Potbelly Corp. Q2 FY2024 earnings call

• Same-store sales grew 0.4% despite a challenging macro environment, and the company continued to take traffic share from the fast casual industry.
• Shop margins expanded for the 13th consecutive quarter.
• Added 4 new shops in the quarter and has franchise commitments to open 22 additional shops.
• Focus on food, service, and value: tested and expanded the $7.99 Everyday Value Combo meal deals, saw digital business represent approximately 40% of total shop sales (an increase of ~200 basis points vs. last year), and the Perks loyalty program is performing as expected with growing member acquisition and engagement.
• Franchise growth: has 663 open and committed shops, with franchise recruitment and lead generation building, and new agreements strengthening franchising efforts in the Southeastern U.S.

Revenues in the second quarter were $119.7 million, with company revenue of $115.5 million (lower year-over-year due to last year's refranchising impact) and franchise revenue of $4.2 million (up 117% vs. Q2 last year, driven by a 53% increase in franchise units). Same-store sales were up 0.4% in the quarter. Food, beverage and packaging costs were 27.1% of shop sales, a 90 basis point improvement. Labor expenses were 28% of sales, a 240 basis point improvement. Occupancy was 10.9% of sales, a 40 basis point increase. Other operating expenses were 18.4% of sales, a 160 basis point increase. Shop-level margins in the second quarter were 15.7%, an increase of 130 basis points year-over-year. Adjusted EBITDA was $8.5 million or 7.1% of total revenue.

• Q3 performance outlook: same-store sales growth of negative 3.5% to negative 1.5%; adjusted EBITDA of between $6.5 million and $8 million.
• Full-year 2024 guidance: same-store sales guidance revised to negative 1.5% to positive 0.5%; adjusted EBITDA to between $27 million to $30 million.
• Anticipates opening at least 30 new shops in 2024, with acceleration expected in Q3 and Q4.

• Macro environment risks affecting consumer spending, leading to consumers trimming restaurant visits.
• Competitive pricing actions could impact profitability and franchisee adoption if overly aggressive.
• Uncertainties in achieving unit growth targets, including potential challenges in franchising and real estate systems.

Q: Largely around the consumer, did the less frequent visitors' behavior persist this quarter and how the $7.99 Everyday Value Combo meals impacted it?

A: Alex, less frequent and less digital/loyal consumers were pulling back visits period, but the $7.99 skinny combo (turkey, ham or chicken sandwich with chips and a drink) helped trim visits from others without overly promoting and creating profitability challenges. Frequent digital customers continued to drive growth with Perks and LTOs.

Q: Can you decompose the 0.4% same store sales into traffic versus price versus mix?

A: Steve Cirulis said price contributed about 4.3% in gross price, with about 2% in average check, and traffic was down a bit. There was also some mix shift down, like customers moving to different sizes on the menu and the $7.99 combo playing a part.

Q: With unit development guidance for 2024 lowered, what's the outlook for franchise development in 2025?

A: Bob Wright stated they expect 10% growth or better in 2025, with momentum building as seen in Q3 opening 8 shops (nearly doubling Q2's 4 openings) and franchisees on track with development schedules, and new shops averaging better than anticipated.