Potbelly Corporation (NASDAQ:PBPB) Q2 2024 Earnings Conference Call August 8, 2024 5:00 PM ET Company Participants Adiya Dixon - Chief Legal Officer, Chief Compliance Officer and Secretary Robert Wright - President & CEO Steven Cirulis - CFO & Chief Strategy Officer Conference Call Participants Todd Brooks - The Benchmark Company Matt Curtis - William Blair Jeremy Hamblin - Craig-Hallum Operator Good afternoon, everyone, and welcome to Potbelly Corporation's Second Quarter 2024 Earnings Conference Call. Tod ...

Potbelly (PBPB) came out with quarterly earnings of $0.08 per share, beating the Zacks Consensus Estimate of $0.05 per share. This compares to earnings of $0.07 per share a year ago. These figures are adjusted for nonrecurring items. This quarterly report represents an earnings surprise of 60%. A quarter ago, it was expected that this sandwich restaurant operator would post a loss of $0.02 per share when it actually produced earnings of $0.01, delivering a surprise of 150%. Over the last four quarters, the ...

carterdayne/iStock Unreleased via Getty Images Context Potbelly (NASDAQ:PBPB) has as a cornerstone of its value proposition the development of a friendly and welcoming concept that emulates the atmosphere of a neighborhood sandwich shop, despite its more than 427 locations in 31 states and the District of Columbia. Quickly contextualizing the history of the company, it was born in Chicago, but precisely on Lincoln Avenue in 1977. In fact, the idea of the creator, Peter Hastings, was for the sandwich shop to ...

Core Insights - Potbelly Corporation has opened its first location at the Pentagon, enhancing its presence on military installations and Department of Defense facilities [3][9] - The company plans to develop three additional restaurants at Fort Liberty, one of the largest military installations globally, with all shops being franchise-owned and operated [3][7] - Potbelly is committed to supporting military families through its annual Potbelly Serves summer volunteer program and will donate all sales from the Pentagon shop on July 16 to the Tunnel to Towers' Homeless Veterans program [2][7] Company Expansion - The Pentagon shop officially opened on June 28, and a grand opening ceremony is scheduled for July 16 [1][9] - Potbelly has plans to open two more locations at Fort Liberty by the end of 2024, expanding its footprint in military communities [7][10] - The company aims for long-term growth with a goal of opening 2,000 shops across the U.S. [10] Franchise Operations - Franchisee Shakti Patel will own and operate all three restaurants at Fort Liberty, highlighting the support Potbelly provides to its franchise partners [4][7] - Potbelly is collaborating with the Navy Exchange Service Command (NEXCOM) and the Army & Air Force Exchange Service (AAFES) for the openings at both the Pentagon and Fort Liberty [7] Community Engagement - The company emphasizes its commitment to the military community by providing convenient dining options and engaging in charitable activities [9][2] - Potbelly's menu includes a variety of offerings such as oven-toasted sandwiches, signature salads, hand-dipped shakes, and fresh-baked cookies, catering to the tastes of military personnel and their families [9][11]

About Potbelly Potbelly Corporation is a neighborhood sandwich concept that has been feeding customers' smiles with warm, toasty sandwiches, signature salads, hand-dipped shakes and other fresh menu items, customized just the way customers want them, for more than 40 years. Potbelly promises Fresh, Fast & Friendly service in an environment that reflects the local neighborhood. Since opening its first shop in Chicago in 1977, Potbelly has expanded to neighborhoods across the country – with more than 425 shop ...

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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 March 31, 2024 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 Co ...

Business Operations - As of December 31, 2023, Potbelly had 424 shops in 31 states and the District of Columbia, with 345 company-operated and 79 franchise-operated shops[18][46]. - Potbelly refranchised 33 company-operated shops during 2023 and expects most shop growth to occur through franchisee development in 2024[48]. - The company opened one new company-operated shop and closed seven in 2023, indicating a cautious approach to growth[47]. - Potbelly employs over 5,000 individuals, with approximately 180 in corporate roles and 450 in shop management[36]. - New shops are designed to create a unique customer experience, averaging 2,300 square feet, with a target size of 1,800 to 2,000 square feet for new openings[51]. - Construction of a new shop takes approximately 60 to 90 days, requiring a cash investment of around $650,000, which may vary based on market conditions[52]. - The company focuses on franchise unit growth while limiting the rate of company-operated shop growth, emphasizing location selection based on demographic and traffic criteria[50]. Financial Performance - In fiscal year 2023, the system-wide average check per entree was approximately $11.87, an increase from $11.38 in 2022[28]. - Average new shop investment is approximately $650,000 with average unit volumes of $1.32 million for fiscal year 2023, aiming for mid to high teens profit margins[49]. - The company’s financial performance could be negatively impacted by adverse weather conditions affecting customer traffic and shop operations[154]. - Labor cost inflation continues to impact the company's financial performance, with potential increases in minimum wages and benefits significantly raising overall labor costs[166]. - Rising healthcare costs related to employee health benefit plans could materially affect the company's financial performance if actual claims exceed estimates[167]. - The company has no plans to pay regular cash dividends for the foreseeable future, which may limit returns on investment for shareholders[183]. - The company entered into an equity sales agreement allowing for the issuance of shares with an aggregate offering price of up to $40 million, subject to market conditions[181]. - Changes in tax laws and unanticipated tax liabilities could adversely affect the company's profitability and financial results[165]. - The company may experience volatility in its stock price due to various factors, including market conditions and operational performance[174]. Customer Experience and Marketing - The company operates with over 39% of orders being digital through the Potbelly App or website and third-party delivery services[33]. - Potbelly's strategic plan includes five pillars focused on traffic-driven profitability, enhancing customer experience, and expanding the Potbelly Perks rewards program[22][23]. - The Potbelly Perks loyalty program allows members to earn 10 points for every dollar spent, with a free entrée reward after 1,000 points[59]. - The company has enhanced the Potbelly Perks program to offer more reward options, allowing members to earn coins based on their annual spend[60]. - The company intends to invest in marketing efforts to attract and retain customers, but these initiatives may not yield the expected revenue increases[160]. Supply Chain and Food Safety - In fiscal year 2023, over 90% of food supplies were sourced through Distribution Market Advantage, Inc., with six primary distributors[61]. - Meats account for approximately 30% of product purchasing, with over 80% sourced from 10 suppliers under non-exclusive contracts[63]. - The company relies heavily on a limited number of suppliers, purchasing almost all bread from one supplier and over 80% of meat products from 10 suppliers[95]. - Supply shortages or interruptions in fresh food products could adversely affect operating results[93]. - The company emphasizes food safety and quality assurance, dedicating substantial resources to ensure safe food products[30][31]. Challenges and Risks - Increased commodity and energy costs could decrease shop-level profit margins, impacting overall profitability[91]. - The company faces challenges in attracting and retaining qualified personnel, which could lead to increased labor costs and operational inefficiencies[97]. - New shop openings may not be profitable and could take 8 to 12 weeks to reach planned operating levels due to initial inefficiencies[105]. - The company’s growth strategy includes closing underperforming shops while expanding in existing and new markets, but this carries risks of delays and increased costs[102]. - Unionization efforts could disrupt operations and affect profitability if a significant number of employees become unionized[98]. - The company’s ability to manage growth effectively is crucial, as existing systems may not support planned expansion[109]. - The success of franchisees is vital for future growth, as their performance directly impacts the company's reputation and financial results[113]. - The company may face challenges in implementing initiatives aimed at increasing sales and traffic, with no guarantee of positive outcomes[111]. - The inability to successfully raise menu prices could lead to a decline in profitability, impacting financial results negatively[115]. - Changes in regulations and consumer eating habits regarding diet and health may adversely affect revenues, necessitating modifications to menu offerings[116]. - Evolving consumer preferences and tastes could result in reduced customer demand for current offerings, impacting financial performance[117]. - Risks related to information technology systems and cybersecurity could lead to civil and criminal penalties, reputational harm, and substantial costs[119]. - Compliance with privacy and data protection laws is complex and may result in significant costs, affecting brand reputation and operational results[120]. - Security breaches of customer information could lead to negative publicity, loss of customers, and legal liabilities, impacting business operations[123]. - Compliance with nutritional information regulations may be costly and time-consuming, potentially requiring modifications to menu items[132]. - Increases in minimum wage laws could raise labor costs, impacting profitability and operational efficiency[135]. - The Americans with Disabilities Act (ADA) compliance may require additional expenditures to modify shops for disabled access[136]. - The company is subject to federal and state laws regulating the offer and sale of franchises, which may impose registration and disclosure requirements[137]. - The company faces potential increases in compliance costs due to current and future laws and regulations, which could adversely affect operational results[139]. - The company may incur significant costs related to litigation from employees, consumers, and suppliers, which could divert management attention and resources[141]. - The company is at risk of losing food service licenses if it fails to comply with food control regulations, which could adversely affect business operations[140]. - The company faces risks related to evolving environmental, social, and governance (ESG) regulations, which may increase administrative expenses and management focus[171]. - Climate change poses risks to the company's operations, potentially increasing costs and affecting the availability and pricing of ingredients[172]. Seasonal Trends - The business is subject to seasonal fluctuations, with customer spending typically lowest in the first quarter of the year[75]. - The company's financial results are subject to seasonal fluctuations, with customer spending typically lowest in the first quarter due to holidays and adverse weather[162]. Menu Innovation - Potbelly's menu innovation includes developing bundling options and premium protein sandwiches to respond to consumer trends[29].

Financial Data and Key Metrics Changes - Revenues in Q4 2023 increased approximately 4.7% to $125.7 million, partially offset by the short-term revenue impact of recent refranchising transactions and benefiting from the 53rd week [16][19] - Fourth quarter adjusted EBITDA was $7.5 million, or 5.9% of total revenue, approximately flat year-over-year [19] - Net income for the quarter was $2.7 million, with adjusted net income decreasing by $1.9 million compared to the prior year [19][20] - Average unit volumes reached $1.3 million, with a target of achieving 16% shop level margins [11][19] Business Line Data and Key Metrics Changes - Same-store sales growth was 6.3% in Q4, driven primarily through traffic growth [32][39] - Digital business represented approximately 40% of total shop sales, an increase of 150 basis points year-over-year [6][39] - Shop level margins improved by 150 basis points year-over-year to 15.7% for the quarter [12][19] Market Data and Key Metrics Changes - System-wide sales grew by approximately 11.4% to $147.5 million [39] - Labor expenses were 28.8% of sales, a 200 basis point improvement versus the prior year [40] - General and administrative expenses were approximately 10.1% of system-wide sales for Q4 [41] Company Strategy and Development Direction - The company is focused on a five-pillar strategy aimed at enhancing customer experience and driving profitability [4][21] - Long-term growth targets include same-store sales growth in the low to mid-single digits, unit growth in the low double digits, and adjusted EBITDA growth in the low to mid-double digits [5][20] - The company plans to achieve approximately 10% unit growth in 2024, with a goal of reaching 2,000 units in the U.S. [11][15] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving high single to low double-digit adjusted EBITDA growth despite headwinds from refranchising [42][43] - The company anticipates a stabilization in wage inflation and low single-digit increases in commodity costs for the upcoming year [76] - Management highlighted the importance of the Potbelly Perks loyalty program, which saw an 87% increase in member acquisition during Q4 [33][107] Other Important Information - The company signed a new three-year $30 million revolving credit facility, providing significant financial flexibility [42] - The 53rd week contributed approximately $7.5 million in sales, although it had a slight negative impact on average weekly sales [98][100] Q&A Session Summary Question: Clarification on FY 2024 guidance for adjusted EBITDA - Management confirmed that the guidance for adjusted EBITDA growth is in the high single-digit to low double-digit range [47][48] Question: Pipeline for new franchise units and potential headwinds - Management indicated strong growth in the pipeline for new franchise units and no significant slowdowns reported [54] Question: Recent price increases and their impact on guidance - Management noted a gross price increase of 3.8% in Q4 and anticipated low single-digit price increases for the upcoming year [79] Question: Outlook for commodity prices and labor costs - Management expects low single-digit increases in commodity costs and stabilization in wage inflation [76] Question: Impact of the 53rd week on sales and margins - Management explained that the 53rd week added approximately $7.5 million in sales but had a slight negative impact on margins due to lower volume [98][100]

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