Potbelly Corp. Q3 FY2024 earnings call

Drivers of Business - First pillar: craveable quality food at a great value. Expanded $7.99 Everyday Value Combo, introduced new and distinct menu innovations like Farmhouse Chicken Sandwich, Blueberry Muffin Cookie, etc., and continued to focus on core menu quality. - Fourth pillar: digitally-driven awareness, connection and traffic. Digital business represented over 38% of total shop sales, an increase of approximately 100 basis points versus last year, with Potbelly Perks loyalty program driving value. - Fifth pillar: franchise-focused development and franchise growth acceleration initiative. Continued progress in unit growth funnel, year-to-date franchise shop commitments increased to 86, opened 8 shops in third quarter with expectations of opening 9 to 11 shops in Q4, and new shops performed well.

System-wide sales were approximately $139.2 million, an increase of 1%, driven by system-wide unit growth. Revenues in the third quarter were $115.1 million with company-operated shop revenue of $110.8 million, lower year-over-year, driven by the short-term impact of last year's refranchising efforts. Franchise revenue was $4.4 million, up 79% relative to the third quarter last year, driven by a 30% increase in franchised units. Average weekly sales were approximately $24,870 and company-operated same-store sales were down 1.8% in the quarter. Shop level margin expanded by 70 basis points annually to 15.3%. Food, beverage and packaging costs were 26.6% of shop sales, a 120 basis point improvement versus the prior year period. Labor expenses were 29.1% of sales, a 20 basis point increase versus the prior year period. Occupancy was 10.7% of sales, in line with the prior year period. Other operating expenses were 18.3% of sales, a 30 basis point increase versus the prior year period. General and administrative expenses were 7.6% of system-wide sales, a decrease of 100 basis points versus the prior year period. Third quarter adjusted EBITDA was $8.7 million or 7.5% of total revenue, a 19% year-over-year growth. Net income was $3.7 million for the quarter, and adjusted net income was $2.5 million, a $1.4 million increase versus the prior year period.

Fourth Quarter - Same-store sales guidance: negative 2.5% to negative 0.5%. - Adjusted EBITDA guidance: between $7 million and $8 million. ### Full Year 2024 - Same-store sales guidance: revised to negative 1.2% to negative 0.5%. - Adjusted EBITDA guidance: between $29.5 million and $30.5 million.

Risks - Challenging consumer environment. - Impact of natural disasters like hurricanes on shop development. - Potential risks associated with franchise development and execution.

Q: Congrats on the solid results in the quarter. Wanted to first come to the kind of the same-store sales trends. I think what you said was that you saw some acceleration throughout Q3 and have seen a little bit of improvement here in Q4. Wanted to just see if you could provide us with a little bit more detail behind the cadence of that. And then also within the Q3 comps, if you could give us a sense on what you saw in traffic, menu pricing and average check.

A: Yes, the quarter did improve for us. The beginning of the quarter was impacted a little bit by a few things, July 4 holiday and the timing of that to start the quarter. Hurricane Beryl in July was also -- had some impact on our business. And flowing into then August, where we had some impact from the DNC in our Chicago market. And that was working against this consumer backdrop where we started to see things stabilize which was great. P9 for us was when we started to really see some acceleration in our performance and that momentum has carried into the beginning parts of Q4. But for things like Hurricane Beryl and the DNC, I think the earlier part of the quarter would have actually been better than we saw. But we're proud of the result coming out of Q3 and entering into Q4. And then as it relates to how we are thinking about the rest of the elements of Q3 in terms of the mix, the price and traffic, we had negative 1.8% same-store sales. That's a combination of a 3.8% step back in traffic and then a 2% gain on the average check line. And then in the average check, we had an increase of about 4.4% price in the quarter and the rest is a bit of a step back in mix.

Q: Congrats on a nice quarter in a really choppy macro environment. So well done. If I could jump off -- just kind of looking at the fourth quarter same-store sales guidance, the down 50 basis points to down 250 basis points, can you characterize the momentum that we saw kind of end of Q3 which has continued or maybe accelerated a little bit into Q4? Just trying to qualitatively get a sense that, are we coming in towards the higher end of that and that guidance is basically giving us a cushion if the consumer slows as we get towards the holidays and things may get a little choppier with them?

A: Yes. Sure, I think -- as you know, we tend to set that guidance range in an area that we feel like we can see, right, without betting on those things that we think are either improbable or impossible to see. And the range that we set at least for the full year ends up being narrowed because we can see more. The Q4 numbers themselves, I think, it's important to note they still show sequential growth quarter-to-quarter, right, as we're coming out of Q3 and into Q4. And as it relates to kind of where we feel things will land -- look, if we're looking at the bottom of the range, I think that would probably portend some different dynamics in the consumer environment than we've seen to date. And if we think about what might look like the top end of the range for us -- I mean, Bob explained in the prepared remarks all the great and exciting things that we've got coming forward in the quarter with the new menu and the sauces and the pulled pork platform that's about to launch. So that -- the high end of the range would mean that we're hitting on all cylinders with those initiatives as well. So we tend to like to be thoughtful about where we set those things without betting too much on things that are not within our control.