PBPB - NASDAQ

Good afternoon, everyone, and welcome to the Potbelly Corporation Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instructions] Please note this event is being recorded. I'd 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 third 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 to their 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. Before we discuss the quarter, I'd like to begin by thanking the Potbelly employees for their continued dedication and hard work. Our people continue to provide a warm welcoming and enjoyable experience for our customers, which has allowed the Potbelly brand to deliver the good vibes of a first-class die for over 45 years. I along with the entire leadership team I'm extremely grateful for their efforts. As the macro environment continues to evolve, we and our customers have been adapting along with it. At Potbelly, we continue to prioritize delivering value not only through our food, but our service experience and the good vibes of our shops. Additionally, I think it is fitting we are discussing our business with you today. After all, it's National Sandwich Day. Our support center employees are in our shops today as the entire Potbelly Nation celebrates with our customers. I will begin today on Slide 3 to discuss our key strategic achievements in the third quarter. Our 5-pillar strategy continues to serve as our framework for growth and has yielded meaningful results. I'm excited to report we achieved record AUVs for a second quarter in a row and significantly expanded our shop level margins on a year-over-year basis, despite challenging macroeconomic conditions and persistent inflationary headwinds particularly within commodity costs. This margin improvement was due to record top-line expansion and increased operating leverage. As we look to further strengthen our operations, we remain dedicated to the increased testing and implementation of our Potbelly digital kitchen or PDK in both franchise and company-owned shops, which is proving additive to operational efficiencies, margins our catering business and improvements in the digital and in-shop customer experience. PDK will allow for increased order accuracy, better speed of service, increase throughput, improve customer experiences and better food quality. So far, we are very pleased with the initial feedback. Additionally, we continue to enjoy benefits from our enhanced marketing programs, including LTOs and special promotional offerings through our Perks loyalty program. These activities all contributed to our record top-line results this quarter. Also and as announced during the quarter, we completed two franchising deals signing SDAAs or shop development area agreements to bring a total of 19 new shops between the Tampa Florida and Central Illinois markets. Since closing Q3, we signed a third deal for six shops in Orlando, Florida. These deals mark key milestones for our franchise growth acceleration initiative. We're extremely excited by the current momentum in our business and improvements we've achieved despite uncertain economic conditions. Slide 4 outlines our financial successes for the third quarter, which I will touch on briefly with Steve providing greater details later in the call. Overall, the quarter was another strong one. Performance metrics included all-time record revenue of $117.6 million. Continued strength in our digital business once again accounting for 36% of revenue, 10.6% shop level margins, an expansion of 190 basis points year-over-year, 15% same-store sales growth leading to another record weekly AUV of $23,383, net income of $9 million for the quarter. And lastly, we reported an adjusted EBITDA of $4.7 million, up $2 million from the year ago period. Turning to Slide 5, I'd like to take you through our recent marketing initiatives and successes during the quarter. We continue to prioritize targeted marketing initiatives and select digital advertising campaigns, which led to increased customer engagement from our Perks loyalty members and contributed to meaningful top-line expansion. Our Perks loyalty program continued to gain traction with 115,000 new members added during the quarter, an encouraging sign as we continue to expand our digital assets and programs. Additionally, our catering business positively impacted sales with continued growth in popularity across professional and social settings and across all shop types as well. We remain committed to menu innovation with LTOs including our Euro Sandwich, Smales Cookie and Pumpkin Spice Shake which drove revenue expansion during the quarter. Also as we began to discuss last quarter, we launched our refreshed branding assets to better reflect the uniqueness and rich heritage of Potbelly Sandwich works. Ultimately, our marketing initiatives are providing critical support in attracting and retaining Potbelly customers, driving traffic, delivering strong branding and unrivaled value for our patrons. With all this success and only an approximate 2% brand fund contribution as a percentage of system-wide revenue, we remain optimistic in our ability to expand our investments in digital advertising and marketing as a core driver of continued top-line sales growth. With that, I will now turn the call over to Steve to detail our financial performance in the third quarter. Steve?

Thank you, Bob. Good afternoon and thank you for joining us today. Please turn to slide six of the presentation, where I will detail the progression of AUVs and same-store-sales over the previous three quarters in the month of October. We are extremely pleased with the momentum in AUVs with two sequential record-breaking quarters. AUV growth was primarily driven by sustained demand in general, as well as continued improving performance from previously lagging CBD and airport shop types and a 3.6% price increase in the quarter, to mitigate the impact of input cost inflation. As Bob mentioned, AUVs continue to benefit from the effectiveness of our marketing initiatives and the progress under our five-pillar strategy. We are seeing very encouraging signs for the initial part of the fourth quarter, with another record period for AUVs and same-store sales metrics of $25,244 and 23.4% respectively for the month of October. Turning to slide seven. I'll walk you through our income statement and specific financial performance for the third quarter of 2022 compared to the third quarter of 2021. During the third quarter, total revenues were $117.6 million, an increase of 15.7% compared to $101.7 million in the prior year quarter. This was driven by a number of factors, including strong same-store sales, successful digital marketing campaigns including LTOs, record Perks loyalty program engagement, strategic price increases and an approximately 60% increase in same-store catering sales. Additionally, the continued recovery of our CBD and airport shops supported top-line expansion alongside healthy performance in our other shop types. We reported a positive net income of $9.0 million for the quarter, compared to a net loss of $2.9 million in the prior year period, inclusive of the positive impact of PPP loan forgiveness of $10.2 million. Adjusted net income was $0.3 million, compared with an adjusted net loss of $1.5 million in the third quarter of 2021. Third quarter adjusted EBITDA was $4.7 million, representing a meaningful step up from the $2.7 million in the year ago period. This notable increase in adjusted EBITDA was primarily driven by significant top-line growth, in addition to improved labor and occupancy leverage, along with disciplined corporate spending. Although challenging, we were particularly pleased with the team's ability to mitigate inflationary challenges during the quarter and will remain diligent in our efforts going forward. G&A costs in the third quarter were $9.6 million or 8.1% of total revenues compared to $7.3 million or 7.1% of total revenue in the third quarter of 2021. The increase on both a dollar and percentage basis were attributable to payroll cost timing and bonus accrual expense. Food beverage and packaging costs, or F&P, were $34.8 million or 29.9% of shop sales versus $28.2 million or 27.9% of shop sales in the year ago period. F&P increase on an absolute and percentage basis was due to higher volumes, as well as meaningfully higher input costs, specifically proteins and bread. Inflationary pressures were higher than expected in the earlier part of the quarter and have since trended lower. That said managing the impact of higher input costs remains a top priority for Potbelly. We continue to proactively mitigate these headwinds through strategic price increases and through a continued partnership with our vendors, while delivering the value we promise to our loyal customers. Labor expenses were $36.0 million or 30.9% of sales, compared to $33.1 million or 32.8% of shop sales in the year ago period. On an absolute basis, higher labor costs were due to higher volumes and increased wages. On a percentage basis, labor expenses decreased by 190 basis points, due to the positive impact of our top-line leverage, as well as labor-related initiatives, such as in-shop and digital tipping, which helps us attract and retain quality workers and reduce recruiting and training costs. Additionally, we continue to benefit from our hours-based labor guide, which ensures the optimal utilization of our in-shop staff matching the proper level of staffing with the timing of peak business demand. Our guide also allows us to ensure we capture efficiencies associated with price increases and other labor-saving initiatives. Other operating expenses were $19.7 million or 17.0% of sales, compared to $17.5 million or 17.3% of sales in the year ago period. On an absolute basis, expenses increased due to costs that are variable with sales such as third-party delivery and credit card fees, increased marketing and advertising spend, as well as inflation related to utilities and some other expenses. Other operating expenses decreased slightly on a percentage basis largely due to leverage from top-line expansion. Shop level margins were 10.6%, a meaningful improvement compared to 8.7% in the year-ago period, driven primarily by top-line growth, including the continued recovery of previously lagging shop locations, disciplined cost controls and operational efficiencies. Our margins improved substantially as the quarter progressed, most notably in September as significant inflationary pressures began to ease and we benefited from a 3.6% price increase combined with strengthening demand. We are happy to see these margin trends continue so far in the fourth quarter. Our liquidity position at the end of the quarter was $23.7 million, consisting of $9.5 million of cash on hand, plus $14.2 million available on our existing credit facility. On slide eight, we will walk you through the contribution to total revenues from each of the respective business channels. Our digital business continues to serve as a vital component to revenue, accounting for 36% of total revenues, consistent with prior quarters on a percentage basis, but higher on an absolute basis, given higher AUVs. This sustained strength from the digital channel serves as evidence of the ongoing impact of the marketing initiatives Bob outlined earlier in today's prepared remarks. Notably, we also saw a second sequential up tick in on-premise dining, attesting to our customers' growing interest in enjoying the unique environment of our shops. I'll conclude on slide nine before passing the call back to Bob, by discussing our primary areas of focus for the fourth quarter, which provide confidence in our performance for the balance of 2022. For the remainder of the year, we look to continue our strong AUV and sales momentum, supported by leveraging and applying our learnings from accretive marketing initiatives, expanding our catering business, higher engagement from Perks loyalty members, successful deal offerings such as our BOGO promotions, LTOs and targeted digital advertising campaign. As we enjoy top-line strength, we are committed to continuing our margin expansion through optimization of labor and management of input costs. Also, we are excited to expand our Potbelly digital kitchen into new locations, as it has shown the potential for increased operational and labor efficiencies and an even better in-shop experience for our customers and employees. Lastly, we are pleased with the initial progress of our franchise growth acceleration initiative, by closing two deals during the third quarter and one more so far during the fourth quarter. Bob will speak to this in greater detail shortly. We believe our strong performance will continue into Q4. With the October sales momentum we expect revenue of $114 million to $119 million for the quarter and, building on my earlier comments about margin expansion during September we now expect Q4 shop margins of between 10% and 13%. We believe this performance trajectory allows us to communicate additional specificity regarding our 2022 fiscal year goals. We're happy to share our expectations of achieving record AUVs of between 1.14 and $1.16 million same-store sales of 16.0% to 18.0% and shop-level margins of approximately 10.0%. With that, I will pass the call back over to Bob.

Thank you, Steve. Now on slide 10, I'll provide an update on our franchise growth acceleration initiative. As I mentioned earlier, during the quarter we announced the signing of our first two SDAAs or Shop Development Area Agreements bringing a combined 19 total shops to the Tampa Florida and Central Illinois regions. A great start to our franchising push. These transactions have earmarked the beginning of our shift to operating as a franchise-focused organization. As mentioned, we've already announced another SDAA earlier during the fourth quarter, for six more shops in Orlando, Florida. We look forward to announcing additional franchise agreements, as they are finalized. As we look to build upon our initial deal momentum, we will continue to fill our pipeline of qualified franchisee candidates. We prioritize building relationships with our candidates by hosting our discovery days, having now hosted four events in total since launching the initiative. These events provide prospective franchisees, the opportunity to present their growth vision and plans, gain a more detailed understanding of our business and the benefits of building their business with the Potbelly brand. They meet with me and our management team and begin the connections of a strong relationship for the future. I'm encouraged with the pace at which we're progressing and look forward to sharing more announcements as deals are signed. I'll conclude today on slide 11, where I'll remind you of our 2024 growth targets which we unveiled at the beginning of this year. Starting with AUVs, we are working towards our $1.3 million goal on an annualized basis. We're enthused with our progress towards this goal. After all we've already achieved weekly AUVs that would translate to $1.3 million during the month of October. As we continue to benefit from improving revenue trends across our diverse shop portfolio, marketing initiatives, success from our digital and Perks loyalty program and operations and throughput improvements we remain highly confident in our ability to achieve this goal. Second, shop-level margins of greater than 16% and -- here again, we continue to demonstrate our ability to maintain strong shop-level margins in all operating conditions, largely attributable to a proactive approach in mitigating inflationary pressures, improved labor leverage, vendor and supply chain management and demand generation. The third goal is to re franchise approximately 25% of our company-owned shops by the end of 2024. As I mentioned, we are encouraged by the pipeline of interest and activity from highly qualified franchise candidates even in this pressured macroeconomic time. And we look forward to announcing deals as they are signed. Finally, we're working to achieve a franchise unit growth rate of at least 10%, through our Shop Development Area Agreements or SDAAs with a focus on shifting to a primarily franchise-owned system. Over the next eight to 10 years, we're aiming for 2,000 total shops with at least 85% of those owned by franchisees. We view the strength of our brand, unit-level economics and underlying fundamental business to give us a meaningful competitive advantage, towards achieving these goals. We look forward to announcing SDAA deals, as they are signed as well. With that, I'll now turn the call back over to the operator to address your questions, Operator?

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] At this time we will pause momentarily to assemble our roster. Our first question comes from Matt Curtis from William Blair. Please go ahead.

Hi. Good afternoon. I just want to start with a question on the October comp. And I guess relatively, average weekly sales which seem to accelerate pretty significantly from the third quarter. Now that seems to go against what I would characterize as typical seasonality in the business where you kind of see a drop-off in volumes after the summer. So I'm just curious on your thoughts about, what drove that. I mean, would it be something like, stronger office occupancy that might be playing a role or maybe more of a return to in-class learning at college camps? Just any thoughts would be helpful.

Yeah. Matt, first of all, great to hear from you and you're right. Seasonally you wouldn't expect record-level AUVs in October. We would attribute it to a combination of things. There's no question that the CBD business continues to recover for us. We shared that last quarter that we saw it becoming a tailwind where for several quarters it had been a headwind. We're still not back to pre-pandemic traffic levels in the CBD markets, but we're pleased with their contribution to growth and believe that they continue to be an overall contributor just to the health of the business. You mentioned the university shops as well. There's no question, there's some strength there. Airport shops are doing really well too. So I think in general a strengthening of the portfolio. We do believe in addition to that though many of the prepared remarks talking about our operations strength the continued efforts with throughput our capacity to handle the digital business on the back line more and more efficiently. And really the staffing efforts that our field team had put into place made a big difference in our ability to manage and handle our business in a more productive way. And then, we just continue to be very enthusiastic about the success of our marketing efforts especially in all those digital channels. And how we keep finding ways to bring Perks to Life with the promotions that we've done throughout the quarter, the LTOs that we've done and the linkage of the digital promotion of the LTOs and the Perks activation of those LTOs. So we think we've got momentum on a number of fronts that are leading to those, kind of sales volumes.

Okay, sounds good. And then, I guess looking towards the latter part of the fourth quarter so November, December. I know in the year-ago period in October, I think you comped 27% and then the full quarter comp, in the fourth quarter last year was something like 33%, if I'm not mistaken. So, I think just the math implies that the comparisons do get more difficult. I was wondering if you could speak to how much more difficult they get. And out of those two months November, December, which month is the tougher comparison for you?

Sure. I can take that Matt. I think all the comps start to get tougher right as we had -- we saw some acceleration in our business within Q4. I think that's a welcome thing right as we had a pretty strong fourth quarter and then we got hit by Omicron at the beginning of this year. But as it relates to the trajectory of the business I think we actually had a really, really strong P12 last year. That's our last period within the quarter. So, I think the comps there might be the most challenging year-over-year. But as we're looking at our business and I think it's implied I think within the guidance that we provided for the fourth quarter, we do expect to have a fairly robust finish to the year across all fronts.

Okay, got it. And then on pricing I heard your comments on the 3.6% increase that you put through. So, what kind of cumulative price benefit did that bring you to for the full third quarter? And then assuming no further price increases what kind of price benefit would you expect for the fourth quarter?

Sure. You mean in terms of the impact on the margin?

No, I just mean in terms of as a component of the comp same-store sales growth? What is the price benefit as part of average ticket growth?

Sure. I think Matt--

Go ahead Steve.

No, no finish Bob, that's okay.

I would just say the blended impact of the pricing that we've taken this year is a little over 9%. And I think in terms of what we would see and carry over next year obviously we've taken those as we've announced throughout the year going back to P2. So some of that starts to roll off next year. And we've really got to watch inflation to see how much more of it continues to pass through the system. Steve has shared in previous calls you go back to 2021 we saw 14 -- over 14% average wage inflation in 2021. That's continued in 2022 at single-digits -- high single-digits, but still high. And this has been the year of food cost inflation. So, a lot of the -- we'll manage the carryover as kind of a baseline and then really be watching food and labor inflation as we turn the corner into 2023 to make some decisions about what we need to do next year.

Yes. And I would just add to that. We have increased prices as Bob said sort of around that 9% rate. The demand however has remained strong even in the face of that. And I think that's just a testament that the activities Bob was talking about on the marketing front and on the operations front. We certainly continue to get the benefit I think of having food at home still far outpacing food away from home inflation as well. And I think our delta to fast-casual in terms of our average check makes us still pretty affordable. So, that's a support to demand even in the face of some of the pressures that the consumer is facing everywhere.

Okay, great. I guess shifting to another topic the catering business. It sounds like the catering comp was up 60% last quarter if I heard that correctly. I guess that might also be related to better office occupancy levels versus last year obviously. But I was just wondering as you go into the holiday period, what do you have in place in order to drive that business a little bit more since this might be the first relatively normal holiday period that we've had in a while.

Yes, I think on the catering business first of all you heard us mention it a few times we continue to be pleased -- we are still expecting a lot more out of our catering business as it continues to return. The thing that -- a couple of things that we're super pleased with Matt is number one it isn't just in the CBD locations as people are coming back into the office. We are seeing that for sure. But the way we shifted our presentation of our catering business when we rolled out our new tech stack and how we've promoted catering a couple of times this year we'll do some more of that as time goes on. We've been more successful in traditional office catering and what we're calling social and celebration occasions for catering in all of our shop types. We also have invested in some additional support in the field in our catering coordinators that are in the shops and in the regional areas that are driving that business. We're reestablishing relationships with companies big and small, even retailers that are surrounding our suburban locations that had once had a relationship with us in catering and doing very, very well with that. And frankly the digital efforts that we're putting forth in our Perks loyalty program and our digital advertising is bringing our brand back to top-of-mind awareness for these catering occasions. We did see last year some return as we started to push catering a little bit more in the fourth quarter. The retail sector can be a good source of catering business for us. We expect that that will be significantly better this year as we go back to that. And the last thing I would add and you hear this theme kind of throughout many of our successes our operations and training team basically refreshed all of the training materials and all of the support materials including the menus and so on for a catering program. And then we retrained all of our managers and our shop leaders that are involved in catering including our franchise groups kind of going back to catering basics. And all of the tips and all of the planning and all of the preparation that goes into handling those catering orders when they come in, how we solicit them, how we follow-up, and the operational details that set Potbelly apart. And we've seen great success with that. The customer feedback is coming back. And that's what's breeding more of the repeat business from those catering orders. So, we think it's a big part of our brand success in the future but we are already seeing the benefits even in the most recent quarter.

Okay, great. Then on the franchising deals that you have recently announced, first of all, congratulations on getting the first couple of those under your belt. But I was wondering if you're also working on any large potential signings or whether we should expect just a very consistent flow of announcements sort of what we've heard recently kind of in the five to 10-unit range going forward.

I think it's a great question and it goes right to our strategy. And we have no reason to believe that we are anything, but right on target with our strategy. As we've shared before what we've done is taken every DMA in the country and broken it into these SDAs, these shop development areas. Now, some DMAs, some markets, you think midsized cities throughout the country, their entire DMA is one SDA and it may be 10, 12, 17 shops to be developed in that market. There are other markets very large cities that we're not present in we've broken those into three or four SDAs. And so the targeted size for the SDA is in that 10 to 12 shop range, because the key to development for us is for every deal that we signed we've got an 8-year clock that starts ticking on that development. So we've seen other brands -- our brand has done this in the past signed very large development deals and you never really see those come to conclusion, not in a reasonable enough time to reach penetration in the market. There are larger more sophisticated experienced developers that can handle more than 10 or 12 or 15 units. And when we entertain those and we are having relationship development with those types of franchise candidates right now. We will absolutely sign a larger deal, but it's a high hurdle for them operationally, financially and their ability to develop the people and find the real estate to meet the goals in that abbreviated time frame of eight to 10 years is the most will tolerate for completing those development deals. So while you may like the -- not you but one may like to hear the announcement about the big deal, every one of these deals you can expect to deliver approximately one or more than one unit a year. So when it comes to real growth, the pacing of the deals this size is going to be much more accelerated growth with every year that continues that we get them signed. So yes, you should expect them to be in this low double-digit size on average.

Okay. Understood. That actually helps a lot to think about it going forward. Okay. Well I'll stop there. Thanks very much to you both, and have a Happy National Sandwich Day.

It has been a great day for us. We watch the sales on this day really closely. So thanks for that Matt. Great talking to you.

Okay.

Thanks Matt.

Thank you, Matt from William Blair. With that, I'd like to hand the call over to Lisa Fortuna to put some follow-up questions. Go ahead, Lisa.

Thank you, operator. Similar to last quarter, we're offering our investors the opportunity to complement William Blair's very thoughtful question. To collect these questions, the Potbelly Investor Relations team reached out to several of our shareholders this week. And moving forward, we'll welcome any questions in the future. First question Bob and Steve is turning back to food prices with supermarket prices inflating faster than restaurant and QSR, even faster than the past casual space. Do you think you're gaining any market share as a result?

Yes. Thanks Lisa. Yes, I think the good news for us is we have the ability to kind of track our market share. We look at it on a weekly basis. We look at it in terms of sales. We look at it in terms of traffic. And Q3 was a strong quarter for us in terms of share gains in both of those areas. Certainly same-store sales, we've seen that happen consistently throughout the year we've seen share gains. And as we look at traffic, with same-store sales pricing certainly has an impact on how that improves. But the traffic is in some ways a way to look at it even more deeply. And we are -- we were pleased to see that every single period of the quarter, we expanded our traffic share as well. And so I think this goes back to get a consumer who's facing inflation and they do their own calculus in terms of what they want to enjoy and what they can afford and what they think they're going to -- where they're going to get the most value for their money. And we're pleased to see that they're choosing us at a rate that's increasingly more so than our fast casual competitors.

Great. The next two questions are really on the franchising topic. One the recent announcement in Florida that franchisee already has two Potbelly shops. So how are those performing in terms of construction costs and revenue? And then the second part of that question is on the refranchising side. We haven't seen any deals yet there, and just wondered if there's any color you can add?

Delighted. I'll take that, Lisa. Yes, on the -- first of all, the Asmar family, our franchisee in Tampa, we are just delighted with them. In fact I was on the phone with our Vice President of Development, who spending the day with them searching for all their next sites yesterday and today. They're engaged. They're great operators. They're putting a wonderful face on the brand. They're building the brand through catering, which is a great way not only to build their sales but to build the brand and extend it as they continue to develop new units. But I love the question on the economics, because the answer -- the straightforward answer is they built them for less than we have published in our FDD. I won't share their specific numbers that's theirs to share. But not surprising franchisees can be very efficient with construction and with their business. And they built both of those units for a decent amount less than what we've published in our FDD, which is around that 600 to 650 range. They're below that. And their volume in both units is better than the national average here at Potbelly. In fact the second location is significantly above the national average. That's a drive-thru location, which does well but really balanced business across the board. And one thing I would make note of Matt earlier asked about kind of our development strategy. There's a second layer of mapping work we do for every franchisee that buys an SDA from us. We at our expense will put together a targeted trade area map for that franchisee, literally giving them green circle trade areas that most closely correlate to the predictive success of a Potbelly. And their second location is right in the middle of one of those green circles. And so we're excited to see the correlation of that success, the trade areas that match what we expect is what they're experiencing. Last thing I'd say about them, which I think is really important is franchising and franchise deals tend to be getting other franchise deals. We have had as we should expect franchise candidates that we haven't made announcements about are talking to our existing franchisees. And as other franchisees asked similar questions, they become more and more interested and more confident about their ability to develop here at Potbelly. So, very pleased with them. Now on the refranchising side, you're right we haven't announced a refranchising deal even though we've announced these three development deals. And candidly, we're okay with that. In my prepared remarks, I said that we would still plan to refranchise about 100 of our locations between now and the end of 2024. And we still expect to do that. It's part of our optimization of our assets, part of our focused strategy to get us focused on a more limited number of markets. But the number one reason that we talked about refranchising is, we believe, especially in our under penetrated markets putting those units in the hands of the developing franchisee is the best way to catalyze growth. So growth has always been our goal with refranchising. We're getting the growth through the SDAs in markets where we haven't refranchised yet. And so, I know that that's to come. It is a different, I mean, look it is a different environment for the acquisition of ongoing businesses. There definitely has been an impact to the economy, what's going on with interest rates has impacted franchisees, buying other franchises, especially very large significant size and scale deals unlike what we're offering. Our deals benefit from their size, because they don't require the amount of leverage that maybe some of these very large QSR deals require, but there is a little bit of a slowing of pace there. No slowing of interest. I want to be really clear about that. But the market is causing franchisees to just be a little extra cautious, when they're making acquisitions. Development is a different story. In the meantime, I can assure you that every market we consider re-franchising is benefiting from all of the success that we're sharing about our brand. So when they get sold, they will be that much more successful for the franchisee that buys them. They're benefiting from the sales and margin growth. And in the meantime, they're contributing to our sales and profitability as a company. So it's not a bad thing that we may do those deals here in the near future versus having one or two of them already done.

Turning to digital over the last two years, Potbelly has invested heavily on the customer-facing digital front and we've seen digital sit at around 36% of sales. What's your long-term digital mix goal? And how do you plan to drive it past current levels?

Yes. Actually, we're very pleased that it is at 36%. In the last four quarters, it's been 36% three out of those four quarters and 39% in one of them, all the while growing our average unit volumes. And so we are growing digital, we're growing it at pace with the rest of the business. We do believe that there's incremental growth and even incremental growth in the mix in the future. We haven't stated a goal of what that would be externally, but when you look at our digital assets and under David's leadership -- what we've learned to do so far with digital advertising, with our paid placement, with our Perks loyalty program, and how we've engaged our Perks customers, especially on our product innovation, we definitely think that there's more there. A certain portion of our catering growth, we expect to show up in our digital mix. There's still quite a bit of catering that comes through over the phone, and believe it or not there's a fact routine that comes in occasionally. But a larger and larger portion of it continues to be digital. So we think that there's growth there as well, but really pleased. Listen this is -- this was in the single digits pre-pandemic. And here we are again just south of 40% for a sustained period of time, while the top line continues to grow. And I think there's more to come. The only last thing I'd emphasize on the driving of digital is given that our investment in marketing is still so relatively low compared to the industry, 2% of our system-wide sales being invested in marketing right now. Almost all of that exclusively invested in digital assets. One should believe that as we expand and we've challenged ourselves we will only expand our marketing spend as we get at least a three to five to one return on that investment. We think there's a lever there too for continued top-line growth. And sure some of that's going to show up in digital I'm sure.

Last two questions kind of related to one another, so I'll kind of put them together back on inflation. We touched on food, but maybe if you could comment on labor as well as just broadly speaking the mitigating actions you've taken and are continuing to take to offset the inflationary impacts you're seeing?

Sure. Sure, I'll take that Lisa. Yes, look, inflation has been persistent for the year really kind of got started with labor back last year around this time. And I think what we've seen over the course of the year, I think we've probably talked about this in our prior calls, as we've seen labor inflation, while still high coming down, right? We were in the double-digits in quarter one in terms of labor inflation. And through the year, it's come down to the mid single-digits. I think we're expecting that for quarter four in terms of labor. And we have some advantages on that labor front, not the least of which is the tipping that we put in place earlier in the year, which provides about two extra dollars per hour for our workers and the shops. And so -- that is a tool that helps us manage some of the labor inflation, but also is a great tool to attract as well as retain employees in our shops. And so we also look at inflation overall and start to look forward into next year. And I think the expectation is that labor will continue to kind of stay in the mid single digits in terms of the rate of growth we expect. And our ability to manage that as well as the COGS inflation, which frankly was really a tougher component of our inflation in Q3, as it reached north of 20% in the quarter. That started to come down. We saw -- we've seen it come down over the last few periods and we expect it to come down even further in quarter four and into next year. And as Bob has mentioned before and we've maintained -- we try to use price as a way to mitigate some of those pressures. And we've done a nice job, I think through the year to attempt to kind of match the pace at which we see inflation with the pace at which we move price and still try to maintain that value equation with the customer. And that's why we watch demand frankly on the traffic side to make sure that we're kind of hitting that sweet spot of managing costs, as well as managing demand. And so we'll continue to do that into next year. I don't suspect we have as aggressive as we're going through our budgeting process. We don't have as aggressive of a profile with price increases next year, because we don't expect inflation to be as high as this year.

And think that concludes the questions. So I will now hand the call back over to Bob for closing comments.

Yes. Thank you, Lisa. And I'd like to thank our institutional investors for submitting the questions that you do. We very much appreciate your interest and support for the brand and delighted to have these conversations with you on a quarterly basis. So Lisa, thanks for doing that. Today for all of you thanks for your time. We -- as you can tell, we are extremely happy with the third quarter performance and we're highly confident in the ongoing strength in especially the positive direction of the brand. As we progress through our next phase of growth, we're going to continue to prioritize things we've talked about operational excellence, strengthen our marketing, and our franchising initiatives and value for our customers to keep them coming back. So with that said, I just want to thank you for your time today. We look forward to engaging with many of you in our upcoming conferences will be at the Stephens NASH Investments Conference, the Wolf Consumer Conference and the Sidoti Small Cap Conference coming up. Thank you all again for your interest in Potbelly. Have a great night.