Potbelly(PBPB) - 2025 Q2 - Quarterly Report

Cover Page and Filing Information Provides essential filing details for Potbelly Corporation's Form 10-Q, including registrant information and common stock outstanding Registrant Information Potbelly Corporation, an accelerated filer, reported 30,260,672 shares of common stock outstanding as of July 27, 2025 - Potbelly Corporation is an accelerated filer[3] Common Stock Outstanding | As of Date | Shares Outstanding | | :----------- | :----------------- | | July 27, 2025 | 30,260,672 | Table of Contents This section provides an organized overview of the report's structure and content for easy navigation PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's analysis Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements and detailed notes on accounting policies Condensed Consolidated Balance Sheets (Unaudited) Total assets increased slightly, driven by cash and property, while liabilities decreased and equity rose Condensed Consolidated Balance Sheets (Amounts in thousands) | Item | June 29, 2025 | December 29, 2024 | | :-------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $16,187 | $11,663 | | Total current assets | $36,994 | $33,201 | | Property and equipment, net | $54,391 | $50,533 | | Total assets | $265,241 | $263,146 | | Total current liabilities | $73,392 | $65,233 | | Long-term debt, net of current portion | $— | $4,000 | | Total liabilities | $204,144 | $205,198 | | Total equity | $61,097 | $57,948 | Condensed Consolidated Statements of Operations (Unaudited) Total revenues increased, but net income significantly decreased due to a prior year income tax benefit Condensed Consolidated Statements of Operations (Amounts in thousands, except per share data) | Item | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :------------------------------------ | :------ | :------ | :------- | :------- | | Total revenues | $123,709 | $119,697 | $237,390 | $230,850 | | Income from operations | $3,702 | $4,119 | $3,952 | $4,237 | | Net income attributable to Potbelly Corporation | $2,488 | $34,712 | $2,426 | $31,945 | | Basic EPS | $0.08 | $1.16 | $0.08 | $1.07 | | Diluted EPS | $0.08 | $1.13 | $0.08 | $1.04 | - Net income attributable to Potbelly Corporation decreased by 92.8% for the quarter ended June 29, 2025, compared to June 30, 2024, primarily due to a $31.3 million valuation allowance release in June 2024[10][102] Condensed Consolidated Statements of Equity (Unaudited) Total equity increased due to net income and stock-based compensation, offset by share repurchases Key Equity Changes (Amounts in thousands) | Item | Balance at Dec 29, 2024 | Balance at June 29, 2025 | | :-------------------------- | :---------------------- | :----------------------- | | Total Equity | $57,948 | $61,097 | | Net income | N/A | $2,914 | | Stock-based compensation expense | N/A | $1,827 | | Repurchases of common stock | N/A | $(989) | Condensed Consolidated Statements of Cash Flows (Unaudited) Operating cash flow significantly increased, while investing cash outflow rose and financing cash outflow decreased Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity | YTD June 29, 2025 | YTD June 30, 2024 | | :-------------------------------- | :---------------- | :---------------- | | Net cash provided by operating activities | $22,366 | $3,850 | | Net cash used in investing activities | $(10,755) | $(8,460) | | Net cash used in financing activities | $(7,087) | $(20,856) | | Net change in cash and cash equivalents and restricted cash | $4,524 | $(25,466) | | Cash and cash equivalents and restricted cash at end of period | $17,002 | $9,071 | Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed information on the company's business, accounting policies, and financial items (1) Organization and Other Matters Potbelly operates 340 company-owned and 107 franchised shops, with new accounting pronouncements impacting future disclosures - As of June 29, 2025, Potbelly operates 340 Company-operated shops and 107 franchised shops in the United States[16] - The company will adopt ASU 2023-09 (Income Taxes) in its 2025 10-K, impacting disclosures but not financial condition. ASU 2024-03 (Disaggregation of Incomes Statement Expenses) will be adopted in the 2027 10-K, with impact currently being evaluated[22][23][24] (2) Restricted Cash Restricted cash, held as collateral for lease agreements, remained stable at $815 thousand Restricted Cash Reconciliation (Amounts in thousands) | Item | June 29, 2025 | December 29, 2024 | | :-------------------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $16,187 | $11,663 | | Restricted cash, noncurrent | $815 | $815 | | Total cash, cash equivalents and restricted cash | $17,002 | $12,478 | (3) Revenue Revenue from sandwich shop sales increased, while total contract liabilities saw a slight decrease Revenue Recognition (Amounts in millions) | Revenue Source | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :--------------- | :------ | :------ | :------- | :------- | | Point in time | $122.0 | $119.1 | $233.6 | $229.7 | | Over time | $1.7 | $0.6 | $3.8 | $1.1 | Contract Liabilities (Amounts in thousands) | Item | June 29, 2025 | December 29, 2024 | Change | | :-------------------------- | :------------ | :---------------- | :----- | | Franchise fee liabilities | $8,184 | $7,163 | $1,021 | | Unredeemed gift card liabilities | $2,569 | $3,954 | $(1,385) | | Customer loyalty program obligations | $5,534 | $6,181 | $(647) | | Total contract liabilities | $16,287 | $17,298 | $(1,011) | (4) Fair Value Measurement Impairment charges of $0.2 million for Q2 2025 were recognized due to underperforming shops - Impairment charges for underperforming shops were $0.2 million for the quarter ended June 29, 2025, and $0.5 million for the year-to-date period[36] (5) Earnings Per Share Basic and diluted EPS were $0.08 for Q2 and YTD 2025, a significant decrease from the prior year Earnings Per Share Calculation | Item | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :------------------------------------ | :------ | :------ | :------- | :------- | | Net income attributable to Potbelly Corporation | $2,488 | $34,712 | $2,426 | $31,945 | | Basic EPS | $0.08 | $1.16 | $0.08 | $1.07 | | Diluted EPS | $0.08 | $1.13 | $0.08 | $1.04 | | Weighted average common stock outstanding-basic | 30,192 | 29,926 | 30,041 | 29,903 | | Weighted average common shares outstanding-diluted | 30,811 | 30,714 | 30,785 | 30,842 | (6) Income Taxes The company recorded an income tax expense of $0.7 million for Q2 2025, a change from prior year's benefit - Income tax expense was $0.7 million for Q2 2025, compared to a $31.0 million benefit in Q2 2024, due to the prior year's valuation allowance release on deferred tax assets[102][119] Income Tax Expense (Benefit) (Amounts in thousands) | Period | Income Tax Expense (Benefit) | | :----- | :--------------------------- | | Q2 2025 | $665 | | Q2 2024 | $(30,982) | | YTD 2025 | $663 | | YTD 2024 | $(30,931) | - The valuation allowance against deferred tax assets was $0.2 million as of June 29, 2025, compared to $0.1 million as of June 30, 2024[40] (7) Leases The company terminated 3 leases YTD 2025, recognizing a gain, and operating lease income increased Lease Termination and Income (Amounts in thousands) | Item | YTD June 29, 2025 | YTD June 30, 2024 | | :------------------------------------ | :---------------- | :---------------- | | Leases terminated | 3 | 1 | | (Gain) loss recognized upon lease termination | $(595) | $110 | | Operating lease income | $2,094 | $1,960 | | Franchise rent income | $3,047 | $2,774 | (8) Debt and Credit Facilities Long-term debt decreased to zero due to Term Loan repayment, with a $30 million Revolving Facility now primary Long-Term Debt (Amounts in thousands) | Item | June 29, 2025 | December 29, 2024 | | :--------------- | :------------ | :---------------- | | Revolving Facility | $— | $4,000 | | Total long-term debt | $— | $4,000 | - The company repaid and terminated its Term Loan in February 2024, resulting in a $2.4 million loss on extinguishment of debt for fiscal year 2024[56] - A $30 million Revolving Facility, expiring February 7, 2027, is now the primary credit facility, used for general corporate and working capital purposes. The company is in compliance with all covenants[47][52] (9) Capital Stock The company repurchased 112,850 shares for $1.0 million in Q2 2025, with 727,891 warrants remaining outstanding Stock Repurchase Program (Amounts in thousands, except shares) | Period | Shares Repurchased | Aggregate Cost | | :-------------------------- | :----------------- | :------------- | | Q2 2025 | 112,850 | $1.0 | | YTD June 29, 2025 | 230,326 | $2.1 | - The 2024 Repurchase Program authorizes up to $20.0 million in common stock repurchases over three years, replacing the 2018 program[58] - Year-to-date June 29, 2025, 155,511 warrants were exercised at $5.45 per warrant, leaving 727,891 warrants outstanding, exercisable through August 12, 2026[59] (10) Stock-Based Compensation The company recognized $1.2 million in RSU and $0.6 million in PSU compensation expense for Q2 2025 Stock-Based Compensation Expense (Amounts in millions) | Item | Q2 2025 | YTD 2025 | Q2 2024 | YTD 2024 | | :-------------------------- | :------ | :------- | :------ | :------- | | Restricted Stock Units (RSUs) | $1.2 | $2.0 | $1.1 | $1.9 | | Performance Stock Units (PSUs) | $0.6 | $1.3 | $0.4 | $1.3 | | Stock Options | $0.0 | $0.0 | $0.0 | $0.0 | - Unrecognized stock-based compensation expense for RSUs is $6.2 million and for PSUs is $4.6 million, both to be recognized through the second quarter of 2028[64][67] (11) Commitments and Contingencies A class action lawsuit settlement is pending court approval, and the company manages food commodity price risks - A class action lawsuit in Washington state, related to the Equal Pay and Opportunities Act, has a probable material loss exposure of $1.8 million, recorded in 2024. A settlement agreement was executed on March 27, 2025, pending court approval[69] - The company uses a mix of forward pricing and formula pricing protocols for food commodities to manage price and availability risks[70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, operational strategies, and liquidity for the quarter and year-to-date periods Forward-Looking Statements This section highlights future financial position, operational goals, and growth strategies, subject to various risks - Forward-looking statements cover future financial position, operational goals, brand growth, shop development, liquidity, and strategic initiatives like the 'Traffic-Driven Profitability' Five-Pillar plan[71] - Risks and uncertainties include competition, marketing effectiveness, economic conditions (inflation), business strategy implementation, franchisee success, commodity/labor costs, credit facility compliance, employee retention, public health issues, growth management, and reputational issues[71] Business Potbelly focuses on profitable growth through its 'Traffic-Driven Profitability' Five-Pillar plan and franchise development - Potbelly's 'Traffic-Driven Profitability' Five-Pillar strategic plan focuses on: Craveable-Quality Food, People Creating Good Vibes, Customer Experiences, Digitally-Driven Awareness, and Franchise-Focused Development[73][74] - The company aims to generate average shop-level profit margins ranging from the mid to high teens[73] Shop Roll-Forward (Number of Shops) | Item | Company Operated | Franchise Operated | Total | | :-------------------------- | :--------------- | :----------------- | :---- | | Shops as of Dec 31, 2023 | 345 | 79 | 424 | | Shops as of June 30, 2024 | 345 | 84 | 429 | | Shops as of Dec 29, 2024 | 346 | 96 | 442 | | Shops as of June 29, 2025 | 340 | 107 | 447 | Key Performance Indicators Key metrics like same store sales, shop-level profit margin, and Adjusted EBITDA assess business performance and growth - Key performance indicators include: same store sales, number of shop openings, shop-level profit margins, system-wide sales, average unit volume, and adjusted EBITDA[78] - Shop-level profit margin is a non-GAAP measure defined as net Company-operated sandwich shop sales less operating expenses (excluding depreciation) as a percentage of net Company-operated sandwich shop sales[83] - Adjusted EBITDA is a non-GAAP measure that adjusts net income for non-operating and non-recurring items to provide a clearer picture of underlying business performance[86] Quarter Ended June 29, 2025 Compared to Quarter Ended June 30, 2024 Q2 2025 revenues increased by 3.4%, but net income decreased significantly due to a prior year tax benefit Q2 Financial Performance (Amounts in thousands, except percentages) | Item | Q2 2025 | Q2 2024 | Change ($) | Change (%) | | :------------------------------------ | :------ | :------ | :--------- | :--------- | | Total revenues | $123,709 | $119,697 | $4,012 | 3.4% | | Net income attributable to Potbelly Corporation | $2,488 | $34,712 | $(32,224) | (92.8)% | | Same store sales | 3.2% | 0.4% | 2.8% | | | Shop-level profit margin | 16.7% | 15.7% | 1.0% | | | System-wide sales | $154,170 | $144,470 | $9,699 | | | Adjusted EBITDA | $9,632 | $8,521 | $1,111 | | - Sandwich shop sales, net increased by 2.5% to $118.4 million, driven by existing shops and new openings, partially offset by refranchised and closed shops[89] - Franchise royalties, fees and rental income increased by 27.6% to $5.3 million, primarily due to new franchise-operated shop openings[90] - Food, beverage, and packaging costs decreased as a percentage of sandwich shop sales to 26.3% (from 27.1%), driven by lower inflation and reduced supplies/packaging costs[91] - General and administrative expenses increased by 12.6% to $13.4 million, mainly due to higher payroll, incentive compensation, consulting, and technology costs[96] - Depreciation expense increased by 30.3% to $3.9 million, primarily due to additional leasehold improvements from remodeling existing Company-operated shops[97] - Income tax expense was $0.7 million in Q2 2025, a significant change from the $31.0 million benefit in Q2 2024, which was due to a valuation allowance release[102] Year to Date Ended June 29, 2025 Compared to Year to Date Ended June 30, 2024 YTD 2025 revenues increased by 2.8%, but net income decreased by 92.4% due to the prior year's tax benefit YTD Financial Performance (Amounts in thousands, except percentages) | Item | YTD 2025 | YTD 2024 | Change ($) | Change (%) | | :------------------------------------ | :------- | :------- | :--------- | :--------- | | Total revenues | $237,390 | $230,850 | $6,540 | 2.8% | | Net income attributable to Potbelly Corporation | $2,426 | $31,945 | $(29,519) | (92.4)% | | Same store sales | 2.1% | 0.1% | 2.0% | | | Shop-level profit margin | 15.3% | 14.6% | 0.6% | | | System-wide sales | $294,831 | $278,659 | $16,172 | | | Adjusted EBITDA | $15,154 | $14,201 | $953 | | - Sandwich shop sales, net increased by 1.9% to $227.4 million, driven by existing shops and new openings, partially offset by refranchised and closed shops[105] - Franchise royalties, fees and rental income increased by 29.1% to $10.0 million, primarily due to new franchise-operated shop openings[106] - Food, beverage, and packaging costs decreased as a percentage of sandwich shop sales to 26.2% (from 27.2%), mainly due to lower protein costs and inflation[107] - Labor and related expenses increased by 2.7% to $66.3 million, primarily due to higher incentive compensation, partially offset by sales leverage[108] - Loss on extinguishment of debt was $0 for YTD 2025, compared to $2.4 million for YTD 2024, due to the Term Loan extinguishment in Q1 2024[117] - Net interest expense decreased by 46.8% to $0.3 million, attributed to debt refinancing in February 2024, resulting in lower average borrowings and interest rates[118] Non-GAAP Financial Measures The company reports improved Shop-Level Profit Margin and Adjusted EBITDA, providing additional operational insights Shop-Level Profit Margin (Non-GAAP) | Period | Shop-Level Profit Margin | | :----- | :----------------------- | | Q2 2025 | 16.7% | | Q2 2024 | 15.7% | | YTD 2025 | 15.3% | | YTD 2024 | 14.6% | Adjusted EBITDA (Non-GAAP, Amounts in thousands) | Period | Adjusted EBITDA | | :----- | :-------------- | | Q2 2025 | $9,632 | | Q2 2024 | $8,521 | | YTD 2025 | $15,154 | | YTD 2024 | $14,201 | Liquidity and Capital Resources Liquidity increased to $46.2 million, supported by operating cash flow and the Revolving Facility - Primary liquidity sources are cash from operating activities, existing cash and cash equivalents, and the $30 million Revolving Facility[129][135] Liquidity Overview (Amounts in millions) | Item | June 29, 2025 | June 30, 2024 | | :---------------------------------------------------------------- | :------------ | :------------ | | Cash balance | $17.0 | $9.1 | | Total liquidity (cash less restricted cash, plus available Revolving Facility) | $46.2 | $34.3 | - Net cash provided by operating activities increased by $18.5 million to $22.4 million for YTD June 29, 2025, driven by higher incentive payments in 2024 and working capital changes[132] - Net cash used in financing activities decreased by $13.8 million to $7.1 million for YTD June 29, 2025, primarily due to the repayment of the Term Loan in 2024, partially offset by lower borrowings under the Revolving Facility in 2025[134] - The company repurchased 230,326 shares of common stock for $2.1 million YTD June 29, 2025, under the 2024 Repurchase Program[146] Critical Accounting Estimates Management's estimates for long-lived assets and income taxes remain unchanged since the last annual report - Significant estimates are used in accounting for long-lived assets and income taxes[149] - No significant changes in critical accounting estimates have been made since the last annual report[149] New and Revised Financial Accounting Standards Refer to Note 1 for details on new accounting standards, ASU 2023-09 and ASU 2024-03, impacting future disclosures - Refer to Note 1 for details on ASU 2023-09 (Income Taxes) and ASU 2024-03 (Disaggregation of Incomes Statement Expenses), which will affect future financial statement disclosures[150][22][23] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk exposures have not materially changed since the last annual report - Market risk exposures have not materially changed since December 29, 2024[151] Item 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were effective as of June 29, 2025[152] - No material changes in internal control over financial reporting occurred during the quarter ended June 29, 2025[153] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, and other miscellaneous disclosures Item 1. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 11 to the financial statements - Legal proceedings information is detailed in Note 11 of the financial statements[155] Item 1A. Risk Factors No material changes to the company's risk factors have occurred since the last annual report - No material changes to risk factors since the December 29, 2024, Annual Report on Form 10-K[156] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 140 thousand shares in Q2 2025 under its 2024 Repurchase Program Issuer Purchases of Equity Securities (Amounts in thousands, except per share data) | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | Maximum Value of Shares that May Yet be Purchased Under the Program (2) | | :-------------------------- | :----------------------------------- | :--------------------------- | :----------------------------------------------------------------------- | :---------------------------------------------------------------------- | | March 31, 2025 - April 27, 2025 | 134 | $9.51 | 54 | $17,026 | | April 28, 2025 - May 25, 2025 | 3 | $8.17 | 59 | $16,525 | | May 26, 2025 - June 29, 2025 | 3 | $10.70 | — | $16,525 | | Total number of shares purchased: | 140 | | 113 | | - The 2024 Repurchase Program, authorized for up to $20.0 million, replaced the 2018 program. Repurchases can occur in the open market or privately negotiated transactions[158] Item 3. Defaults Upon Senior Securities This item is not applicable to the company's current financial reporting Item 4. Mine Safety Disclosures This item is not applicable to the company's operations or reporting requirements Item 5. Other Information No director or officer adopted or terminated trading agreements during the quarter ended June 29, 2025 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading agreement during the quarter ended June 29, 2025[161] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications and XBRL documents - Exhibits include certifications (Sections 302 and 906 of Sarbanes-Oxley Act) and Inline XBRL documents[163] Signature This section formally concludes the report with the required signature and filing date Signature Block The report was signed on August 6, 2025, by Steven W. Cirulis, the company's Chief Financial Officer - The report was signed by Steven W. Cirulis, Senior Vice President, Chief Financial Officer and Chief Strategy Officer, on August 6, 2025[166]