Matthew Revord - Senior VP, Chief Legal Officer, General Counsel & Secretary Alan Johnson - President, CEO Michael Coyne - CFO.

Nicole Miller - Piper Jaffray Sharon Zackfia - William Blair Karen Holthouse - Goldman Sachs Mary McNellis - Robert W. Baird Gregory Francfort - Bank of America Stephen Anderson - Maxim Group.

Good morning, everyone, and welcome to Potbelly Corporation's Fourth Quarter Fiscal 2017 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. I would now turn the call over to Mr. Matt Revord, Potbelly's Chief Legal Officer. Please go ahead..

Good morning, everyone, and welcome to our fourth quarter earnings call. Before we get started, I'd like to 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 2018 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, we're giving today can be found in our most recent annual report on 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.

Our presenters today are Alan Johnson, our new Chief Executive Officer; and Mike Coyne, our Chief Financial Officer. Alan will begin by sharing his thoughts on his early days at Potbelly. Mike will then provide an update on our business and financial results for the fourth quarter and full year as well as provide our outlook for 2018.

After our prepared remarks, we'll open up the call for your questions. Now it's my pleasure to introduce you, Alan Johnson, Potbelly's Chief Executive Officer..

Thanks, Matt. Good morning, everybody, and thank you for joining the call. It's a real privilege to join the Potbelly team, as Chief Executive Officer. As you know, the objective of this call is to discuss our fourth quarter and full year 2017 results and to provide our outlook for 2018.

But before we jump into that, I would like to spend a few minutes sharing what attracted me to Potbelly. Along with my initial thoughts on what I view to be our opportunities to return the brand to profitable growth. I was attracted to the opportunity to lead the company, first and foremost, because of my experience, as a Potbelly customer.

This is a powerful brand with great food, with millions of loyal and passionate fans, who love our product and love having us, as part of the everyday lives. The culture at Potbelly, expressed in 3 words is passionate, authentic and supportive. A strong foundation to build on, as we embark on implementing our turnaround plan.

Our culture is nurtured at every level of the organization and reflected in the caliber of our associates and our differentiated customer experience. We have a group of dedicated, hard-working associates and franchise partners, who are committed to executing this turnaround. In short, we have a strong foundation to build on.

Since I joined Potbelly, I spent much of my time talking with our associates, franchisees, customers, partners and stakeholders to get their view of Potbelly.

I'm often asked, what have you seen so far, and what do you think you will change? As a newcomer to the company, I've had the benefit of looking at our business with a fresh set of eyes to challenge existing assumptions, supported by a mandate from the Board that they ought to be no sacred cows.

Let me share with you some high-level observations of what I'm seeing so far. To be very clear, 2018 will be a transition year for Potbelly. And there is significant work to be done to turn around the business. Our key focus will be to reverse our traffic trends.

We have had 9 consecutive quarters of negative traffic, driven by a myriad of factors both internal and external. While we must adapt to macro headwinds, I believe there are significant opportunities, well within our control to substantially and significantly improve our performance. Let me be a little more specific and share a few examples.

First, we need to be strategic with our new shop growth. As many of our markets are underpenetrated and lack scale to gain leverage and drive efficiencies. Second, we have underinvested in marketing, which has inhibited our ability to maintain our share of voice and drive unaided brand awareness.

We are behind in customer-facing technology, and we are playing catch-up on targeted customer engagement and loyalty. While we have made significant strides with our mobile app and Potbelly Perks, we have barely scratched the surface of what is possible.

The good news is, the recent investments in this area have opened up new ways to engage with both our existing and future new customers, making Potbelly much more convenient and relevant for those planned and unplanned locations when you have to have and get your craveable fix that only Potbelly can satisfy.

Third, from a brand built around a craveable product that is portable and travels well, we are vastly underpenetrated in our backline business. We need to own catering and delivery in our category, and our performance reflects the limited resources, investments and commitments that we have made to date.

Fourth, the same could be said with our franchising business. We need to invest more, coupled with our initiatives to drive traffic and re-examine the capital cost of the box. This will provide a solid platform for accelerating the growth of our franchise business. Finally, we need to continue to find opportunities for savings in our cost structure.

Along with productivity initiatives and to reinvest these to fund our traffic building and investment initiatives. Our challenge is not that we have previously tried a lot of things that did not work, but rather that we were too conservative and too risk-averse to adapt the pace required to capitalize on the opportunities in front of us.

In my first two months, we have made significant progress on this front, made possible because of our support of culture that is hungry for change. As I had mentioned, our primary focus in 2018 is to drive positive traffic to our shops over time. To get there, we need to challenge ourselves to innovate, move quickly and execute flawlessly.

We must act with urgency and be willing to take thoughtful risks. Finally, we need to get back to executing the basics well and holding ourselves accountable for our daily execution. We recognized that our turnaround will take time.

But we are making meaningful progress towards identifying our key traffic-building initiatives and to drive this effort, with the right balance of long-term thinking with short-term execution to harvest the considerable low-hanging fruit. Let me share with you a couple of specific examples.

We need to institutionalize the power of one more, which essentially is, how do we get our existing customers to visit a one more time to buy one more item and to spend one more $1. This is a perfect example of something that we can implement today that can affect tomorrow's performance.

This will have a profound impact on the business and provide a clear path to positive comps.

We have other opportunities to drive sales through mainly engineering and simplification to give every customer what they want, but in a simple and intuitive manner, to enhance the in-shop experience, but also, maximize the average transaction traffic and profitability. We also need to focus on product innovation.

We saw the positive mix benefits of avocado, Craft-Your-Own Mac & Cheese and our premium Turkey Club in 2017. We must continue to use our menu as a platform for innovation and growth. We should also explore segmented promotions, offers and bundling as these are proven methods to keep customers engaged.

We also need to enhance our value proposition and develop a framework to make intelligent pricing decisions to maximize both traffic and profits. In addition, we need to invest in technology and marketing plus harness the catering and delivery potential of the brand.

Finally, we also need to invest the appropriate resources to accelerate and support our franchise business. The way I see it, our biggest opportunity is to improve our customer experience through continued innovation, convenience and relevance. And we need to execute with a greater sense of urgency and a bias for action.

There is a significant amount of work to be done, but what is most encouraging is that despite our challenges, we have a strong foundation with a complementary culture to build on, providing a support to return to sustainable and profitable growth. My initial experience at Potbelly has confirmed to me that our best days are ahead of us.

It is still very early days for me at Potbelly, and I'm still learning and understanding what the key challenges and opportunities are. Our previously announced strategic review is ongoing and aligned with our relentless focus on driving positive traffic to improve profitability and returns, with the ultimate objective to maximize shareholder value.

My assessment of the business and the strategic review will conclude over the coming weeks. I look forward to providing you with an update on our next earnings call.

We have time later in the call to address any questions you have around these introductory comments, but now let me turn over to Mike, who will go through the details of the P&L in the fourth quarter and full year as well as our plan or expectations for 2018.

Mike?.

Thanks, Alan, and good morning, everyone. As Alan mentioned, I will briefly review the P&L and give you some of the highlights associated with our fourth quarter and full year results. I will then provide a summary of our outlook for 2018. Starting with the top line. Total revenue increased 9.6% to $112 million in the fourth quarter.

We opened 15 new shops, including 12 new company-operated and 3 franchise. During the fourth quarter, our company-operated same-store sales decreased 2.4%. Breaking down same-store sales, our average check grew approximately 3.8%, driven by a combination of price and mix.

For the full year, total revenue increased by 5.2% to $428 million, driven by our new unit growth as same-store sales decreased by 3.8%. We opened 50 new shops, including 34 new company-operated and 16 franchised. Our shop level margin for the fourth quarter was 17.9% of company-operated sales, as compared to 19.5% in the prior year period.

Shop level margin for the full year was 18.2%, as compared to 19.7% in the prior year period. Cost of goods sold, as a percent of company-operated sales was 26.7% in the fourth quarter, an improvement of 60 basis points to the prior year period, driven by pricing and modest commodity inflation.

For the year, cost of goods sold was also 26.7%, an improvement of 70 basis points to the prior year and at the low end of our prior guidance. For the quarter, labor was 29.7%, which was an increase of about 70 basis points from the prior year.

For the full year, labor was also 29.7%, which was an increase of 60 basis points compared to last year and favorable to prior guidance. Increases were primarily driven by wage inflation and partially offset by price increases and improved productivity.

Occupancy expense was 14.2% in the fourth quarter, an increase of 100 basis points, as compared to the prior year period, due to sales deleverage and inflation in certain occupancy-related costs, including lease renewals, real estate taxes and common area maintenance.

For the year, occupancy expense was 13.8% of sales, which was an increase of 80 basis points compared to prior year. Operating expenses were 11.5% in the fourth quarter, an increase of 60 basis points compared to the prior year.

For the full year, operating expenses were 11.6%, an increase of 80 basis points compared to the prior year period, due largely, due to sales deleverage in operating expense items, such as repairs, maintenance, utilities and other expenses not directly variable with sales.

Our general and administrative expenses were approximately $11.2 million in the fourth quarter or 10% of total revenue, which is an increase of 60 basis points, as compared to the prior year period.

For the year, our G&A expenses were $44.6 million or 10.4% of total revenue, an increase of 50 basis points compared to the prior year, driven primarily by our CEO transition cost. Excluding these costs, our full year G&A was $41.9 million at the midpoint of our previously guided range.

Our adjusted EBITDA was $11.1 million for the quarter, which was a decrease of 7.1% from the prior year period. For the year, adjusted EBITDA was $41.7 million, which was a decrease of 5.6% from the prior year period, mostly driven from our decline in same-store sales as well as labor and occupancy inflation.

During the fourth quarter, we had income tax expense of $4.4 million, which resulted in an income tax expense of $4.6 million for the full year.

During the fourth quarter, we recorded an adjustment of $5.7 million related to the write-down of our deferred income tax assets and liabilities, as a result of the Tax Cuts and Jobs Act of 2017 and the previously discussed impact of accounting standard, ASU 2016-09.

Our adjusted net income for the fourth quarter was $2.2 million or $0.08 per diluted share, as compared to adjusted net income of $3.8 million or $0.15 per diluted share in the prior year period.

For the full year, our adjusted net income was $8 million or $0.31 per diluted share, as compared to adjusted net income of $11.9 million or $0.45 per diluted share in the prior year period. Regarding our share repurchase program.

In the fourth quarter, we repurchased approximately 330,000 shares of Potbelly common stock in the open market for a total of approximately $4.1 million. During fiscal year '17, we repurchased 1.1 million shares for approximately $12.9 million.

At the end of the fourth quarter, we had $14.8 million available from our board-authorized program for repurchases, which we'll continue as we move forward. Our capital expenditures came in at approximately $34.7 million for the full year, which was within our lower guidance for the year.

Our balance sheet remains very strong, with a cash balance at the end of the fourth quarter of $25.5 million and we have 0 debt. Turning now to our outlook for the full year fiscal 2018.

As Alan mentioned, it is our top priority in 2018 to make investments and implement the strategic initiatives to make Potbelly well positioned to drive sustainable positive traffic trends over time. However, we recognized, it will take time to affect this turnaround from negative comps to positive comps.

Consequently, we expect to deliver flat company-operated same-store sales growth in 2018. And while we don't provide detailed guidance in the quarters, you should expect improving comps as the year progresses, with negative comps in the first half of the year, improvement of positive comp in the second half of the year.

We also expect relatively modest levels of goods inflation accelerating slightly, as we progress through the year. We anticipate cost of goods sold in the range of 26% to 26.5% for 2018 and our food cost basket is approximately 60% locked. We expect labor as a percent of sales to trend around 30%.

Our guidance assumes continued wage pressures from minimum wage increases implemented last year as well as expected minimum wage increases and inflationary pressures this year, in part offset by the price that we have taken. We will also continue to manage our labor expense through our ongoing efforts to improve our labor productivity.

For the year, we expect our G&A expense to be in the range of $46.5 million to $47.5 million, which includes increased investments in marketing and technology as well as approximately $1 million of remaining CEO transition costs.

Given the slowing pace of our company-owned unit growth and anticipated shop closures, as we continue to optimize our portfolio, coupled with inflationary pressures and our ongoing strategic growth investments to drive traffic, we expect adjusted net income per diluted share in the range of $0.37 to $0.39 in 2018.

This range includes a positive impact from the new Tax Act of approximately $0.06.

The Tax Act, which reduced the federal corporate income tax rate from 35% to 21%, resulted in an effective tax rate in the range of 24% to 26% for next year, excluding the impact of accounting standards update 2016-09, which could have a material impact on our effective tax rate.

As we stated previously, we are slowing the pace of our company-owned unit growth, and we expect to open 10 to 12 new company-operated shops in 2018, which will be backend weighted. We also expect to open 12 to 14 new franchise shops.

In addition, we remain focused on optimizing our existing company-owned portfolio and as such, we will continue to explore opportunities to exit less profitable shops. Finally, we expect to spend between $23 million and $25 million in CapEx in 2018. So with that, I'll turn it back over to Alan for summary remarks.

Alan?.

Thanks, Mike. In closing, I'm really very excited about the opportunity ahead. There's a strong foundation in place at Potbelly, and I believe we will make the right investments and implement the appropriate strategic initiatives to realize our full potential.

To be very clear, 2018 will be a transition year for Potbelly, as there is significant work to be done as we implement our turnaround plan. Our top priority is to drive positive traffic. And we will be bold and act with urgency while striking the right balance of long-term thinking with short-term execution.

As I had mentioned earlier, my current focus is to listen and learn and to evaluate our strategy with a fresh set of eyes and to execute our traffic-driving initiatives. I look forward to sharing with you more detailed perspective on our ongoing strategy on our next earnings call.

In the meantime, it would be remiss of me, not to thank the entire Potbelly team for their warm welcome and willingness to embrace change. Thank you all for your time today. We appreciate you being on the call and the support of our business. Now, I will turn it over to the operator and open for questions..

Thank you. [Operator Instructions] Our first question is coming from Nicole Miller of Piper Jaffray. Please go ahead..

Thank you. Good morning. Appreciate all the color and welcome and thanks for the update. A couple of things, I'm not sure that I heard on the prepared comments.

How do you feel about this as a company and franchise model going forward? And what's the appropriate balance? Meaning would you ultimately grow franchise stores more quickly? And would you also reconsider refranchising the company store base?.

Nicole, this is Alan. Thank you very much for the question. And -- yes, let me address that. I think certainly, in the last earnings call, Mike confirmed that we out there are looking for senior executive to head up the franchise department. We're well underway there, making good progress.

And it will be that person who will develop the strategy and the full execution plan. I've been, almost, exclusively devoting my time to figuring out how to drive traffic As far as which markets do we want to refranchise? We're really, at the stage, we're not looking to get into any specifics until that senior executive is in play.

For sure, 2018 will be a year for franchise to lay the foundation and '19 be the sort of the year for accelerated growth probably around the back end of 2019..

Thank you. And you've also walked into more or less, the pristine balance sheet situation.

Do you imagine leverage coming under the balance sheet anytime soon? And would that be for investments or potentially, share repurchase and/or dividend?.

Nicole, its Mike. I'll start. First, I would note that with the substantial reduction in our capital expenditures now, coupled with the benefits, the cash tax benefit from the new Tax Act, we're going to have substantially more excess cash flows available to us.

And I referenced, certainly, on the last call related to the reduced CapEx that the substantial majority of that will be used to repurchase shares. So that's what we do there. As for debt, still evaluating, kind of, the when and if of that. Certainly, there is benefits of introducing some debt into a capital structure.

But we're not quite there yet in terms of deciding when we might do that. I would anticipate, if we were to do that, that likewise, would go to share repurchases. At least, in the near term, there wouldn't be a capital investment need for those dollars..

That context helps. Thank you. Last question, Alan. There's a lot of great existing in fresh ideas about turning the comp. Could you help us understand the prioritization.

What are the 1, 2 or 3 things that you're focused on first, or most and how they work in combination? And what kind of momentum or performance will they draw? Essentially, what you want us to be looking for, so we can also stay focused on the comp turnaround?.

Yes. Absolutely. As I've mentioned, this is our #1 priority. And so if we get 7,000 people focused on one thing, I'm pretty sure that we're going to get that move in the right direction.

But I actually did develop -- because you're right, there is a myriad of initiatives that we could implement, but I put together a bit of a filter, so that we make sure that we focus on the ones that will have greatest impact. First of all, I think, it's important to lean in on our strengths, lunch and sandwiches are a good example.

Secondly, look for things that have broad appeal. The broader the appeal, the biggest impact that they will have. Very good example of that would be the power of one more. If we can affect every single transaction, whether they spend a little bit more, they buy a little bit more or they come more often that would be very important.

The third is to take a very customer-centric point of view. If the customer wants it, values it and will reward us for it, we ought to do it. The next thing that I also look for is what are the things that we are already doing, but we just need to do them with greater commitment, so catering and delivery.

I mean, there is enough tailwind behind those 2 categories, but we really haven't provided the right investment, not only from a personal point of view, but also the complementary tools to make that sort of part of our differentiation for the brand.

And then to be quite honest, I've been quite surgical in looking for things that we can do today that can affect tomorrow. And probably the best example of that is to implement one more, you don't need system changes, you need to hire people, you don't need to spend capital, you just need to recommend avocado.

And so, I'm conscious of the fact that we need a long-term vision, but we need to be short term in our execution. And then simple, but nonetheless, I think, impactful things like menu innovation, making the ordering process more simple. We've played catch up on the technology.

You're going to see certain feature functionality added to the both the app and website that will make catering and delivery almost seamless. And yes, that's the filter that I applied..

Thank you. Appreciate the color..

Pleasure..

Thank you. Our next question is coming from Sharon Zackfia of William Blair. Please go ahead..

Hi, good morning. I guess, within the context of one more, could you talk about how you're incentivizing -- about the unit levels to drive those same-store sales? Is there any change there? And then, secondarily, on the marketing side, what you mentioned, I think, Potbelly is relatively inefficient in marketing in most regions outside of Chicago.

So as you talk about ramping up that, or being under allocated appropriately.

How do you go about that given the scattered program?.

Yes. Thank you for the question. Let me deal with one more first. And we'll just start is, when you look at the order process inside the shops, one of the things that I noticed, pretty much during my due diligence and I've confirmed it since, is that on very few occasions do our associates actually recommend an additional item.

Whether that be chips, whether that be a drink, whether that be a cookie. So we put in place certain methods to make sure that we inspect what we expect. So that's revamping how we collect that daughter, what our district managers check, and we are going through our incentive plan, making sure that one, we speak a common language.

So we've made sure that everybody understands and get access to the basic metrics around units per transaction. How do you drive that. What the average transaction is. What their traffic is. We've also embarked on retraining some of the folks behind the counter, so that they make thoughtful recommendations at the right time.

So that's critically important. We're going back and making sure that our reward system, rewards people for doing the right thing. So that is a change. And to be quite honest, we're an organization that has not been used to using the word, selling. And it surprised me. It's probably the biggest surprise that I found.

And what is terrific is that I've already seen traction in the 2 months that I've been here on the percentage of occasions, when our associates do suggest to sell. So I think that was part one of your question. And there was a second part which I missed part of it, regarding marketing.

Could you just repeat that part, please?.

Yes. I mean, it really relates partly to the portfolio and how spread out it is or scattered. So from a marketing perspective, you're pretty inefficient, given how scattered the store base is, particularly, outside of Chicago. So I'm just wondering, as you step up the marketing expenses, kind of how you're attacking that..

Yes. There's a combination of things that we're doing. Unfortunately, the vast majority of our customers, we don't know who's in the shop. And so we need to change that. So we're very much focused on making sure that we incentivize the customers to use the app.

So if we can convert that from currently, it's in the low double digits of the customers that we know who you are, where you live, what you buy. And so there are certain things that we're going to test to see if we can accelerate that. At this point, we have no choice but to market to the consumer, who is already in the shop.

But there's very good news here because the last time I checked, lunch happens 365 days a year. And if you look at the number of visits that the average customer is coming in a year, it is vastly below 365 days a year. So plenty of room for that one more visit is very good example.

We are typically, as an organization, we must be one of the few fast casual concepts that really don't offer offers and bundles and coupons and down specs. Now, yes, I don't want that to be the only way that we can attract new customers or get them to buy more items. But to have almost no activity, I think, that is a miss.

So we're actually in the process of testing a number of offers and bundles, something as simple as by one sandwich and get a second one free on your next visit. We haven't done a lot of that. So at this stage, I think, it has to be quite local. And you're right, we cannot afford to have a national radio campaign in and every 1 of the 34 states.

But a different approach for those markets, where we do have scale like the Midwest, like Washington, where we can afford to use media. And then, lastly, our social marketing and the customer-facing marketing, we're going to get a lot more innovative there.

Right now, we really don't do anything that drives the metric that we're trying to change, which is traffic. So that's going to be big focus for us..

Thank you. Looking forward to the year, as next week..

Our next question is coming from Karen Holthouse of Goldman Sachs. Please go ahead..

Hi. Just one quick housekeeping question to start.

Did you give price traffic and mix in prepared remarks? And apologies if you did, and I missed it?.

Yes. So when we set for the quarter the comp down to 4, we said the check was plus 3.8% and that check makeup is price of 2.8 and mix of a point..

On the price effect, I was just thinking about your base today is a little bit higher than what we're hearing from some other folks.

And within that, I guess, on -- you obviously work around the brand, you didn't really -- is there anything you're seeing around your value or quality that would suggest you need an investment in either of those areas?.

Karen, you broke up at the beginning of that.

Could you just please repeat that for me?.

Yes.

How are you thinking about prices you had through the balance of the year? And then within sort of the broader, what you need to do to drive traffic? You mentioned you have areas of investment, but you're investing in price, you're investing in quality, something that's also on your radar?.

Karen, this is Alan. Thanks for the question. Yes, this is an area, where I would like to bring a little bit more science to the art of pricing. So we're busy talking to a group of consultants, who specialize in helping companies develop the strategic pricing framework.

So that we have something that clearly articulates our value proposition and helps us make intelligent decisions, when it comes to pricing. That, on one level maximizes traffic and profitability, but also helps us understand the role that different products play on the menu.

So a very good example is in the grocery business, they fully understand what their traffic drivers are, the milk, the eggs, the bananas and the bread. In our business, we need to really understand what those traffic drivers are and then treat those differently to maybe the items that are simply basket builders.

So we're getting very close to kick off that exercise. And then there's -- on the science side, there are some basic techniques that are -- that work pretty much everywhere else that we need to adopt.

How much do we take? How often do we take it? How do we group things on the menu? Do we group them alphabetically? Do we group them by price? And if you have a look at our menu board, I'm pretty certain that if you're a first-time shopper, it's daunting. I mean, there are 115 items on the menu at 66 individual price points.

That's as complicated as I've seen anywhere. So as I say, bringing that alternate science together and that ticks off very, very shortly..

And then one final one. Two areas, you did talk about as potential areas that have been underinvested in our marketing and technology.

Thinking about the outlook for the year, does it already bake in or give some cushion for incremental spending in those areas? Or is that something that could change, as we get to, sort of, the broader update with next quarter's call?.

I'll start by saying the guidance given, in particular, in G&A and to some degree the cost of goods is impacted by some of the things that we plan to do, already factors in our incremental spend.

I think, as Alan continues laying out his framework and building out the initiatives, we will look to take advantage of what also Alan said, which was finding opportunities, find savings in our structure, so we can allocate more dollars to marketing and technology initiatives..

Yes. Absolutely. I think we've been very thoughtful in this area, as we've sort of embarked on looking at everything. There is -- as I mentioned in the opening remarks, there are no sacred cows. And I don't see ever the day, where we're not going to look for opportunities to work smarter and to convert costs into sales-generating funds.

So we already made some progress in that area. And we're going to use those to fund the initiatives that we've laid out there.

But as I say, also, there are quite a few opportunities to take technology and take labor out of the business model, so simple things as much as how we hire people, automate that process, converting some of the manual paperwork that the stores have to do manually and automate that.

Good examples of the way we can repurpose G&A dollars to sales-generating dollars..

Great. Thank you..

Thank you. Our next question is coming from Mary McNellis of Robert W. Baird. Please go ahead..

Good morning. Thanks for taking the question. First, I was just wondering, if you could talk about how your same-store sales trend have started the year, so they can put your flat comps guidance for the year into context..

Sure. Happy to do that, Mary. And what I would say is, just to repeat, what we said on the call is, as we leave the year, we were at pretty soft sales and traffic trends to get ourselves back to flat. That was a prudent way to think about this year.

What we've seen in the first part of this year, as other companies have noted and I think, generally, industry benchmarks have reflected, the early '18 trends are not as strong as fourth quarter trends. I will quickly add to that though that we had actually planned for more negative trends.

And for us, a bit more in the down mid-single-digit range, but that's, as I said, as expected, as planned and is incorporated in the guidance that we've already given. But let me give you a couple of reasons for that. One, there is a significant impact from the calendar shift.

And we can talk about this as much as you like, but you see that moving from the 53-week year to the 52-week-year and line up the calendars has an impact in these early period. Also, there's a holiday shift, again, using as an example, New Year's Day.

We have a New Year's Day in this year comparing against a first week of '17 that has New Year's Day in it. Then to compound that New Year's Day move from a Sunday to a Monday, which is significant to us. And Sundays are fairly soft and Mondays are not.

And we also planned reflecting the fact that, last January had big events like inauguration and marches in places where we have many, many shops and this year did not, so much of that was planned for. What wasn't planned for was that we had substantially worse weather this year than last.

So last year, January and February very good weather months for us, and we noted that on the call last year. So we're even-handed in this, but there are couple of weeks within this first, kind of 6 or 7 weeks that were very challenging for us, particularly bad in markets were we are fairly concentrated.

I actually think that you guys, in particular, noted that in some of your analysis. Unfortunately, we made it to the top of your list and the way that we wouldn't want to in terms of your estimating, folks that were impacted most based on kind of regional impacts.

So I'd say that's the part that we didn't plan for, but that said, on a year-to-date basis so far, we're roughly on the plan that we set out, and it's absolutely incorporated into the guidance that we gave..

Okay. And maybe just a few quick other ones.

Are there any key talent additions that you guys thinking you need to make trough this year to execute the turnaround possibly in technology or any other areas?.

Yes. And one we'd mentioned before, which is hire a senior executive to head up the franchising business, so underway there. We're making investments in technology and adding a couple of heads there. Another area of investment is in marketing. We're adding a couple of folks there that will focus on driving the traffic.

But mostly, customer-facing initiatives, and at this stage, as we rollout our strategy, I'm sure that we're going to identify further opportunities to repurpose certain headcount. And an area, where we also are way underinvested using the catering area.

So individually, they're not huge investments, but I think, when you add them all up and you realize that they're all focused on driving traffic then they are more substantial when you kind of look at it through that prism..

Thank you for that perspective.

And then just lastly, on the plan to increase the marketing spend, could you just talk specifically about what the magnitude of that increase can look like relative to what you've done in the past?.

Yes. You need about $1 million I think increase on 2017. And....

Okay. Thank you very much….

And there's -- in addition to that there is dollars in cost of goods that weren't big as when we do some of the promotional activity like the BOGOs, et cetera, that has an impact on cost of goods. Obviously, we've got a very tight and terrific cost of goods as a percentage of sales. So it already has absorbed the additional spend will do there..

Got it. Thanks, Mike..

Thank you. Our next question is coming from Gregory Francfort of Bank of America. Please go ahead. .

I have a couple. Just the first one.

Hello, do you hear me?.

We can now. Yes..

Sorry. I was -- I think, I presume my headset wasn't working. Can -- just I had a couple of questions. The first is, the margins on the mature stores versus the sort of new stores. What is the current, like if I try to break down the current 18% restaurant margins into stores that are open more than maybe 2 years versus stores that are newer.

What's that kind of dynamic or break down?.

Well, maybe I'd just tell you qualitatively and directionally be the more seasoned shops have margins that are 20%-plus. And the newer shops, as a general rule, I think, we talked about this before. New shops will start off in single-digit margins, right? And as they work their way up into that first year, they get into the double digits.

And then it really depends facts and circumstances on markets and individual shops as to know that where do they peak out. Is it -- some of them, unfortunately, peak out at that level and some can get themselves into well 20%..

So I guess, Mike, where I'm going with it is, if you guys were to slow unit growth down to basically 0, would we expect restaurant level margins to kind of move up into the roughly 20% range? And then, the other question I have sort of tied to that is.

What will your CapEx levels be, do you think at sort of 0% unit growth versus kind of current growth rates?.

Sure. So the first part of what you said, I think, that you're right, again, directionally, again, dependent on individual shops. I've mentioned before that we need to optimize our portfolio, which means there are shops that we just need to get rid of, close down.

We did one actually, a couple of weeks back, a shop that was losing a substantial 6-figure amount. So we will do that. And then you're right, what you get certainly, in the near term by opening up less new shops, is a benefit to the shop-margin percent. You don't get that drag that you're referring too for sure.

And then on the CapEx side, as you saw that in 2017, we have CapEx of $35 million. We gave a range here that at the lower end is $23 million. And that incorporates the roughly doesn't, 10, 12 shops we're talking about. So the easy math is to say, if you did 10 less shops at $600,000 that's another $6 million..

Understood. Got it. And maybe you mentioned closing a couple of the underperforming stores.

How many negative cash flow units do you have now? And how many of those, do you expect you can turnaround and get back to positive cash flow versus ones that may have some challenges for the foreseeable future?.

Yes. I think, I'd mentioned on the last call, where we're taking this in pieces and that we hired an outside firm to help us with this. And really, we're focused on the first kind of 10, 12 of our worst-performing shops. And then we'll see what we want to do next.

And actually is, while we're focused on, on those shops, it's in a very focused way is because it's a lot of hard work, right? Because landlords aren't willing -- with a credit risk like ours, aren't looking to let us out of what's remaining on a 10-year lease, right? So it's just going to take some time, but that's our initial focus is on those first couple of handfuls..

Understood. And then Mike, just on the revenue recognition changes on the accounting side that are coming next year.

Any sense for rough dollar, either top line or bottom line impact from those?.

Yes. No, thanks for asking. Obviously, in the bulk of our business, we don't have much of an impact from revenue recognition. The accounts haven't figured a way to make. Selling a sandwich for cash or on a credit card is complicated. But -- and my controller's in the room, so he likes that jab.

But we do have, franchise fees, of course, and we have get product revenue, and so both of those are impacted. And we had a bigger franchise business, it would been more of an impact.

I think you should think about the -- if you had 2018 on kind of the old accounting rules rather than new, it's maybe $400,000 or $500,000 of impact that you bring that through to the bottom line. It's probably $0.01 or so or a little bit more of impact in 2018. So in the guidance that we've given you, the range of the $0.37 to $0.39.

That absorbs the fact that we're down roughly $0.01 because of the new franchise -- I'm sorry, revenue recognition standards..

Understood. And maybe I'll sneak one last one in. I think a lot of people are going to see the new tax changes show up in their bank accounts, basically with the next pay cycle or even this pay cycle.

Are you factoring that into how you're thinking about staffing levels kind of on the first of the month in March? And is that sort of factoring into your expected recovery in sales, as we move throughout the year? How are you factoring that into how you approach the business?.

I'm trying to make sure I understand what specifically you're asking.

Can you just repeat that for me?.

Just like in terms of withholding taxes on pay checks, I think, are changing basically now, and so people will start to see the impact on their banking -- on their, basically, bank account in their payments now.

And so are you changing sort of how you're approaching staffing levels, going forward?.

Yes. I would say that we haven't really thought through how to -- what our changes in staffing levels will be. The reason I ask for the clarification is, so much going out of the Tax Act, I don't know if you meant it from the corporate perspective, the employee perspective or the customer perspective. But to your specific question.

No, there's -- we've not started realigning anything heavily with our staffing levels..

Understood. Thank you..

[Operator Instructions] Our next question is coming from Stephen Anderson of Maxim Group. Please go ahead..

Yes, good morning. I just have two questions. First of all, noticing what in the last few conference calls, you've talked about the Potbelly customer, maybe the lower end of that customer being swayed more towards some of the more aggressive offers coming from the quick service part of the industry.

And I just want to ask if there may be some part of your customer base that you might not want to pursue, maybe stick toward the higher-spending customer? And then I have a follow-up..

Stephen, this is Alan. Thank you for the question. No. At this stage, we'll take money from anybody. I think we're a very affordable option for breakfast, lunch and dinner. I mean, the average sandwich is at around $5.50. So as we leverage our insights group, certainly learning more and more about the customer.

And as those learning’s filter through into our strategy, I think, you will start to see us, particularly, linking your question to like value-proposition work is -- we're going to experiment with a couple of things to see, if we change, how we group things may be on the menu, does that produce a different result? So much to learn, and over the course of the next 6 to 12 months, I think, you'll see that in many of our stores.

The great thing about our circuit is that with nearly 500 shops, we can test things in sort of small groups and apply the sort of technique of test, learn, adjust and then roll..

Okay. Just another question looking at the tax reform. By my model it looks like you're going to realize the whole $0.06 of the change going from a sort of base line to mid-30s down to about 24%, 25%.

Lot of your peers are talking about reinvesting most of the proceeds into -- back into the business, where you're paying more employees or would it be other internal initiatives, but would it be safe to say that you're going to realize more than what we're seeing at the peers?.

Yes. What I would say is your math is right. When you take the effective -- the blended effective tax rate from '17 and '18 and accounts to $0.06 and that $0.06 is contemplated in the range of $0.37 to $0.39.

I think the incremental investments we're making versus where we found savings gets a bit fungible, right? So Alan already mentioned that we're going to be spending more in marketing and more in technology, and that's in part because we're finding savings and other elements of our cost structure. So - but I think your basic premise is right.

The way you've calculated it, the $0.06 is exactly what you get when you get the lower effective tax rate..

Thank you..

[Operator Instructions] At this time, I would like to turn the call over to Mr. Johnson for any closing comments..

Yes. Thank you. I just like to thank everybody on this call for their interest in our business. And that concludes today's call. And we look forward to giving you an update on our next earnings call. Thank you very much..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day..