type=section&id=Signature) The report is signed by Steven Cirulis, Chief Financial Officer of Potbelly Corporation, on May 4, 2023, certifying its submission pursuant to the Securities Exchange Act of 1934 - The report was signed by Steven Cirulis, Chief Financial Officer, on May 4, 2023[145](index=145&type=chunk)

Financial Data and Key Metrics Changes - Quarterly revenue reached $120.2 million, and full-year revenue was $452 million, both all-time records, representing a 17% increase for the quarter and a 19% increase for the year compared to the previous year [14][24] - Same store sales growth was 18.9% for the quarter and 18.5% for the year, driven by strong traffic and operational success [14][24] - Positive net income of $2.7 million for the quarter and $4.3 million for the year, marking the third consecutive quarter of profitability [14][18] - Adjusted EBITDA for the year was $15.7 million, an improvement of $15.2 million compared to the previous year [24] Business Line Data and Key Metrics Changes - Digital engagement represented 38% of revenue, significantly contributing to record fourth-quarter results [15][44] - Catering business is accelerating, with sales approaching pre-pandemic levels, supported by targeted marketing initiatives [16][40] Market Data and Key Metrics Changes - AUVs (Average Unit Volumes) were $24,144 for the fourth quarter and $22,464 for the full year, with January and February 2023 AUVs recorded at $22,311 and $23,815 respectively [14][17] - The company experienced strong growth in CBD, airport, and suburban locations, indicating a recovery in these markets [3][17] Company Strategy and Development Direction - The company aims to become primarily franchise-focused, with 51 new shop commitments signed in late 2022, and plans to refranchise approximately 25% of company-owned shops [13][22] - The strategic plan includes achieving AUVs of $1.3 million and shop level margins of 16% by 2024 [22] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about continued growth in 2023, expecting first-quarter AUVs between $23,000 and $24,000 and same store sales growth between 18.5% and 20.5% [21] - The company anticipates inflation to be less impactful in 2023, with a focus on maintaining operational efficiencies [19][20] Other Important Information - The company reported a liquidity position of $31.4 million at the end of the fourth quarter, including cash and available credit [23] - The company has made significant progress in improving customer satisfaction scores and operational efficiencies [3][12] Q&A Session Summary Question: What is the goal for new shop commitments by year-end? - The company is focusing on quality over quantity in filling the pipeline, with mid-hundreds of leads per quarter and a robust sales team to manage these leads [28][30] Question: What is the outlook on commodity pressures and contracts? - Commodity inflation peaked at over 21% but is expected to continue decreasing, with about 55% of the basket locked in contracts [31] Question: How has wage inflation been trending? - Wage inflation is expected to be in the mid-single digits, with high retention rates aiding in recruitment [33][35] Question: What is the status of the digital kitchen rollout? - The digital kitchen is currently in 38 locations, with plans to expand to around 100 by year-end, showing improvements in customer experience metrics [51] Question: How is the company leveraging digital engagement? - The company is focusing on digital advertising, e-commerce efforts, and a perks loyalty program to enhance customer engagement [59][69]

Business Operations - As of December 25, 2022, Potbelly had 429 shops across 31 states and the District of Columbia, with 384 company-operated and 45 franchise-operated shops[19][49]. - The company employs over 6,000 individuals, with approximately 1,800 in shop management roles[37]. - Potbelly's culture, defined by its Vision, Mission, and Values, plays a crucial role in attracting and retaining employees, contributing to a better-than-industry-average turnover rate[18][43]. - The company has initiated a franchising program since 2010, with plans to expand the number of franchise shops at an increasing rate[28]. - The average investment for a new shop is approximately $650,000, with average annual unit volumes of $1.15 million, aiming for shop-level profit margins in the mid to high teens[51]. - The average size of new shops is targeted between 1,800 and 2,200 square feet, with a typical dining area seating 40 to 60 people[53]. - The franchise agreement includes a 6.0% weekly royalty on sales and an initial franchise fee, with franchisees required to participate in an eight-week training program[57][55]. - Approximately 69.3% of the company's total domestic shops are concentrated in Illinois, Texas, Michigan, Maryland, Washington, D.C., and Virginia, making it vulnerable to regional economic conditions[154]. Financial Performance - In fiscal 2022, the system-wide average check per entree was approximately $11.38, an increase from $9.81 in 2021[29]. - Increased costs of utilities, labor, and commodities could adversely affect profitability, with inflation and supply chain disruptions being significant factors[100]. - The company has experienced significant labor cost inflation, which could materially adversely impact financial performance if not offset[165]. - The company may face increased healthcare costs due to rising medical claims, which could adversely affect financial performance[166]. - Changes in tax laws or unanticipated tax liabilities could adversely affect the company's profitability[163]. - The company has no plans to pay regular cash dividends for the foreseeable future, which may limit returns on investment unless shares are sold at a higher price[180]. - The company entered into a new credit agreement with an aggregate commitment of $25 million for a term loan, which imposes certain financial covenants and restrictions on operations[148]. Market Strategy - Potbelly's business strategy includes a "Traffic-Driven Profitability" plan with five pillars aimed at driving profitable growth and enhancing customer experience[23][24]. - The company prioritizes franchise unit growth while limiting company-operated shop growth, emphasizing the importance of location selection for long-term success[52]. - The company has increased its digital marketing efforts, utilizing platforms like Facebook and Instagram to enhance customer engagement and drive traffic growth[61]. - Potbelly aims to enhance its digital customer experience through technology investments, including the Potbelly Digital Kitchen[34]. - The company plans to continue emphasizing mobile and digital ordering, delivery, and catering, although these efforts may face operational challenges[160]. Supply Chain and Food Safety - More than 85% of food supplies are sourced through a cooperative arrangement with six primary distributors, with meat products constituting approximately 30% of purchasing composition[63][66]. - The company relies heavily on a limited number of suppliers, purchasing almost all bread from one supplier and over 90% of meat products from ten suppliers, which poses a risk to operations[102]. - Potbelly emphasizes food safety and quality assurance, dedicating substantial resources to ensure safe food products[31][32]. - Supply shortages or interruptions in fresh food deliveries could adversely impact operating results and overall business performance[101]. Risks and Challenges - The business is subject to seasonal fluctuations, with the first quarter typically seeing the lowest customer spending due to various factors[79]. - New shop openings may not be profitable and could take 10 to 13 weeks to reach planned operating levels, impacting overall profitability[113]. - Expansion into new markets carries risks, including higher costs and difficulties in hiring qualified staff, which could delay profitability[112]. - The company faces challenges in attracting and retaining qualified personnel, which could lead to increased labor costs and operational inefficiencies[105]. - Negative publicity regarding food quality or safety could materially harm the company's results of operations and brand value[157]. - The company is subject to various claims and lawsuits that could divert resources and generate negative publicity, impacting sales[146]. - Cybersecurity risks and information technology system failures could disrupt operations and negatively impact business[125]. - Security breaches involving customer information could lead to reputational damage and legal liabilities[127]. - Compliance with nutritional information regulations may increase operational costs and affect menu offerings[135]. - The company may face challenges in raising capital in the future, which could limit its ability to fund capital requirements[124]. - Class action lawsuits related to workplace and employment laws pose a risk of substantial damages and management distraction[144]. - The company acknowledges that climate change poses inherent risks that could disrupt operations and lead to additional costs[171]. - The company may face increased general and administrative expenses due to evolving environmental, social, and governance (ESG) regulations and stakeholder expectations[168]. - The company may not be able to adequately protect its intellectual property, which could harm brand value and market acceptance[147]. - Provisions in the company's bylaws may discourage or delay changes in control, potentially affecting stock price[176]. Consumer Trends - Over 35% of Potbelly's orders are digital, processed through the Potbelly App or website, as well as third-party delivery services[34]. - Potbelly's menu innovation focuses on responding to consumer trends and includes the development of bundling options and premium protein sandwiches[30]. - Changes in consumer eating habits and health regulations could adversely affect revenues, potentially requiring modifications to menu offerings[122]. - A shift in consumer preferences away from outside-the-home food could negatively impact financial results, particularly if new products are not accepted[123].