Potbelly(US:PBPB)2021-03-12 18:51Business Operations - As of December 27, 2020, Potbelly had 446 shops across 32 states and the District of Columbia, with a 5.9% reduction in total shop base compared to the previous year[17]. - The company employs approximately 5,500 individuals, with around 100 in corporate roles and 500 in shop management[35]. - Potbelly's franchise program includes 46 shops operated by franchisees as of December 27, 2020, with plans for disciplined expansion in suitable markets[27]. - As of December 27, 2020, the company operated 400 shops and had 46 franchisee-operated shops across 32 states and the District of Columbia[48]. - In 2020, the company opened 5 new company-operated shops, compared to 2 in 2019 and 10 in 2018, and plans to limit company-operated shop growth in 2021 with no new openings expected[48]. - Approximately 69% of the company's total domestic shops are concentrated in Illinois, Texas, Michigan, Maryland, Washington, D.C., and Virginia[141]. - Shops located in the Chicago metropolitan area comprised approximately 29% of the company's total domestic shops as of December 27, 2020[141]. Financial Performance - The shop-level profit margin for Potbelly was (1.4)% in 2020, compared to 15.0% in 2019 and 16.7% in 2018, significantly impacted by the COVID-19 pandemic[17]. - The system-wide average check for Potbelly in fiscal 2020 was approximately $9.09[29]. - The average investment for a new shop is approximately $600,000, with average unit volumes around $1 million annually, aiming for shop-level profit margins in the high teens to above 20%[49]. - The company had $6.3 million outstanding under its Revolving Credit Facility as of December 27, 2020[134]. - The company has experienced significant impairment charges in past years, which could adversely affect future operating results if additional impairment charges are required[151]. - Changes in tax laws and unanticipated tax liabilities could materially affect the company's profitability and financial results[152]. Strategic Initiatives - Potbelly's strategic plan for 2021 includes five pillars aimed at driving profitable growth, focusing on customer experience, menu updates, and digital engagement[22]. - Potbelly aims to enhance its off-premise business, including catering, delivery, and pickup, as additional growth drivers[24]. - The company plans to focus on improving delivery and customer pickup experiences in response to COVID-19[52]. - The company’s growth strategy includes closing underperforming shops while maintaining a limited rate of company-operated shop growth[125]. - The company’s ability to expand in existing and new markets is critical for increasing revenues and profitability[127]. - The company plans to continue investing in marketing efforts to attract and retain customers, but these initiatives may not yield higher revenues, potentially leading to increased promotional expenses[148]. Marketing and Customer Engagement - The company has implemented a customer loyalty program, Potbelly Perks, where customers earn 10 points for every dollar spent, redeemable for a free entrée after 1,000 points[58][59]. - The company has increased its use of digital marketing tools, including social media platforms, to enhance customer engagement and promote the Potbelly brand[57]. - Potbelly's marketing strategy leverages positive brand perception and customer feedback to drive interest in both existing and new markets[26]. Supply Chain and Food Safety - The company sources approximately 87% of its food supplies through a cooperative arrangement with Distribution Market Advantage, Inc., utilizing six primary distributors[60]. - Meats account for about 27% of the company's product purchasing composition, with over 95% of meat products sourced from 10 suppliers under non-exclusive contracts[62]. - The company relies on a limited number of suppliers, purchasing almost all bread from one supplier and over 95% of meat products from ten suppliers, which poses a risk to operations if suppliers fail to meet obligations[102]. - Shortages or interruptions in the supply of fresh food products could negatively impact operating results, as the company depends on frequent deliveries of quality ingredients[101]. - The company emphasizes food safety and quality assurance, dedicating substantial resources to ensure safe food products[31]. Regulatory and Legal Risks - The company is subject to extensive federal, state, and local laws, which can increase compliance costs and expose it to litigation risks[115]. - Legal and regulatory risks include potential class action lawsuits related to workplace and employment laws, which could result in substantial damages[121]. - Compliance with current and future laws regarding nutritional information and health regulations may be costly and time-consuming, potentially affecting menu offerings[113]. - The company faces risks related to cybersecurity and data privacy, as breaches could interrupt operations and lead to litigation[106]. - Unionization activities or labor disputes could disrupt operations and affect profitability, especially if collective bargaining agreements differ significantly from current arrangements[104]. Operational Challenges - Increased costs of utilities, labor, and commodities could adversely affect profitability, with the company needing to anticipate and react to these changes[99]. - The business is subject to seasonal fluctuations, with historically lower customer spending in the first quarter of the year[76]. - The company is subject to risks associated with long-term non-cancelable leases for its shop locations[143]. - The company may incur liabilities if subtenants or assignees default on lease obligations[144]. - The company is vulnerable to negative publicity regarding food quality and safety, which could harm its brand and financial performance[146]. - The volatility of the company's stock price may prevent shareholders from selling shares at or above their purchase price, especially in response to activist stockholder actions[153]. - The company may face challenges in raising capital in the future, which could hinder its ability to fund operations and expansion[160]. Human Resources - The company has a better than industry average employee turnover rate of 82.5% for the year ended December 27, 2020[42]. - The company emphasizes the importance of attracting and retaining qualified personnel to support shop operations[132]. - The company’s future performance is dependent on retaining key management personnel, with the loss of any key executives potentially having a material adverse effect on business[103].