Matthew Revord – Secretary, Senior Vice President and General Counsel Aylwin Lewis – Chairman, President and Chief Executive Officer Charles Talbot – Chief Financial Officer and Senior Vice President.

Joseph Buckley – Bank of America Merrill Lynch Sharon M. Zackfia – William Blair & Co. LLC Jonathan R. Komp – Robert W. Baird & Co., Inc. (Broker).

Good afternoon. Welcome to Potbelly Corporation’s First Quarter Fiscal 2014 Earnings Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. Today's call is being recorded. All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session. (Operator Instructions) thank you. I would now like to turn the call over to Mr. Matt Revord, Potbelly's Chief Legal Officer. Please go ahead..

Good afternoon everyone and welcome to our first quarter earnings call. Before we get started I'd like to note that certain comments made on this call will contain forward-looking statements regarding future events for the future financial performance of the Company.

Any such items including targeted results for 2014 and details related to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties.

Additional detailed information concerning many of the risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information that we are giving today can be found on our most recent annual report on Form 10-K under the headings risk factors and MD&A and in our subsequent filings with Securities and Exchange Commission which are available at sec.gov.

Our presenters here are Aylwin Lewis, our Chairman and Chief Executive officer and Charles Talbot our Chief Financial Officer. Aylwin will begin with a brief overview of our first quarter financial results and discuss some recent developments, by providing discussion of our ongoing strategic initiatives.

Charlie will then review our financial results and future outlook in more detail before we open the call up to your questions. Aylwin..

Thanks, Matt. Thank you, everybody, thanks for joining the call, let me begin by saying our performance for the quarter was satisfactory given the significant weather that negatively impacted our comps roughly 375 basis points despite those headwins our adjusted net income increased by 520% to $2,000 or $0.01 per diluted share.

Our revenue increased 7.5% basically on the strength of our new shop openings which is partially offset by our company operated shops same store sales negative 2.2%.

Everybody kind of discussed the weather in Q1, we are kind of tired of it, but kind of dimension wise out of the 91 days in the quarter 37 of those days were either impacted by extreme cold or extreme precipitation. That being said, we're very confident in the fundamentals of our business.

We believe we are on track to achieve our previously disclosed low guidance of – guidance of low single digit comps for fiscal year. Charlie is going to talk about our financials in much greater detail, what I’d like to do is talk about the business and how we’re going to support our growth plans balance of the year and in the future.

First an update on our development, we opened four hub cities over the last couple years. New York, Seattle, Boston and Phoenix. As I mentioned on our last call we are inline to open a new hub market maybe 18 to 24 months. Late last year as we were examining our strategic plan, we decided that Denver would be our newest hub city.

We open a hub market in hopes that eventually that hub will become regional spoke regional city for us. Denver and its adjacent markets will provide an awesome opportunity for us to grow neighborhood by neighborhood in that mountain region of the U.S.

We currently have three to five shops in the pipeline for Denver this year, we expect our first shop open this summer. As we continue to expand the business our geographic imprint will also grow. We take a very measured and disciplined approach to development.

We really believe in the Denver market and we think by growing in our legacy markets as well as new hub market we will achieve our stated of goal of at least 10% new unit growth for a long, long period of time. Let’s talk about our menu and menu development. Our passion is to be “The Best Place for Lunch”.

Simple menu is very important for us because a big part of what we do in that 60% of our business from 11.30, 2:30 is drive speed with great product quality for a menu for example, we recognize that we can’t stand path.

So on the first quarter we typically celebrate and market our SKINNY product which is our answer to value and better for you because it has less calories. In mid March we introduce a new salad which was our chicken Mediterranean salad which was chicken with chickpeas, feta cheese, artichoke hearts and roasted pepper.

Salad is an important part of our menu. I'm excited to talk to you today about a product that we feel very excited about today we’re rolled out in our legacy markets product that we called Flats. Flats is a thin multigrain bread that provides our customer with a whole new way to experience Potbelly.

We believe Flats will broaden the appeal of our sandwiches to both existing and new customers. Customers who love originals will believe they can use Flats to experience the great product and the sandwich as they like.

The customers that are not ours we believe that Flats is a tremendous experience it accentuates the flavor of our product, its 90 calories less than original product. We’ve been working on this product for multiple years, testing it getting the formula right.

And our test results and our test markets has been strong, we got great customer feedback, so Flats is now part of our menu. We will continue to drive menu innovation because we know it’s necessary for us to grow. In our existing markets you’ll see a traditional media in Chicago and DC. We will use nontraditional media in the rest of the company.

Also we will, starting today we introduce Biggs in New York City and Boston as part of our life cycle approach to marketing where we are allowing the brands in the hub markets to develop kind of naturally the way Potbelly developed in our legacy markets. So now Biggs will be in New York and Boston.

We’re advertising our legacy salad in Seattle and Phoenix this quarter technology is important. So we continue to use technology to drive our throughput to our clinical lunch period. By the middle of the summer, all of our shops will have our fast oven. That oven reduces 40 seconds off of our whole oven time.

So we have had this oven in our fleet over the last five years. We decided to make sure it is in every shop by the end of this year. In March we introduced our mobile application which works on Android device and iOS operating systems. In fact you can get it off iTunes, the Apple system.

The mobile app will allow customers to find their nearest Potbelly also allow them to get nutritional information. They can also order product to pick up or be delivered. I think the mobile app is a great way for our customers to access the brand and use of the devices has becoming very, very popular.

Over the last year and a half we have made great strides in our back line business. It’s all the orders that happen, not on the front line, and encompasses delivery, pick up and catering. In fact, over the last two years we have hired six catering managers across five markets in our business.

We are in the process of adding another catering manager in another market. These catering managers have dedicated a 100% to driving our catering business, big orders. Back line business allows us to extend the brand outside the footprint of our shops.

It is one of the fastest-growing parts of our business and in fact this year it really helped us in the first quarter as our managers and our teams really worked hard on this part of the business. We operated increasingly as a separate business from the frontline.

We call it a brick wall mentality between those two businesses and it will become and continue to be a very essential part of how we run things and grow our business. In summary, our teams I think performed well in Q1. We are never pleased with our results when they don’t hit what we have specified.

But given the very challenging weather, it is hard as a management team to know what to do when you have things that you don't control you. Those 37 days impacted our business, negative 7.7%. So you see we worked hard on the other days to whittle that down to negative 2 points. We continue to believe in this business.

Our unit development, our menu development, our technology initiatives are all geared to help us grow this business. Our fundamentals are strong. Our culture is strong, management team is strong.

So while Q1 was impacted naturally by weather, we believe the underlying business is still strong and we remain committed to delivering on our long-term results as well as what we stated the annual results will be for this fiscal year. Now I’ll turn it over to Charlie and he will walk you through the details of our financial results..

Thanks Aylwin. As Aylwin mentioned we delivered solid first quarter results. Total revenue increased 7.5% in the quarter to $74 million driven by strong new unit results partially offset by a decrease in company operated comparable shop sales of 2.2%. As Aylwin stated earlier that winter weather is old news.

But now that it is behind this I want to provide more specifics on the impacts to our first-quarter results. Overall, we estimate the weather impact first quarter, revenue impacted first quarter revenue by roughly $2.7 million and comps by 375 basis points.

This is driven by nearly a 500 basis point impact in both January and February and roughly a 180 basis points impact in March. Nearly 80% of our shops are located in areas impacted by a typical weather during the first quarter including the Mid West, North East and Mid-Atlantic.

And as Aylwin mentioned 37 of the 91 days are roughly 40% in the quarter were negatively impacted by either extreme cold temperatures and/or snowfall. Comparable shops sales for these 37 days were down 7.7%. It’s also worth noting the quarter result was positively impacted by roughly 70 basis points from the Easter shift into the second quarter.

So neutralizing these factors, the underlying comp trend was slightly below 1% comp growth for the quarter. The February and March trending in the 1.5% to 2% range. Our average check growth for the quarter was around 1.5% driven from roughly 0.5% pricing that we discussed on the last call and the remaining for menu mix growth.

So with all that being said, we are encouraged by the underlying business trends and a positive trajectory in the second half of Q1 and as we head into Q2, so moving down the P&L shop level profit margin for the quarter was 17.5% decline of a 120 basis points from a prior year.

The decrease was driven by deleverage of fixed expenses and the margin ramp up of nine new company operating units, openings in the quarter. I would say overall our general managers did a really good job of managing what they could control inside the shops, specifically on labor scheduling and the food prep given the inconsistency of volumes.

Cost of goods sold as a percentage of net sandwich shop sales decreased in the quarter to 28.7% down 50 basis points from prior year driven primarily by lower commodity costs in addition to lower levels of waste.

In late 2012, we implemented a new food cost system, as our operating teams have become more comfortable with the new system, we have started to lower levels of waste in the shop, which we are optimistic will continue. The deflation in the quarter was driven by a number of key products locked into the first quarter at favorable pricing terms.

So despite the deflation in the first quarter, I think it’s important to note, we still expect roughly 1% to 2% inflation for the year. Our food cost basket is roughly 70% blocked for full year and the sequential step up in inflation is really being driven by proteins and dairy in the back half of the year.

Labor as a percent of net sandwich shop sales increased in the quarter to 29.2% an increase of 30 basis points from prior year. This was driven primarily by deleverage of fixed labor expense and also the addition of nine company operated shops during the quarter versus six in the prior year.

For the full year fiscal 2014 we maintain our expectation that labor as a percentage of net sandwich shop sales will range from 28% to 29%. We anticipate leverage from our comp units partially offset by labor efficiencies from the 35 to 40 company operating new openings in 2014. Additionally, we will experience some impact from the Washington D.C.

and Minnesota minimum wage increases effective midyear. It’s also important to note that labor will fluctuate by quarter based on sales seasonality and timing of new unit openings which we expect to be more heavily weighted towards the second half of the year.

In addition we recognize that there maybe some timing fluctuation from pay roll tax expense on options exercises in 2014 with more risk potential in the second quarter given the lockup expiration.

Operating expenses as a percentage of net sandwich shop sales increased in the quarter to a 11.1% up 60 basis points from prior year, driven primarily by higher utility expenses and deleverage a fixed expenses.

Occupancy expenses as a percent of net sandwich shop sales increased for the quarter to 13.6% of 90 basis points from prior year, again driven primarily by deleverage of fixed occupancy expenses in addition to our new company operated shops opening during the quarter.

So for 2014 we reiterate our expectation that occupancy expenses as a percent of net sandwich shop sales to be in the range of 12% to 12.5%.

Turning to general and administrative expenses they were around $7.8 million during the first quarter, its an increase from Q4 levels as expected, but down from prior year by roughly 300,000 when you exclude the one time IPO cost.

This was driven primarily by the lower bonus expense in the timing of marketing expenses that I will talk about in a minute. As we move forward in Q2, we expect the higher level G&A expense than Q1 driven from roughly $700,000 and higher marketing spend related to the Flats introductions and a 100,000 and 200,000 higher stock comp expense versus Q1.

We anticipate Q3 and Q4 spend to be slightly higher than Q1 with a more normalized marketing spend and the continue level of higher stock compensation expense. As a percentage of revenue we anticipate marketing dollars consistent with 2013, in total and shift some more quarters are promotion timing related to the Flats introduction.

As we communicated in our Q4 call at this time, we still believe that $2 million to $2.5 million. A public company cost range is an accurate projection for 2014. As Aylwin mentioned our adjusted net income for the first quarter was $200,000 or $0.01 per diluted share, which is about 128% higher than prior year.

We estimate that the impact related to the weather in Q1 to be about $0.02 on top of this number. Our first quarter adjustment to net income includes the impact of $800,000 of impairment expense gross of tax related to two of our shops in New York.

For a reconciliation of our reported to adjustment net come please refer to the reconciliation table included in our first quarter earnings release. Turning to development, during the quarter we open up nine new company operated shops and two franchise shops for a total unit growth rate of 16%.

Seven of the new company operated shops opened in our legacy markets. And for the year we expect our new shop openings to be more weighted towards legacy markets versus the last couple of years. This mix will vary year-to-year as we move forward. And longer-term we expect our new unit development to be split evenly between new and legacy markets.

Additionally, we expect our new shop openings to be weighted towards the back half of this year. So I would like to reiterate our full year outlook for fiscal 2014. We expect adjusted net income growth of 25% to 35%, low-single-digit company operated comparable sales growth driven by combination of traffic and check.

Effective tax rate not to exceed 39.5%, capital expenditures of $30 million to $35 million and finally shares outstanding between $30 million and $32 million shares. So with that I’d like to turn it back over to Aylwin for a few summary remarks..

I really appreciate your willingness to join us on the call and your interest in Potbelly. You might thought, our journey as a public company has been short, but it has been very interesting. If you would have scripted out these first three quarters we would script some differently.

But I just want to reaffirm our commitment to this brand and its future. We had a very disruptive environment. The last two calls we talked about weather, that were be in a situation, - again. But it was significant we will continue to recover from this disruptive environment.

We haven't changed our playbook, we haven't changed our outlook for the business. And we haven't changed the Outlook for what this business will be over time and we believe in the strength of the brand and continues to resonates with our customers in the neighborhoods we operate. Our development continues to go we are disciplined.

We believe we will be at a higher end of the range we communicated with our new shop development. And when were on the road we talked about a couple of things and why you should excited about this company one was a management team that was experienced and committed to our mission.

We have significant wide space as a concept as well as geography of a strong culture that we spent a lot of time talking about training, and using it to run the business that we have strong unit economic. Still very committed to the targets we laid out.

Low single digit same store sales plus 10% unit growth for a long, long period of time, and reached 20% unit margins, 25% return on our invested capital then 20% growth in net income year-to-year. We believe these commitments make us a very attractive company and a high growth company. Again thank you for your time today.

I would like to turn it over to the operator and we will answer your questions..

Thank you. (Operator Instructions) Your first question comes from the line of Joseph Buckley with Bank of America Merrill Lynch..

Hello. Joe are you there..

I think he must have fallen off.

Hi, did you hear me okay?.

Yes, we have got you, Joe. .

Okay, sorry about that. I wanted to ask a question on the Flat sandwiches.

You mentioned the marketing spend to support the introduction, can you tell us a little bit about how that’s being spent, maybe talk a little about the test market results and just how you see that product position is it part of a value kind of offering or is it or more premium or how do you think consumers will perceive it?.

.

And we hope that folks that don’t like our bread, it’s unbelievable that we do have people that don’t like our bread, we hope that those customers will come out and say, you’ve eliminated a barrier for us.

The additional marketing spend we do traditional marketing primarily in the big markets of DC and Chicago, is traditional stuff the outdoor transit advertising we do radio in Chicago. So that’s how we’re standing. We’ve added some advertising in movie theaters in a couple cities..

:.

:.

And just Joe, couple of things we are quite on the marketing spend really it’s a shift from in particular we saw some of the issues in Q1 with salads move some of the waiting into this launch into this launch, which without was a good idea and looking back was a great idea, given some of the challenge we had in Q1.

so really, it’s not an incremental spend, it’s a shift in media that will hit us in Q2 relative to other quarters. I think there’s a couple of other stats, which give us confidence about this product. we’ve all been eating it for a while, and I think a lot of us have changed our habits around how we order our sandwiches.

but we did a ton of service on this stuff. People who have tried it and some interesting facts, feedback was that we surveyed 96% of our existing customers said they like the sandwich, 88% said they were likely to purchase the flat sandwich again, and 37%, they visit more often because of flats.

those are really powerful numbers coming from people and this wasn’t a significant number of people that we put this in front of. so it gives us a lot of optimism as we approached not just this window, but looking out for the balance of the year and beyond with this part of our business..

Okay.

and then how you make sure in the legacy markets, how many stores does that encompass?.

Not 300, so it’s probably 90%..

Okay, thank you. .

Your next question comes from the line of Sharon Zackfia with William Blair..

Hi, good afternoon. just a few questions, I guess on the flat sandwiches line of question, when you tested, it sounds like name wide operation, so if you do get any sense to other, it was more impactful on some of the frequency of existing customer weather, it was a pretty significant drop for your customers.

and then some of margin profile, I think you said $0.20 price about the rest of the sandwiches, is it a better margin profile than the regular sandwiches of the Biggs?.

It’s not there in Biggs, that’s compared to Biggs that’s why….

Okay..

The New York and Boston are excited to get it. It’s a most entire than original product, we see it coexisted with the original product, and in our new market, I mean in the test market, we saw kind of 50-50 mix here some books are converted $0.20 actually with that mix shift.

and then asking new customers, we’re were targeting this to our folks that are not currently today heavy users, kind of rejected brand, because of the bread and thickness of the bread.

so this kind of eliminates that and we saw, we had probate of – our test market, our test market is a concept, the testing concept and an (indiscernible) we don't do additional marketing spend. So it gives us a really good idea of the product. And then we just spend a lot of time talking to customers in those shops.

So we feel very good about this product, we’re excited about it. It's probably the biggest thing we have done since chicken. And so.

Okay, and then just a question for Charlie, on the cadence on the quarter, it sounded like you thought that the underlying trend was in the 1.5% to 2% range in February and March in last year if I heard that correctly and I'm just wondering if that included in the benefit of Easter shifting away for March and the April?.

Yes, that was kind of the clean look at February and March. The quarter got better. Once we got January, I think it shocked everyone and I think people got a little bit my sense is people got a little bit more to – so February and March were more consistent.

If you strip out the weather and you strip out the Easter shift, that was, that’s what I was referring to..

Okay, and then is the corresponding Easter penalty on the second quarter 70 basis point..

So it’s 70 basis points in Q4, for Q2 I should say..

Thank you. .

Your next question comes from the line Nicole Miller Regan with Piper Jaffray..

Great, thanks this is Josh on for Nicole. So going back to the inflation outlook it seems there might be a little bit more than, what we thought initially. But just curious Charlie, this is more or less playing out like you thought if we were to go back to the last call.

And you would called up the dairy and the protein, or any other items of note or really just those two just be primary drivers of that inflationary outlook?.

As lot of people have talked about, and we have been saying sort of – inflation has kicked up as we have gone through the first quarter. So the two drivers of the inflation in really in the back half of the year are the proteins.

So a lot of news around beef and another proteins and then the dairy products, which have been surprising I guess as we gone through the year typically I think settled down as we get late into Q1 in the dairy markets. They haven't done that yet but as we sit here today we are actively looking at locking that in for the balance of the year.

And so we think our 1% to 2% is appropriate at this point, so it will be at 70% probably a little than more locked in for the year and the variables really are related to proteins and dairy..

Great, that’s helpful and then.

Taking a step back or maybe looking a little bit historically as we think about the Potbelly promise and the three different components of that that were rolled out at the end of last year has that worked in specifically I’m think about the eight minutes to the line backs in the branding and awareness around freshness and selection.

I’m curious if that had played out the way that you thought it would now that we’ve had some time digest and any sort of warnings that came out of that as you are able to interface with consumer with that messaging at a shop level?.

So we tell it’s important to get up ramp bout and so its mainly been passive right now first year we a launch each element by quarter and all three of them showed up at the end of the year and so now we worked on plans for test can we use it as business driver to really be more aggressive around that.

with introduction flat we haven’t got to that work but that is the intension to see if we can use that, we think it’s very important to have a very visible catalytic mechanism in our shops, wanted to announce the customers hear us what you should expect and if we don’t meet that we want to get from you the eight minutes for example if we don’t hit the eight minutes and customer calls on it to get a free cookie on the spot.

When we do stuff like this, we took for we have a multi year plans, first year get it out get introduce was passive and then hopefully you see it in the upcoming years where it will be much more aggressive around this problem..

That’s helpful, thank you..

Your next question comes from the line of Jonathan Komp with Baird..

Hi thank you.

Charlie just first a clarification, could you just mentioned again what the pricing and all in average check component was during the first quarter?.

Sure, so pricing was around half of percent for Q1 and then the mix component if you will was round 1.5% total, I’m sorry so the total non-traffic related impact was 1.5% pricing of which was half percent of that in Q1..

Okay got it and then are planning to take any additional price increases during the balance of the year do you think half a point is it for the year?.

We maintain consistency around our pricing approach which is re priced a cover inflation if you think that we’ve always targeted around 1%, 2% inflation for the year so that forecast if you will haven’t really change some we took a little bit of pricing in a year recover, we don’t have any specific plans at this point to take pricing..

We don’t try to double to, but if things go side ways outside of our estimates on inflation we’ll look at it but we are going to do everything on a power to stick with what we’ve done so far and not do anything this year..

And that the other point there is that really also encompasses a lot of the work that’s being done in around minimum wage. And so we know that has potential impact is not this year going forward. So we like the fact that we have the ability to take pricing down the road if necessary..

That’s helpful perspective and then may be just a broader question about holding the comps guidance for the year and maybe you are thinking there, it sounds like you are seeing an encouraging trendline on a underlying basis actually in Q1 just wanted to hear your thoughts on guidance your low single digits for the year implies you are giving the softer start in Q1 it implies I think something near 2% to 3% or higher for the balance of the year even with the Easter shift going against in Q2.

So just wanted to clarify that thinking there if that’s the range you are thinking for the balance of the year and may be how much contribution might be assumed from some of the new initiatives that you mentioned?.

That’s why we talked about the new initiative because that’s why we are challenging on, and challenges give advance where we are sticking to that, the implication is the balance - stronger than we have talked about in the past at the low single digit of one to three.

So we have to jump on that pony and get a riding, but we believe we got some really good things taking up the strategy. Without that we would not be sitting here with the same amount.

Yes, I think you know Aylwing talked about some of drivers of the growth and his comments and I think it’s really important those we expect those to pay out and in terms of top line growth I think it is also important to note if you look at, we look at our business (indiscernible) trend perspective.

We talked about that before and so as you look at 2013, as comparisons year-over-year really the comparisons moderate in the back half of the year. And so we think that even if we were in current trends ex-weather will get those levels that you discussed but it’s on us we have to do here..

Okay, got it very helpful color. Thank you..

Thank you (Operator Instructions). And there are no further questions..

So in closing, thank you for your interest, thank you for the questions. We believe in the brand and we believe what we are doing, again basically talking to some of the board and they are like disappointed we couldn't offset the impacted weather, the comment was I just didn’t know what to do when you closed down.

DC had four big waves of snow that forced them to close down, so when customers don’t come its hard to say how you over compensate for that or try to compensate for that, but this is a strong company, our future is very bring, the development stuff is really working and we have some work to do for the balance of the year but we remain committed to our stated goals.

So with that I’ll end the call and we will see you get out and buy even big or flat thank you..

Thanks..

Thank you ladies and gentlemen that does conclude the conference call for today we thank you for your participation. We ask you to please disconnect your lines..