Potbelly Corp. Q1 FY2024 earnings call

• Profitability: Successfully managed restaurant-level and corporate costs, driving a 150-basis-point expansion to shop-level margins to 13.5% and adjusted EBITDA of $5.7 million.
• Development: Franchise sales team added 32 franchise commitments to the pipeline, and franchise development team opened 3 new shops. Momentum continues into Q2. Top line outpaced the fast casual segment but results were below expectations.
• Digital experience: Digital business was 41% of shop sales, up 200 basis points, driven by Perks loyalty program. Perks active members up 36% year-over-year.
• Menu and innovation: Introduced new menu items and plan to continue enhancing the innovation pipeline. New prototype shop (1,800 square feet) introduced to reduce costs and enhance digital experience.
• Franchise growth: 642 open and committed shops, with 30 units in various stages of 2024 development cycle and 10 units in early stages for later 2024 or 2025.

Revenues in the first quarter decreased approximately 6.0% to $111.2 million. Same-store sales were down 20 basis points in the quarter. System-wide sales of $134.2 million grew by approximately 1.9%. Food, beverage and packaging costs were 27.2% of shop sales, a 70-basis-point improvement versus the prior year period. Labor expenses were 30.0% of sales, a 120-basis-point improvement. Occupancy was 10.9% of sales, a 50-basis-point improvement. Other operating expenses were 18.4% of sales, a 90-basis-point increase. Shop-level margins were 13.5%, an increase of 150 basis points year-over-year. Adjusted EBITDA was $5.7 million. Digital business represented approximately 41% of total shop sales, an increase of approximately 200 basis points versus last year.

• Full year 2024: Same-store sales growth in the low single digits; unit growth of approximately 10%; adjusted EBITDA growth in the mid- to high single digits.
• Second quarter 2024: Same-store sales growth of between 0% and 2% and adjusted EBITDA of between $7 million and $8.5 million.

• Industry trends were softer than anticipated, leading to results below expectations.
• Slight declines in transactions from more infrequent customers, who are managing their wallets, affecting results.
• Forward-looking statements involve significant risks and uncertainties, and events or results could differ materially from those presented.

Q: As we look at consumer behavior throughout the quarter, did you guys see any trends with comps sequentially? And then to add on to that, are you seeing any consumer shifts with different locations, maybe anything from a CBD location to a suburban store standpoint?

A: Yes, January was the softer month, but February and March started to strengthen. There's a slight pullback in more infrequent customers, and we plan to focus on enhancing everyday value. Our most frequent consumers are driving digital growth.

Q: Could you give any updates on your desire to sell company units or the demand from others to purchase existing company locations?

A: Strategy is still to refranchise to catalyze growth. We're deploying the strategy more judiciously, with continuing growth in open and committed shops and new commitments in Q1.

Q: Would like to lead off. Bob, I was excited to hear about the new work, cementing the new prototype, the 1,800 square feet. I don't think -- did you share a new build cost relative to the prior $650,000 that you're looking at for the new box?

A: We're excited about the prototype. The big win is leasing margin expansion for franchisees. Recent franchise builds have been less than the published average of $650,000, and we're working to improve costs.

Q: Within the guidance for second quarter same-store sales at flat to up 2%. And I think, Bob, you commented that we're positive low single-digit quarter-to-date. What's the assumption on price mix that's baked into the flat to up 2% assumption?

A: We'll manage price to outrun costs. We carried about 3.3% of price into the quarter and netted about 4%, with expectation to end the year in a similar range.