Potbelly(PBPB) - 2024 Q2 - Quarterly Results

Potbelly Q2 2024 Earnings Release Q2 2024 Financial Highlights Q2 2024 saw decreased revenue due to refranchising, but a significant tax benefit drove GAAP net income to $34.7 million Q2 2024 Key Financial Metrics vs. Q2 2023 | Metric | Q2 2024 | Q2 2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $119.7M | $126.6M | -5.5% | | Same-Store Sales Growth | +0.4% | N/A | N/A | | GAAP Net Income | $34.7M | $2.2M | +1477% | | GAAP Diluted EPS | $1.13 | $0.07 | +1514% | | Adjusted Net Income | $2.5M | $2.0M | +25.0% | | Adjusted Diluted EPS | $0.08 | $0.07 | +14.3% | | Adjusted EBITDA | $8.5M | $8.0M | +5.9% | - The decrease in total revenues was primarily driven by a $9.2 million (7.4%) decline in company-operated shop sales due to the refranchising of 26 locations since Q1 2023[1] - The substantial increase in GAAP net income and diluted EPS was inclusive of a $31.3 million income tax benefit from the release of the company's tax valuation allowance[2] - Franchise royalties, fees, and rent income increased by 117.4% to $2.2 million, driven by a 53% increase in franchised units[2] Management Commentary Management highlighted the 13th consecutive quarter of shop margin expansion and strong franchise development despite a challenging environment - The company achieved its 13th consecutive quarter of year-over-year shop margin expansion[3] - Key drivers of business confidence include high customer satisfaction scores, strong performance of digital channels, and new shops outperforming expectations[3] - The company remains focused on executing its Five-Pillar Strategy to grow the brand and create stakeholder value[3] Financial Outlook The company projects a Q3 same-store sales decline but maintains its full-year Adjusted EBITDA guidance of $27.0M to $30.0M Q3 2024 and Full Year 2024 Guidance | Metric | 3Q'24 Guidance | 2024 Guidance | | :--- | :--- | :--- | | Same Store Sales % Growth | -3.5% to -1.5% | -1.5% to +0.5% | | Adjusted EBITDA | $6.5M to $8.0M | $27.0M to $30.0M | | New Unit Growth | N/A | At least 30 shops | - Guidance reflects the impact of refranchising 33 company locations in 2023, the absence of a 53rd week in 2024, and increased costs for franchise growth support[5] Development and Share Repurchase Update The company advanced its franchise growth with 22 new commitments and repurchased $0.7 million of its common stock in Q2 - Opened 4 new shops in Q2 2024, with a total of 9 new shops opened year-to-date through August 8, 2024[6] - Signed commitments for 22 new franchise shops in Q2, bringing the 2024 total to 54 new commitments[6] - As of June 30, 2024, Potbelly has 663 open and committed shops, a 25% increase from Q2 2023[6] - During Q2, the company repurchased about 86,000 shares for approximately $0.7 million, with $19.3 million remaining under the share repurchase program[7] Financial Statements Consolidated Statements of Operations Q2 revenue declined due to refranchising, but a $31.0 million tax benefit boosted net income to $34.7 million Q2 2024 vs. Q2 2023 Statement of Operations (in thousands) | Account | For the Quarter Ended Jun 30, 2024 | For the Quarter Ended Jun 25, 2023 | | :--- | :--- | :--- | | Sandwich shop sales, net | $115,536 | $124,709 | | Franchise royalties, fees and rent income | $4,161 | $1,914 | | Total revenues | $119,697 | $126,623 | | Income from operations | $4,119 | $3,344 | | Income tax (benefit) expense | ($30,982) | ($48) | | Net income attributable to Potbelly | $34,712 | $2,216 | | Diluted EPS | $1.13 | $0.07 | - Labor and related expenses as a percentage of sandwich shop sales improved, decreasing to 28.0% in Q2 2024 from 30.4% in Q2 2023[21] Consolidated Balance Sheets Total assets remained stable while stockholders' equity grew to $48.3 million, driven by net income and a new deferred tax asset Balance Sheet Highlights (in thousands) | Account | Jun 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $8,322 | $33,788 | | Deferred tax assets | $30,976 | $0 | | Total assets | $254,610 | $252,460 | | Long-term debt, net | $4,000 | $19,168 | | Total liabilities | $206,908 | $238,367 | | Total stockholders' equity | $48,302 | $14,693 | Consolidated Statements of Cash Flows Year-to-date operating cash flow decreased to $3.9 million, with significant cash used for debt repayment and share repurchases Year-to-Date Cash Flow Summary (in thousands) | Cash Flow Activity | For Year Ended Jun 30, 2024 | For Year Ended Jun 25, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,850 | $12,022 | | Net cash used in investing activities | ($8,460) | ($5,919) | | Net cash (used in) provided by financing activities | ($20,856) | $13,288 | | Net (decrease) increase in cash | ($25,466) | $19,391 | - Financing activities in the first half of 2024 included $22.8 million in term loan repayments and $0.7 million in treasury stock repurchases[24] Non-GAAP Financial Measures & Reconciliations Reconciliation of Net Income to Adjusted Net Income and Adjusted EBITDA Q2 GAAP Net Income of $34.7 million was adjusted to $2.5 million of Adjusted Net Income after removing a $32.4 million tax benefit Q2 2024 Reconciliation of Net Income to Adjusted Net Income (in thousands) | Description | Amount | | :--- | :--- | | Net income attributable to Potbelly Corporation | $34,712 | | Total adjustments before income tax | $173 | | Income tax adjustments | ($32,361) | | Adjusted net income attributable to Potbelly Corporation | $2,524 | Q2 2024 Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Description | Amount | | :--- | :--- | | Net income attributable to Potbelly Corporation | $34,712 | | Depreciation expense | $3,016 | | Interest expense, net | $181 | | Income tax (benefit) expense | ($30,982) | | EBITDA | $6,927 | | Other adjustments (Impairment, Stock comp, etc.) | $1,594 | | Adjusted EBITDA | $8,521 | Reconciliation of Income from Operations to Shop-Level Profit Shop-level profit margin improved to 15.7% in Q2 2024, an increase of 130 basis points from the prior year Q2 2024 vs. Q2 2023 Shop-Level Profit Reconciliation (in thousands) | Metric | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Income from operations | $4,119 | $3,344 | | Adjustments | ... | ... | | Shop-level profit | $18,110 | $17,932 | | Sandwich shop sales, net | $115,536 | $124,709 | | Shop-level profit margin | 15.7% | 14.4% | - The shop-level profit margin expanded by 130 basis points year-over-year, from 14.4% in Q2 2023 to 15.7% in Q2 2024[30] Selected Operating Data Key Operating Metrics System-wide sales remained flat as a 52.1% increase in franchise sales offset a 7.4% decline in company-operated shop sales Q2 2024 vs. Q2 2023 Operating Metrics | Metric | Q2 2024 | Q2 2023 | | :--- | :--- | :--- | | Company-operated comparable store sales growth | 0.4% | 12.9% | | Sales from company-operated shops, net | $115,536K | $124,709K | | Sales from franchise shops, net | $26,782K | $17,608K | | System-wide sales | $142,318K | $142,317K | Shop Count Activity The system-wide shop count grew to 429, with a strategic shift increasing franchised locations to 84 from 55 a year ago Shop Count as of June 30, 2024 vs. June 25, 2023 | Shop Type | End of Q2 2024 | End of Q2 2023 | | :--- | :--- | :--- | | Company-operated | 345 | 372 | | Franchised | 84 | 55 | | System-wide | 429 | 427 |