Potbelly(PBPB) - 2021 Q4 - Annual Report

PART I Business Potbelly Corporation operates 443 sandwich shops guided by its five-pillar "Traffic-Driven Profitability" strategy Shop Count as of December 26, 2021 | Shop Type | Count | | :--- | :--- | | Company-Operated | 397 | | Franchise-Operated | 46 | | Total | 443 | - The company's "Traffic-Driven Profitability" strategy is centered on five key pillars[23][24] - Craveable Quality Food at a Great Value, People Creating Good Vibes, Customer Experiences that Drive Traffic Growth, Digitally Driven Awareness, Connection and Traffic, and Franchise Focused Development[24] - The system-wide average check per entree increased to approximately $9.81 in fiscal 2021, up from $9.08 in 2020[30] - The company contracts with Distribution Market Advantage, Inc (DMA), which supplies over 85% of its food supplies through six primary distributors[59] Risk Factors The company faces significant risks from the COVID-19 pandemic, industry competition, and operational challenges - COVID-19 Pandemic Risks: The pandemic has adversely affected and could continue to impact customer traffic, staffing, supply chains, and cause shop closures[78] - Business and Industry Risks: The company faces intense competition, risks of food-borne illness, and challenges related to its growing digital and third-party delivery business[85][86][88][91] - Labor and Supply Chain Risks: Profitability is sensitive to changes in commodity prices and labor costs, with reliance on a limited number of suppliers and distributors[98][101] - IT and Cybersecurity Risks: Failures or security breaches of IT systems could interrupt operations, damage reputation, and lead to legal liabilities[120][121] - Debt-Related Risks: The Revolving Credit Facility imposes business limitations, and there is uncertainty regarding the forgiveness of its $10.0 million Paycheck Protection Program (PPP) loan[143][145][147] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[177] Properties The company leases all 397 of its company-operated shops, with a high concentration in Illinois and Texas Top 5 States/Districts by Number of Company-Operated Shops (as of Dec 26, 2021) | Location | Number of Shops | | :--- | :--- | | Illinois | 111 | | Texas | 62 | | Michigan | 30 | | Maryland | 28 | | District of Columbia | 22 | - The company does not own any real property; all company-operated shops are in leased premises[179] - Initial lease terms are typically ten years, with two additional five-year renewal options[179] - The corporate headquarters in Chicago, Illinois, occupies approximately 15,000 square feet under a lease through March 31, 2027[180] Legal Proceedings The company faces ordinary course legal proceedings, which are not expected to have a material adverse impact - The company is subject to legal proceedings and claims arising in the ordinary course of business, which are generally covered by insurance[182] - Management does not expect the ultimate liability from these proceedings to have a material adverse impact on the company's financial condition or operations[182] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[183] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with no dividends planned or shares repurchased in fiscal 2021 - The company's common stock is listed on the NASDAQ under the symbol "PBPB"[184] - The company does not anticipate paying cash dividends in the foreseeable future, as it plans to retain funds for business development and growth[185] - There were no purchases of the company's common stock by or on behalf of Potbelly Corporation during the year ended December 26, 2021[186] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 revenue grew 30.5% to $380.1 million, with an improved net loss and recovering shop-level profit margins Fiscal Year 2021 vs. 2020 Performance | Metric | FY 2021 | FY 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $380.1M | $291.3M | +30.5% | | Comparable Store Sales | +30.3% | -24.7% | N/A | | Net Loss Attributable to Potbelly | ($23.8M) | ($65.4M) | +63.6% | | Shop-Level Profit Margin | 8.5% | (1.4)% | +9.9pp | | Adjusted EBITDA | $0.5M | ($32.7M) | N/A | - The increase in revenue was primarily driven by the easing of COVID-19 restrictions and the national rollout of a new menu, which increased traffic and average check[225] - Food, beverage, and packaging costs as a percentage of sales decreased to 27.8% from 28.4% due to menu price increases, partially offset by commodity inflation[228] - Labor and related expenses as a percentage of sales decreased to 33.7% from 36.4% due to sales leverage, despite higher wage rates from labor availability challenges[230] - The company ended fiscal 2021 with a cash balance of $14.4 million and total liquidity of $28.8 million[253] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from variable interest rates and commodity price volatility - Interest Rate Risk: The company is subject to interest rate risk from its variable-rate credit facility, with $9.9 million outstanding as of December 26, 2021[282] - Commodity Price Risk: The company is exposed to price fluctuations for food commodities and manages this risk through pricing agreements with suppliers but does not use derivative instruments[283] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and the independent auditor's report Consolidated Balance Sheet Highlights (as of Dec 26, 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $28,054 | | Total Assets | $253,237 | | Total Current Liabilities | $69,880 | | Total Liabilities | $255,654 | | Total Equity (Deficit) | ($2,417) | Consolidated Statement of Operations Highlights (FY 2021) | Account | Amount (in thousands) | | :--- | :--- | | Total Revenues | $380,052 | | Loss from Operations | ($22,488) | | Net Loss | ($23,623) | | Net Loss Attributable to Potbelly | ($23,784) | | Diluted Loss Per Share | ($0.86) | - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the company's internal control over financial reporting[286][287] - The critical audit matter identified was the evaluation of long-lived shop asset impairment, due to the high degree of judgment required in forecasting individual shop cash flows[292] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[397] Controls and Procedures Management concluded that the company's disclosure controls and internal controls over financial reporting were effective - Management concluded that as of December 26, 2021, the company's disclosure controls and procedures were effective[398] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 26, 2021[401] - There were no changes in internal control over financial reporting during the fourth quarter that materially affected, or are reasonably likely to materially affect, these controls[402] Other Information The company reports no other information for this item - None[411] PART III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[413] Executive Compensation Required information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[415] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference, with details provided on equity compensation plans Equity Compensation Plan Information (as of Dec 26, 2021) | Plan Category | Securities to be issued upon exercise (thousands) | Weighted-average exercise price | Securities remaining available for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Approved by security holders | 538 | $12.03 | 1,568 | | Not approved by security holders | — | — | — | | Total | 538 | $12.03 | 1,568 | Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[418] Principal Accountant Fees and Services Required information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information required by this item is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement[419] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report on Form 10-K - This section contains the list of financial statements filed with the report[420] - An Exhibit Index is provided, listing all exhibits filed as part of the Annual Report[421] - No financial statement schedules are provided because the required information is not applicable or is included elsewhere in the financial statements or notes[422]