Potbelly Corporation
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good afternoon everyone and welcome to the Potbelly Corporation's First Quarter 2021 Earnings Conference Call. As a reminder this conference is being recorded. I would now like to turn the call over to Ms. Adiya Dixon Potbelly's Chief Legal Officer. Please go ahead.

[Adiya Dixon:]

Good afternoon everyone and welcome to our first quarter 2021 earnings call. Our presenters today are; Bob Wright, our President and Chief Executive Officer; and Steve Cirulis, our Senior Vice President and Chief Financial Officer. Please note that we have provided a set of PowerPoint slides that will accompany our prepared remarks. You may access these slides on the Investor Relations section of our website. After our prepared remarks we'll open the call for your questions.

[Bob Wright:]

Thank you Adiya and good afternoon everyone. Thank you for joining us today. I hope you and your families have remained safe and healthy since our last update. As always I want to thank our dedicated employees for their ongoing hard work and positive energy. I continue to be, so very proud of the team's contributions as we focus on future growth of Potbelly. When we reported our full year 2020 results back in March, we provided a glimpse into the quarter and I can tell you that the rate of acceleration continued in a very positive direction during the final weeks of the quarter and throughout April. But first things first let's look on Slide three where I'll provide a quick overview of the first quarter 2021. Revenues of $78.1 million increased by 4.3% compared to the fourth quarter of 2020 and same-store sales decreased by 3.1% as compared to Q1, 2020. This is a noticeable improvement when compared to the decrease of nearly 20% in the fourth quarter of 2020. Suburban, university and drive-through locations remain strong while CBD and airport locations continue to lag. However, we're beginning to see modest improvements in those shop types recently as well.

[Steve Cirulis:]

Thanks Bob and good afternoon everyone. Please turn to Slide 4 of the presentation where you can see the progression of our same-store sales and average weekly sales for the first quarter 2021 in the month of April. As Bob already mentioned, company-operated same-store sales declined by 3.1% for the quarter which was a dramatic improvement compared to the fourth quarter 2020 decline of 19.7%. In March and April, we saw a significant increase with same-store sales at positive 29.5% and positive 148% respectively. Clearly, the year-over-year comps were impacted by the extremely weak period in 2020 at the onset of the pandemic which began mid-March last year. Breaking down same-store sales our average check grew by 2.4% while traffic declined by 5.4% which was a 14.5 percentage point improvement over our fourth quarter of 2020. Turning to slide 5. We show average weekly sales volumes a slightly different way comparing the first four months of 2021 to 2019, a more intuitive comparison given the unprecedented weak conditions of 2020. Even with February's weather-related challenges, we expanded average weekly sales by over $4,400 from January through April, a 31% increase to approximately $19,000 touching just above the full year 2019 level. This sales expansion has continued into the first week of May. When we report our second quarter results, we'll start to show sales volume and comp trends on a one-year and two-year basis for the reasons just mentioned. We believe this will provide a more meaningful context for the pace of recovery. Turning to slide 6. I'll walk you through our income statement and specific financial performance for Q1. Like we did for the last two quarters, we're going to highlight our performance this quarter against the sequential quarter or Q4 of 2020. During the first quarter, total revenues increased 4.3% sequentially to $78.1 million due to improvement in volumes and same-store traffic. Our general and administrative expenses were $7.4 million in the first quarter of 2021 or 9.5% of total revenue compared to $6.7 million or 8.9% of total revenue in the fourth quarter 2020. The increase in G&A was due primarily to increased bonus accrual. Just as a quick note starting this quarter, we are now breaking out advertising from G&A on the income statement. In the fourth quarter figures, I just mentioned were adjusted to provide a like-for-like comparison.

[Bob Wright:]

Thanks Steve. Everyone please turn to Slide 11, where we'll briefly remind you of our brand position as the sandwich shop with the craveable quality and good vibes of a first-class dive. I can tell you that we're continually energized by this brand position and believe it resonates with both our loyal and prospective customers and positions Potbelly well for the future. Next on Slide 11, we'll review our strategic focus which has its foundation in our brand position. Our strategy quite simply is to bring to life the very best attributes of Potbelly as a brand represented by our five pillars with a unifying objective of traffic-driven profitability. As we discussed in March, implementation is well underway for most of the initiatives with acceleration over the course of the year. There are five core pillars to our strategy. And on Slide 12, we'll review a few of the focused investments we're making to drive traffic, reward loyal customers and prepare for future growth. Starting with the menu, which clearly falls under the first pillar of craveable quality food at a great value. Our work to simplify the Potbelly menu continues with the ultimate objective to improve traffic, enhance the customer experience, as well as influence the customer perceptions of value. The results from the initial testing phase have been extremely positive. And as a result, we rolled out the beta test to more shops just a few weeks ago. Menu simplification includes consolidating the menu boards, a wider price ladder, as well as other product enhancements like offering smaller sandwiches and half salads outside of our popular Pick Your Pair offering. We're also testing larger-sized portions with more meat, cheese and toppings too. Overall, we expect fewer SKUs making for a more efficient system and faster customer experiences. Assuming the beta test goes as planned, we expect to roll out the new menu across all of our shops in the second half of the year. Our tech stack improvements are also gaining solid traction. We're completely redeveloping both our app and our web interface to improve customer experience, allow for easier reordering and better leverage our Perks loyalty program. The decision to develop our own web and app gives us greater control over our data and much greater flexibility for future enhancements to the digital customer experience. We've also already seen a positive impact from our efforts to implement differential pricing with third-party delivery, which contributed to our results in the first quarter. End-to-end testing is underway and we're on track to launch the pilot and go live during third quarter. On the marketing side, we're making great strides with a focus on our scaled media and enhancing our local shop marketing in order to grow traffic and frequency. We have active campaigns, which are already proving their ability to drive additional sales. Our recent success leverages a new creative approach utilizing Potbelly user and customer-generated-styled content, which has already performed well in expanded test markets. Under this approach, the marketing doesn't feel like an ad, but rather has the look and feel of a story which fits well with today's popular social channels. More importantly, we're very pleased with the customer response and the sales lift we're seeing from our new media. In terms of third-party activation, we've executed a few successful campaigns here as well with great partners, such as Grubhub and Uber Eats during the month of March. As an example our Grubhub exclusive Lucky 7 sandwich promotion drove a 24% lift in orders, and a 25% lift in sales versus the prior two weeks. With Uber Eats, we held a promotion around the NCAA tournament and that resulted in a 24% lift in sales versus the prior period. We continue to make progress with our Perks loyalty program during the quarter by adding 132,000 members, an increase of 26% year-over-year. Perk sales increased by 11% year-over-year during the quarter significantly outperforming total shop sales and Perk transactions grew by nearly 20% versus 2020. Some of the loyalty promotions we ran included Perks Appreciation Week double and triple points days Groundhog Day, Valentine's Day and others. Our focus will be to continue to grow our loyalty base and enhance the rewards with these types of targeted campaigns to drive engagement until our tech stack launch, which again is slated for the third quarter. At that time, we'll have even more flexibility with our Perks program. Our next phase of Perks technology will allow us to customize one-to-one relationship building and segmented campaigns well beyond our current capabilities. Lastly, as we mentioned last quarter franchise-focused development will be the last pillar to fully develop and implement. However, our recent slate of franchisees remain active and committed to developing over the next few years as originally planned. There's a healthy pipeline of inquiries for potential franchisees given the brand's recognition and the fact that we are significantly underpenetrated across much of the United States. We still expect to welcome three to five new franchise shops in 2021 and expect to see significant annual growth in that number as we work through 2022 and beyond. The team is squarely focused on our strategic initiatives and we look forward to providing you with regular updates on our plan, which leverages our core capabilities and will enhance our future performance. With that, I'll now turn the call back over to the operator, so we can address your questions. Operator?

[Operator:]

Thank you. The first question is from the line of Joshua Long from Piper Sandler. Please go ahead.

[Joshua Long:]

Great. Thanks for taking my question. Wanted to see if we might be able to dig into some of the transaction or average check trends that you saw during the quarter, nice to see that overall top line and things are moving the right way and faster than expected. But just curious what you're seeing from the consumer and how they're embracing the brand and kind of changing and/or not their activity as they come back into the store?

[Steve Cirulis:]

Yes, sure. Thanks for the question Josh. We saw some good movement in our average check. We ended up quarter-over-quarter improving that I think partially due to our differential pricing with our third-party delivery partners. So we ended the quarter at $9.28 on a sales per entrée basis. On a sales per transaction basis, it's $14.64. I think that was also an improvement over the prior quarter. Again, as we saw digital business, I think, which tends to have larger order sizes continue to be a strong part of our business as we talked about earlier in the call.

[Joshua Long:]

Great. That's helpful. And can you remind us where you're at in that differential pricing with your third-party delivery? And have you seen any pushback to date? And is there a consideration of pushing that a little bit further? It seems like that's a topic these days in terms of finding where that real horizon is for what the guest will tolerate and/or embrace? Any thoughts there would be helpful.

[Bob Wright:]

Yeah, Josh, I'll jump in. First of all, I think one of the things we're excited about is as we continue to develop the tech stack, what you're seeing here is our team's real thoughtful approach to taking a component of that technology that would have been middleware that we were able to implement prior to the web and app going into place and that's what allowed us to do this differential pricing ahead of the tech stack rollout. We're not with all of our third-party providers and we did – to be honest with you we took a little bit of a middle tier increase as compared to what we knew that most of the competition was doing. So you're going to see that in the 20-ish-percent range. And we know that, there are competitors that have gone much higher than that. And in the QSR space, I understand that there are some that have gone significantly higher than that. So we do have some plans in place to see how we can test what those upper limits are. The key for us was to try to make that check that digital check more economical for us as a business to offset some of the costs that, we had with the commissions that we have to pay to these third-party delivery providers and still make sure that Potbelly doesn't become an unattractive digital option for our customers. The – I think what you see in the stickiness of that digital business is that, we think we found the right balance for now, and I think we're going to try to strive to push that a little bit further where we believe we can, but not give up the traffic that goes with it. So I'm very, very pleased with the early goings.

[Joshua Long:]

Great. Thank you for that. And it sounds like the simplified menu test is coming along nicely. I understand that, we're early on and the expectations are referred to roll out later in the year. But curious, on any sort of early learnings or observations you've seen from it in terms of what's been most attractive to guess what they've embraced and/or, how that relates to kind of your expectations going into this test? Obviously, things are good because you're planning to expand it. But just curious, if you could provide any other details there in terms of, just how that guest journey in the in-store has been evolving?

[Bob Wright:]

Sure. Well, like I said in my comments, a couple of big rocks that we really wanted to tackle here was

[Joshua Long:]

That's very helpful. I appreciate the color there. And earlier on in your prepared comments you touched on some labor initiatives that really came to fruition during the quarter. I imagine some of those are what you just outlined there with the test you're doing with the simplified menu, and I imagine that just as sales improve things get a little bit easier in-store. But curious, if you might be able to provide a couple of thoughts on the labor initiatives that you've put into place. How those are working? And then maybe also tie in, how the addition of Scott, as the Chief People Officer side expect to play out over the year? I know, human capital and culture has been a very important part of the story historically and will be going forward. So just curious, how you're going to bring all those together and what he might be tackling first?

[Bob Wright:]

Yeah. Thanks for that. We're super excited about Scott joining the team. He's got a tremendous depth and breadth of background and has been an HR professional his entire career. He would tell you that, it's his life's work, and it shows through in his engagement. Scott's already been in shops. He's done two days of training, right alongside managers. He's already been traveling in only two weeks of being on a job and engaged rather deeply. So I think that behavior alone exemplifies the kind of people leadership that we're very happy to have here at Potbelly. He'll be a partner to us all. But that partnership with the operations team, especially on your question about labor is going to continue to be an area of significant focus for us. We got very scientific with those labor initiatives that we talked about in past conversations. There's a model an hour-based labor guide model that we're using, so that we know where and when we need the associate staffing to better support our customer experiences and where we might have been maybe a little bit heavy. And not only do we have that labor guide in place in all of our company shops. We've offered to our franchisees for their implementation as well. And having the guide in place means that we can scale this business up and down as sales volumes go up and down. It works really well with our sales projections and it's put our managers in a position to know that they're well prepared for the day. The other element of that is that in addition to the number of people that are needed. Adam Noyes is leading our ops team and partnership with his team has put in the positioning guidelines. So it's one thing to know how many you need, but where might they need to be in order to best serve the customer. Steve made comments about the fact we have two production lines with all our digital business that has changed our business a lot. So having five or six or seven people online during lunch today is different than it was two years ago and the positions they need to staff are different. Providing that guidance really helps our operators manage for success drive throughput and of course, that throughput gives us leverage and efficiency. And we were able to pull out some of those inefficient hours. So we're very pleased with the results on the labor initiative for sure.

[Joshua Long:]

Great. Thank you for that. And one more -- then one quick one for me. On the quick side you might have said it and if so I missed it my apologies. But how many Perks members do you have now? It seems like there's a lot of really great initiatives there and I imagine we would expect to see that sign up increase going forward. But just curious just for kind of a housekeeping item where we're at now in terms of the total members in the system?

[Bob Wright:]

Yes, proud to share that. We're 2.3 million members. And you're right, we have a target ourselves to accelerate the acquisition of our traditional annual membership significantly this year on top of that. And as you may have picked up in my comments, we're getting a lot smarter and we'll be even smarter with this when we get our tech stack in place because our ability to segment these customers provide them with the kind of one-to-one communication that really further increases their traffic patterns into our shops is really important to us. But we're pleased so far and see those numbers continue to accelerate. So that's where we are today.

[Joshua Long:]

Great. Thank you for that. And then my last one just going back to that same-store sales by type chart on slide 7, very helpful to see and interesting to just see some of the seasonality across all those different pieces coming back in particularly university as some of the students are probably getting back on campus. But curious when you think about some of the better performing units maybe in your suburban or urban or maybe even drive-through however you want to frame it up? But just curious what you're seeing in some of those better performing units that might give you a glimpse into what the system looks like once we get reopened vaccines are distributed and things get back to somewhat of a more normalized trend?

[Bob Wright:]

Well, I think in broad terms, what we've seen is we continue to see those drive-through and suburban shops leading the way and I'll let Steve expand a little bit on the numbers here. But not only -- the other business has changed. It's not only across the shop types, but we see far stronger business across all seven days. And we think that's driven by certainly how we're improving the operations in the shops, making sure that we're staffed in all dayparts all days. But the digital business is showing up in dayparts and days of the week that may have been traditionally in the past, a little weaker for us as a brand. And we're holding serve if you will on some of those sales throughout the week and the days in those shops too.

[Steve Cirulis:]

Yes. And I would just add one thing to that. It's also -- as part of the labor initiative honestly, taking a deeper look at operating hours too. We've expanded operating hours in many shops to take advantage of collecting some of those digital sales earlier. And so not only are we changing the profile or seen a change profile in kind of the sales volume by day of the week, but we're also seeing benefits of expanded shop hours through all these efforts.

[Joshua Long:]

Great. Thank you for taking my questions.

[Bob Wright:]

Thanks, Josh.

[Steve Cirulis:]

Thanks, Josh.

[Operator:]

We have no further questions. I'll turn it over to Bob Wright for closing remarks.

[Bob Wright:]

All right. Well, thank you and thank you again for your time today everyone. We're very encouraged about how our 2021 has started out with the first quarter performance exceeding our expectations. We continue to have confidence in Potbelly's future and we are just at the beginning of reaching our full potential. We hope to meet many of you virtually in the various conferences that we'll be attending in June including the William Blair conference, the Piper Sandler conference, the Stifel and the Oppenheimer conference as well. Please refer to our Investor Relations website for the dates of each of these events. We appreciate your interest and support in Potbelly. Hope you have a great day.

[Operator:]

That does conclude the conference call for today. We thank you for your participation and you can now disconnect your lines.