PBPB - NASDAQ

Good afternoon, everyone, and welcome to Potbelly Corporation's Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Ms. Adiya Dixon, Potbelly's Senior Vice President and Chief Legal Officer. Please go ahead.

Good afternoon, everyone, and welcome to our Second Quarter 2022 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. I'd like to call your attention to our cautionary statements on Slide 2, and note that certain comments made in this call will contain forward-looking statements regarding future events or the future financial performance of the company. Any such statements, including our outlook for the remainder of 2022 or any other future periods, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance nor should they be relied upon as representing management's views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties, and events or results could differ materially from those presented due to a number of risks and uncertainties. Additional detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information that will be given today can be found in our Form 10-K under the headings Risk Factors and MD&A and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov. During the call, there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles or GAAP. Reconciliations of these non-GAAP measures due to most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon, both of which are available in the Investors tab of our website. I'll now turn the call over to Bob.

Thank you, Adiya. Good afternoon, all and thank you for joining us today. I'd like to be in our call today by thanking our Potbelly employees for their continued hard work and commitment to our company. Our people are the heart of our brand, and it is their positivity, diligence and strong work ethic that allows Potbelly to operate as a top quality food brand we promise our customers. I'm incredibly proud of our team and look forward to seeing what we accomplished together as we continue growing. Of course, we know our customers are navigating an ever-changing economy filled with challenges, and we are very happy to continue providing an unparalleled customer experience and value for their money. We'll begin with Slide 3, which provides a high-level summary of the quarter's results and our views on the broader operating environment. We continue to view our 5-Pillar Strategy as our road map to success. Our strategy leverages superior quality food at an excellent value while elevating our associate experience to set us apart for everyone that visits, providing bring you back customer experiences, building brand leadership in all our digital channels and accelerating growth through franchising and refranchising efforts. The 5-Pillar Strategy has been the backbone of Potbelly story from the beginning of the pandemic through the company's recovery and now growth. We've driven significant revenue and profitability improvement as well as record AUVs in the quarter by executing against this strategy. Additionally, our business has proven flexible and resilient in the face of broader macro environmental challenges. We see notable improvement in staffing trends, maintain disciplined spending and continue to drive strong top line growth and expansion in shop-level margins. Looking forward, we are highly encouraged by our ability to continue delivering value to our customers, and we remain on a positive trajectory to achieve our long-term growth objectives. Slide 4 headlines our financial achievements that Steve will cover in detail later in our call. But I'm proud to share we had a very strong quarter. We drove revenues of $116 million in the quarter. We achieved record AUVs of nearly $23,000 per week, grew same-store sales by 17.2% in the quarter, continued our strength in digital business at 36% of sales. And I'm very proud to share that we drove positive net income of $0.6 million and adjusted EBITDA of $5.8 million. We've been clear and consistent about our focused strategy. Today, I'm excited to highlight with additional clarity how the fundamental growth engines of operations, marketing and development are leading us to achieve such strong performance and why I have confidence that it will continue. To this point and turning to Slide 5, I'd like to highlight our recent marketing activities in the quarter that have become an integral part of our business strategy. These efforts always maintain focus on the elements that differentiate our unique brands starting with our food. Our customers love our innovative LTOs, including the successful rollout of Cold Brew shake, Cubano sandwich and Lemon Cheesecake cookie, which have contributed to increased sales and daily transactions. Importantly, we maintained our investments in digital marketing and paid social campaigns as the primary means of marketing not only our LTOs but broader brand awareness and traffic driving advertising. In addition to traditional brand awareness and traffic driving methods, we also accelerated targeted digital-only promotions like our one-day only buy one, get one free our BOGO offers, which resulted in increased perks and downloads, perks engagement as well as incremental perks revenue dollars and daily transactions. Lastly, I'm very excited to announce we recently launched updated branding with a refreshed appearance that better reflects the uniqueness of Potbelly. This includes returning to our heritage as Potbelly Sandwich Works. You can already see our updated logo and colors on our website at pompbelly.com and, of course, in today's presentation. Our online creative work will begin incorporating this updated branding later in Q3. The results of our marketing programs and initiatives are highly encouraging, and we have confidence they will be growth drivers into the future. Moving to Slide 6, I'd like to discuss our progress on our franchise growth acceleration initiative. We are extremely pleased with the pace and quantity of our refranchising and new shop development discussions as well as the state of our current pipeline. To support our pipeline and deal progression, we've held two Discovery Days so far this year, the most recent having taken place just a few weeks ago. These events allowed a number of experienced potential multi-unit franchise owners to have individualized time with the management team and learn about the unique opportunities here at Potbelly. Alongside our Discovery Days, our dedicated franchise team is proactively researching and identifying attractive areas for Potbelly's continued development and market penetration through SDAs, or Shop Development Areas, were ready for sale to our franchisees. Additionally, we are continuing to expand our marketing and sales tactics supported by the integration of franchising tools and systems. Our franchise-oriented goals remain our top priority, and we look forward to sharing specific refranchising and franchising deal activity as we sign and close those deals. Turning to operations highlights on Slide 7. Operations focus is not an area we have previously highlighted in great detail, but we think it's important to discuss the innovative momentum we believe we've established in our ongoing quest for streamlining and improving efficiencies. We view it as a vital part of driving company growth. We're making in-shop investments with the intention of enhancing customer satisfaction through optimized workflows. We've also implemented internal control measures, including new shop level financial reporting systems and improved hours-based labor guide and customer satisfaction monitoring, which allow for improvements to financials as well as the experience we offer our employees and our customers. We're making further improvements to our technology systems and tools to best support the customer experience, driving higher operational standards for the company, too. Additionally, we've begun testing a new in-shop tech platform through what we're calling our Potbelly Digital Kitchen. We believe this project has great potential to build on the customer-facing digital investments we've made over the last 18 months. Potbelly Digital Kitchen is designed to make processing our digital orders more efficient while also improving our traditional in-shop visits, bringing improved customer experiences, better speed of service and on-time orders, increased throughput, improved accuracy and better food quality. Lastly, we are increasingly aligning our corporate staffing structure to support our franchise-oriented business model. These operational investments not only help us operate our own shops better and more profitably, but they also drive predictability of operation success and consistency, which is critical as we become a franchise growth company. I will now turn the call over to Steve to detail our financial performance in the second quarter. Steve?

Thank you, Bob, and good afternoon, everyone. Please turn to Slide 8 of the presentation, where we outline the progression of average unit volume, or AUV, as well as same-store sales throughout the second quarter 2022 and the month of July. We have continued to achieve substantive same-store sales growth, delivering an increase of 17.2% versus the second quarter of 2021. This growth was supported by the continuing recovery of our CBD and Airport shops. As Bob mentioned, we are pleased to highlight record AUVs of approximately $23,000 in the quarter. July AUVs moderated slightly, but this is a solid performance as it included a traditionally lower traffic July 4th holiday period. As you've heard from other restaurant concepts, there is some uncertainty about how customers will react to the dynamics of the economy. So far, our customers have demonstrated that Potbelly remains a strong part of their eating out routine. Turning to Slide 9; I'll walk you through our income statement and specific financial performance for the second quarter of 2022 compared to the second quarter of 2021. During the second quarter, total revenues were $116.0 million, an increase of 18.9% compared to $97.5 million in the prior year quarter. This was driven by a number of factors, including our strong same-store sales increases, successful digital advertising and promotions, LTO marketing efforts and strategic pricing increases. Additionally, the continued recovery of our CBD and Airport shops supported our top line expansion alongside healthy performance in our other shop types. We reported a positive net income of $0.6 million, a meaningful increase compared to a net loss of $3.9 million in the prior year period. This is our first positive net income quarter since the first quarter of 2017, demonstrating the impact of our 5-Pillar Strategy and strength of execution. Our adjusted net income was $1.5 million compared with a net loss of $2.9 million in the second quarter of 2021. Our adjusted EBITDA was $5.8 million, over 3 times the $1.9 million in the year ago period. This notable step-up in adjusted EBITDA was driven by a combination of strong top line performance, expanding shop level margin and disciplined cost management. G&A costs in the second quarter were $8.8 million or 7.6% of total revenues compared to $8.7 million or 8.9% of total revenue in the second quarter of 2021. The decrease on a percentage basis was primarily the result of top line leverage. Food, beverage and packaging costs, or F&P, were $32.8 million or 28.5% of shop sales versus $26.3 million or 27.2% of shop sales in the year ago period. The increase in F&P on an absolute basis was due to higher volumes as well as higher input costs, specifically proteins, packaging and paper products and breadth. Managing the impact of persistently higher input costs remains a priority, and we are committed to protecting our margins and bottom line while providing value for our customers. For the full year, we expect to see up to 18% F&P inflation, primarily driven by protein. It was higher than that in the second quarter, and we expect it to be at similar levels in Q3 and eventually moderate in Q4. Labor expenses were $36.1 million or 31.4% of sales compared to $32.0 million or 33.0% of shop sales in the year ago period. The increase on an absolute basis as a result of wage increases, in line with that of the broader industry over the trailing 12 months. Despite the higher wage environment, we have been able to decrease labor expenses on a percentage basis by 160 basis points due to top line performance and the positive impacts from our labor-related initiatives, such as referral bonuses, the tipping initiative we implemented last quarter and our hours-based labor guide. As we look forward, we anticipate moderating labor inflation rates across food and beverage as well as packaging. We continue to be encouraged with our ability to efficiently staff our shops in order to meet demand in the midst of a challenging operating landscape. Other operating expenses were $19.1 million or 16.6% of sales compared with $15.6 million or 16.1% of sales in the year-ago period, largely driven by expenses that scale proportional to revenue such as third-party delivery fees as well as inflation and some fixed expenses like utilities and repairs and maintenance. Before discussing shop level margins, I would like to remind everyone that beginning in Q1 2022; we elected to adjust and reclassify our margins to now carry certain advertising and marketing expenses based on a percentage of sales, aligning with the reporting structure of franchise-oriented organization. Shop level margins were 11.4%, exceeding our guidance range of 9% to 11%. This was a meaningful improvement compared to 9.7% in the year ago period, driven by top line growth, the continued recovery of CBD and Airport shops and improved operational efficiencies. Our liquidity position at the end of the second quarter was $26.9 million, consisting of $14.7 million of cash on hand, plus $12.2 million available on our existing credit facility. Slide 10 highlights how our channel mix has evolved over the past year. We are pleased to see the percentage of sales attributed to our digital channels has remained relatively stable and ended the second quarter at 36%. This consistently strong digital contribution reinforces the positive response and customer engagement we have enjoyed as a result of our enhanced tech stack, individualized Perks royalty program and purchase-focused marketing deals such as our digital and Perks-targeted BOGO promotion. Additionally, in-shop dining saw an increase of 4 percentage points sequentially as weather conditions improved and more customers return to our shops. This was in line with expectations. As mentioned earlier, we are excited to highlight our strong AUVs in the second quarter as a significant achievement as we look out to our 2024 objectives. I'll conclude on Slide 11 to discuss our 2022 priorities and guidance. In 2022, we remain focused on executing against our 5-Pillar Strategy, which we view as the foundation to continue delivering business expansion. Additionally, we continue to prioritize and strengthen our menu innovation, digital marketing activity to drive awareness and traffic throughout the brand. We believe our digital marketing platform allows Potbelly to enjoy greater guest acquisition rates as well as establish deeper brand loyalty with its patrons. These priorities will drive our path to achieving our 2024 long-term growth objectives. Additionally, we remain on track to deliver our previously provided 2022 guidance of record AUVs, double-digit growth in same-store sales and shop level margins in the low double-digit range. For the third quarter 2022, we are expecting total revenues of between $113 million to $118 million and shop level margins of between 9% and 12%. Note, our guidance does not take into account the potential impact of refranchising opportunities that could occur during the quarter. Additionally, subsequent to quarter end, we received forgiveness for our $10 million PPP loan, which will impact our third quarter 2022 financials. With that, I'll pass the call back over to Bob.

Thank you, Steve. Turning to Slide 12; I'd like to remind you of the 2024 growth targets we unveiled back in March. First, AUVs of $1.3 million, which we've seen meaningful progress towards through our improving performance rooted in our commitment to enhancing the customer experience, investment in technology, operational systems integration, strategic marketing and our differentiated menu. Additionally, we continue to enjoy recovery across our full shop portfolio particularly that of CBDs while maintaining strength in our digital mix of business. Second, shop level margins of greater than 16%. I'm pleased with the progress, and I'm confident we can continue our march towards this goal with heightened sales leverage, careful management of supply chain and food costs, and stronger in-shop efficiency driving lower labor costs, including many of the systems I mentioned earlier in the call. Thirdly, refranchising approximately 25% of our company-owned shops by the end of 2024. We've made significant progress towards this goal. And as I mentioned earlier, we will provide specifics around deals once they are signed and closed. And finally, we are working to achieve a franchise unit growth rate of at least 10% through our shop development area agreements, supporting our shift to a primarily franchise-oriented organization. We view our long-term U.S. shop total to reach 2,000 units and at least an 85% franchise system, which we believe we will achieve through the attraction of high-quality franchisees interested in Potbelly's strong competitive advantage in the fast casual space. With that, I will now turn the call back over to the operator to address your questions. Operator?

[Operator Instructions] Our first question is from Matt Curtis with William Blair. Please go ahead.

Thanks very much guys. I guess the first question on your extension of targeted digital offers during the quarter, which seemed to go fairly well. I was just wondering, I mean, you talked in the past about leveraging the detailed check data you've been collecting from your new tech stack to deliver more personalized offers for Perks members. I mean is there any data you can share around perhaps the sales lift? Or what are the percentage of offers that results in a transaction? I'm just trying to get some context around what the impact is?

Yes. Thanks, Matt. We appreciate it. We have enjoyed some extended success with some of these digital targeted offers. And as you mentioned, many of them have been targeted towards everyone in the digital world, both web and app. We've narrowed that through the quarter occasionally to app and Perks only. I should say Perks only, which has gone really well for us. And we have continued the segmentation of our offers for our Perks members based on their check level data and their frequency. We won't share, for competitive reasons, exactly how those levers are working for us. But what I can say is we've grown our Perks population over 2.2 million Perks members. And across all the fronts that would matter in terms of outcome, the mix of our sales that is Perks-driven sales, the frequency of those Perks transactions compared to non-Perks transactions, the average check that we get on Perks versus non-Perks orders and our ability to improve the frequency of the Perks members within that environment is all improving because of these results. And candidly, we still think we've got a lot of dry powder here. We're a full quarter now into the segmented offers and the check level data and segmentation that we get out of that. We're learning about what works in terms of promotional activity and the algorithms that we use to target those consumers are learning with us, which is a great benefit. So we think there's a lot more we can do there. We're looking forward to not only growing just total Perks members, but the contribution to the business.

Okay. Great. Glad to hear it. I guess shifting to your promotions. I mean, you got back the Cubano LTO, which seems to go well. I was wondering if you could talk about how often you plan to run these in the future? I mean I know in years past, it used to be more of a seasonal thing. And then relatedly, what price points you're expected to be at? I know historically, the LTO seemed to be a little bit more premium priced. The Cubano seen to be more in the kind of mid-price price range. So I'm wondering if that's kind of the target going forward? Or maybe if you consider doing a more value-oriented LTO given the inflationary environment?

Yes, great question. First of all, we've enjoyed bringing food innovation back. And you're right. We've gone back to the pantry on a couple of products that have worked well for Potbelly years ago. Even those, though, have some improved and slightly different ingredients. And if you think about them across the menu, what I think you see us doing is offering our customers our sandwiches in an LTO format. We've done the cookies as well, and we've now done the chips – or sorry, the shakes. We have done some things with meal deals, but on a little more subtle basis. The thing that we're learning is that each of these behave differently. So sandwiches provide a clear quality lift to the brand, and Cubano did that. Cubano performed really well. We tuned the price so that it fit the laddering and tiering that we did with the three-size menu last year. We don't want to create value disparity across the menu even when we do an LTO. We priced up a little bit, the one that we've run more recently because it has some higher input costs. And we see those providing lift with a little bit of mix, but also with some of that check growth. Now cookies behave differently, very differently. The customers are adding our cookies as add-ons, and we really like the add-on incidents that comes with them. We're getting a whole lot of love on social media for the various flavors we've introduced and how much people are creating videos about how much they like our cookies and the LTO cookies are no exception. We're seeing similar behavior with the shakes. So I think what you're going to see with us is the continued pulsing of LTOs so long as they benefit the customer, they don't disrupt the operations and they bring a positive advantage to the financials all across the board.

Okay. Great. Shifting to the digital kitchen platform that you're testing. I mean, you seem to be testing a variety of technologies designed to improve operations as well as, I would imagine improve the employee experience as well. I'm wondering if you could be a little more specific about what kinds of things are being tested as well as when you think they might be ready to be broadly deployed in the stores.

Yes, I'd be delighted. That's part of the reason we added that to our prepared remarks. A lot of what we've talked about in the last year is what we've done with the tech stack. And most of the tech stack work was consumer-facing, the app, the web and even the integration layers for Perks and for all of our digital orders. We had always seen this down the pipeline. We were working on it a little more quietly, but we also know that in the shops, there's an opportunity for additional technology investments, whether they're through software enhancements that allow us to manage the business better, like I mentioned, some with our labor guide and the financial performance metrics that we have, the operation standards evaluation tools that we use. But specifically with Potbelly Digital Kitchen, what we've done is taken the advantage that Potbelly already had by having two make lines. We've talked about that a lot over the last couple of years and digitizing both of those lines so that we can be even better at delivering the customers' expectations when they order digitally and even more successful with throughput and with customer quality when someone comes in the front door and goes through the front line. So our ability to receive process, sort those orders, present them to the – to our associates so that they can coordinate the orders. They can make sure that the orders are already on time. We get the advantage of monitoring all of our shops that have those systems in place so that we can troubleshoot and coach where there may be gaps and we can also use that data to continue to tune the labor guide and enhance the system itself. So we're excited to be at that point where we're doing some more digitization in shop. We have it in more than a handful of shops now and we're pleased with the results so far. We've got some additional testing to do. But we're at the point where we're going to be contemplating what the investment costs would be for a broader rollout and be in a position in the future to talk about why we believe that investment makes sense.

Okay. Great. I guess shifting over to pricing in the commodity environment. Do you expect to take more price in the balance of the year at this point? And maybe you could also just remind us what your cumulative price benefit is right now? And then, I guess, a third part of that question, sorry, is, you could maybe remind us how much of your commodity basket is locked in for the balance of the year as of right now?

Sure. I'll let Steve help us with some of the pricing discussion because like everybody in this space, we're all watching it very closely. We've tried to manage the balance on the commodity side really closely about – if you look at third quarter, about 85% of our basket is locked and it drops to about 60% when you get to fourth quarter. You would – in normal times, you'd expect more of that to be the case. But like a lot of brands, I think, we're expecting some moderation in those supply chain pressures and those costs. So we want to make sure we've got the flexibility to take advantage of that when it happens. And we have taken two pricing raises so far this year, and we're prepared and flexible for 1 more. But in total so far, we're – just go ahead, Steve. Steve you got to help me out here.

Yes. I think it bears repeating, our pricing posture is really specifically designed to try to offset inflationary pressures on our input, right? And we've been kind of moving along at that – at a similar pace. I think we expect with our actions to be roughly margin neutral after we're done. Obviously, we have more pricing increase as contemplated. And our inflation is – our inflation, we feel on the commodity side has hit its peak, right? I know you probably heard that from other folks as well. But our expectation is that Q3 is still going to be pretty high, but that we're going to start to come down more meaningfully in Q4. And with labor, we've seen labor certainly still high, but a little lower than what we expected. And Bob mentioned some of the things that we're doing on that side. Our tipping program, in particular, I think, helped us moderate those wage increases. But that's right. We took a pricing action in P6, and we've got one more that's expected. So we're – we haven't seen demand fall off as a result of the price increases. You've probably heard from others, there's some softening out there in the environment. But for us, we've been really careful about the way that we thought about moving price to keep pace with inflation and balance that with customer value and demand. And so far, we've been pretty happy with the way we to be able to work that balancing.

Okay. Understood. I guess just to touch on your restaurant level margin guidance for the third quarter from that. 9% to 12%, a smidge wider than it was last quarter when it was 9% to 11%. I was just wondering why that is? I mean, is that because there's more uncertainty around inflation in the back half? Or is it because you're less contracted in the fourth quarter or something else, if you could help us with that?

It's both of those, honestly. There's – we're pretty excited about expanding our margins year-over-year to where we got them to 11.4%. And as we look into the next quarter, like I said, we're still going to have that high inflation on the commodity side, hopefully really coming down a bit later in the quarter towards Q4. So we just want to make sure that we've got the right kind of range in place so that if we start to see things change from where we expect them to be that we've got room. But we fully intend on continuing to work on all the things that will help us expand the margin. Certainly, top line helps us, right? And we see demand continuing to be strong. And our ops team works hard on the labor side and we've been able to manage that as well with other costs that are in the system in terms of other operating expenses. So the – we're working towards the – and we always will work toward the high end of that range, and we'll work to beat it. But we wanted to make sure we had a realistic range for everyone to look at us through.

Okay. Understood. And then, I guess, maybe if I can finish up with just a broader question on the state of the consumer right now. I mean we've seen a lot of restaurant concepts talk about some demand impact from higher gas prices. And it seems like this has really been concentrated around weakening demand from lower income consumers, particularly. I was just curious to see if you guys have seen any of that in your sales trends and if you care to comment?

Yes, Matt, the – you're right. I mean, listen, one must conclude the consumer and the customers are under pressure. The broad-based inflation that they're experiencing is coming at them from all directions. We have some advantages though. And as we've said, our two pricing increases so far have certainly been pricing increases we've been able to take and haven't seen those directly impact the demand from our customers in particular. The question really, I think, that you're getting at is kind of who is experiencing that pressure the most? And how are they reacting to the pressure? The jobs market is to their advantage. The savings that they had going into this inflation is to their advantage. And for many of the available credit that they had is to their advantage. Now for us, in the fast casual space in a Potbelly in particular, it's important for us to note that when you're earning $75,000 to $100,000 a year or more where the fast casual consumer really sits, they're just in a better position to withstand the pressure. We have another advantage that food at home inflation is still outpacing food away from home inflation. So those are all kind of the macro external things that we're processing it. At the end of the day, I think we all have to be ready for the pressure to be something that's kind of ever present for the consumer, at least in the near term. So then you turn internally. And we focus on the things that we control. We're really happy that we installed the new menu that we did last year. That is – that had the effect of installing a value layer into our menu that didn't exist before. And we see some very subtle movement within the menu patterns that suggest that people are still using Potbelly, but maybe adjusting very small amounts, but you can see a little more uptake on skinnies and that's great because that means that, that menu is working hard for us. We've intended to have that craveable quality and that great value throughout the menu. We added some expansion to our meal deals. So if you do have an extra few pennies or $1 in your pocket and you want to get chips in a bottle drink when you're ordering digitally, but you'd rather get the fountain drink when you're in the shop, you can take advantage of that. You can upgrade also to a shake if you want to do that. So there's some flexibility in those value meals. And then the promotional activity that we've put forth throughout the quarter, certainly, you should see that as a reflection of our desire to make sure we're giving our customers as much value as possible, especially those digital and Perks consumers, and they responded really well. I just would like to add too, and I know we've emphasized this in past quarters. The brand has typically significantly underspent our competitors in this space when it comes to marketing investments. And because we have two – sorry, we have during that period of time, and we started to learn of ways that we can promote our brand without doing discounting, we think we've got a lot of dry powder. These digital promotions are working really well.

Okay. Great. Well thanks very much and congratulations on the continued improvement.

Thank you.

Thanks Matt.

Thank you. We will now pass the call over to Lisa Fortuna from Investor Relations.

Thank you, operator. This quarter, we are testing a new approach to complement the great questions that William Blair offers by taking questions from our investors. To collect these questions, the IR team reached out several of our top holders this week and pulled together about four questions. Moving forward, any of our investors are encouraged to submit questions prior to our calls in the future. Our first question is related to the recent 13D. So the question being, do you have any comment on the recent 13D filed by D3 funds?

Yes. Thank you, Lisa. First of all, we won't comment on quite a bit of it. But what I would like to say is we really appreciate D3 and their support for the stock. They've not been in the stock for a long period of time, but are now a very significant holder of the stock, and we've included them in our investor communications from time to time since they entered the stock with great respect for their insights. And again, very much appreciate their support, and they've been buyers here for a while. As you mentioned, they just filed a couple of weeks ago, and everyone can find their 13D on our website or if you get it directly through the SEC, that's fine, too. If you haven't read it, I encourage you to read it. Because I personally and we, as a team, appreciate the way they're looking at the near-term and the long-term value of the company. And we view their stated focus is something that's really well aligned with management's focus in our current strategy. So we look forward to working with them. And like all of our investors, maintaining an open and positive communications, relationship with them over time. So yes, happy to see what they're writing about us for sure.

Thank you. The next question is related to franchising. We've seen one franchise deal, even if you can't name the partner names yet, where are you in the process? What does the pipeline look like? And where are you with regard to time line, so beginning to execute on the long-term strategy?

Yes. We appreciate this question. So we – as we mentioned in our prepared remarks, there's a tremendous amount of activity in franchising far beyond the notion of trying to get to and consummate a deal. These – and yet I recognize that for investors, you're looking for something with more definity and finality when it comes down to those deals because for a brand that really hasn't been a significant franchise growth brand, that ultimately is – the proof is in those numbers. What I can say and reiterate what I said in the prepared remarks is that we are in very active discussions with a very healthy pace of a number of franchise candidates and candidly at every stage of the franchising process from initial lead and e-mail communications with our sales teams all the way through to quite detailed and specific deal terms on various deals that we're working on. Ultimately, frankly, I understand the question is coming from how can we really accelerate that? And are we going to be able to – are we going to be able to meet our near-term and long-term goals of this level of franchise growth? I will tell you, with all the internal insight that I have, I feel quite confident that, that's the case. There are a number of reasons, too. I just would like to say there are a number of reasons that we really can't talk about the deals until they're signed and closed and some of them are internal decisions. We have people working for us in these refranchise potential markets. And we want to take care of them in the right way and order that transition. In some cases, some of the refranchised deals could be in competitive bids, and we need to make sure that we maintain all the right confidentiality around that. And of course, we wouldn't want to publish anything until we know we've got it signed and closed because we don't want to be a weakened negotiating position. So I'll add to this, too, just in terms of sort of breathing some confidence. The activity of this franchising effort is geographically dispersed. It includes refranchising deals as well as new development deal work. It includes various sizes of potential franchise candidates as well as various sizes of franchise deals. And as I already said, it is at all stages of the process in all variations of these deals. So we very much look forward to our announcements. And I'll make this crystal clear; too, Lisa, that when we have signed deals that are closed, we will announce them in due course and I'll save those all up for the next earnings cycle.

Thank you. Next question, can you provide more color on the REEF partnership? And how it fits into the 2,000 unit goal?

Yes, happy, too. As I think most of our investors know REEF was essentially a ghost kitchen food truck operating as a franchisee of the brand. And I'm a fan of their model. I think it's – there's a reason that they've been able to grow that – the way they have. And when you look at the white space that we have at Potbelly, there's also a reason to believe they could be a great partner for us because they now can grow quickly when successful with the brand, we hope that we can see some of that success, too. Where we are specifically is we're finalizing the menu and the equipment package that allows them to prove out the proof of concept in the first couple of test locations. Once those steps are complete, getting those first couple of vessels, they call them up and running does not take very long at all. And I'm optimistic that we can get to those unserved customers. I'd like to address a part of the 2,000 unit goal though. So specifically with regards to that 2,000 unit goal, we developed that goal with an understanding of what market holding capacity was for traditional Potbelly units across the country. And I think that's really important for investors as you think about what are the volumes of our 2,000 units expected to be, what's the contribution from franchise royalties expected to be? And a non-traditional development like REEF and other solutions, this is going to be great for us to help serve our customers and fill in the gaps also. But I wanted everybody to understand that the 2,000 units are really built on a traditional development model.

And then our final question is; do you see yourself in a favorable position operating in the fast casual segment as consumers start to watch their wallets? Or are you noticing some pressure from the consumer?

Yes, good question. It kind of builds off Matt's question, I think. And we are seeing consumers just try to manage their wallet. But like I said, we're not seeing it in our sales, and we're certainly not seeing the reaction that some have seen in sales decline. So we're pleased with where we sit. We're pleased with the typical income of the average fast casual consumer as well as the Potbelly consumer. And as I mentioned, we've been able to outpace the food at home inflation rates here in the restaurant space, which really helps us. The momentum in the business is strong. Our ability to grow the business is strong. And specifically, categorically, I think there's something really special about the fast casual business. And I would compare not only to QSR like you asked about your question, but casual dining as well. The gap in average check for fast casual is much larger when you compared to casual dining than when you compared to QSR. The gap to QSR is not nearly as large in terms of average check. The data that we've seen suggests that we operate in a fast casual average check that's actually below fast casual averages, which makes us all the more competitive to casual dining and especially for those QSR experiences where they want to have a nicer experience, but don't want to step all the way to casual. So we believe we can catch the business on the way down when people are trading out of casual, and we believe we offer an incredible value upgrade from QSR. The business really sits in a great place for us, and we think it's a competitive advantage.

At this time, there are no other questions in queue. I'll now turn the call back to Bob Wright for any closing remarks.

Thank you, and thank you all again for your time today. We're pleased to have delivered a notably strong performance this quarter, and we remain highly confident in our business and growth momentum as we continue to navigate today's uncertain times. Potbelly is in the midst of its next phase of growth, and we're excited to continue progressing towards unlocking the brand's fullest potential. And just thank you all for your interest in Potbelly. We appreciate your support. Have a great night.