Matthew J. Revord - Potbelly Corp. Alan Johnson - Potbelly Corp. Michael W. Coyne - Potbelly Corp..

Nicole Miller Regan - Piper Jaffray & Co. David E. Tarantino - Robert W. Baird & Co., Inc. Gregory R. Francfort - Bank of America Merrill Lynch Stephen Anderson - Maxim Group LLC.

Welcome to the Potbelly Corporation First Quarter 2018 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to Matt Revord, Chief Legal Officer. Please go ahead, sir..

Good afternoon, everyone, and welcome to our first quarter 2018 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 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 our actual results to differ materially from the forward-looking statements and other information we'll be 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 Chief Executive Officer; and Mike Coyne, our Chief Financial Officer. Alan will begin with his perspective on the first quarter performance and provide a discussion of our ongoing strategic initiatives.

Mike will then review our financial results and future outlook in more detail, before we open the call up for your questions. I'll now turn the call over to Alan..

Thanks, Matt. Good afternoon, everyone, and thank you for joining the call. Our first quarter results were in line with our expectations as we generated revenue of $103 million and adjusted earnings per share of $0.03.

Our company-operated same store sales decrease of 3.6% was negatively impacted by unfavorable weather, the New Year and Easter Holiday shift and certain discrete events last year. Excluding these impacts, we are encouraged by our results and we saw improved comp trends through the first quarter and these trends continued into the second quarter.

We are encouraged by the early progress of our traffic building initiatives, which provides us with the confidence to reiterate our guidance for the year. Mike will review our financial results and outlook for 2018 in greater detail later in the call.

But first I would like to spend a few minutes to provide you with an update on our strategic initiatives.

As I mentioned in the last earnings call, we have concluded our strategic review of the business and we have leveraged the resulting analysis and learnings to refocus our efforts to get back to basics, and to reposition the company to return to profitable growth.

Our main priority this year will be to establish the foundation to position Potbelly for sustained traffic and same store sales growth over time. Clearly, this will be a transition year for Potbelly and we recognize that it will take time to turn around the business.

However, we believe we are focused on the right strategic initiatives to substantially improve the operating performance. First, we must become a more sales-focused organization. Through initiatives such as OneMore, which aims to get our existing customers to visit one more time, to buy one more item and to spend one more dollar.

We believe there are opportunities to drive incremental sales and build traffic. We have increased our focus on suggestive selling. And in a matter of only a few months, we have increased the percentage of time our associates are suggestive selling to over 40% from less than 10% previously.

We have seen a measurable increase in the units per transaction and we are encouraged by the early traction we are seeing. During the first quarter, we tested several marketing initiatives including segmented promotions, offers and bundling as these are proven methods to keep the customers engaged.

Second, we aim to drive incremental sales through menu engineering and product innovation. We are focused on enhancing the in-shop experience through menu engineering and product innovation to provide our customers with what they want but in a simpler and more intuitive manner, while maximizing the average transaction traffic and profitability.

As part of this effort, we have hired an outside firm to help with the strategic review and analysis of our menu pricing assortment and menu design. During the first quarter, we introduced the Gyro Flat as our featured premium sandwich.

We saw solid attachment rates with this delicious sandwich which performed above our expectations and contributed to our positive mix for the quarter. We also introduced a new Lemon Cheesecake Cookie as a satisfying finish to your lunch, but can also be enjoyed as an afternoon indulgence.

And yesterday, we launched our premium Cuban sandwich, which features slow-roasted pulled pork, smoked ham, melted Swiss cheese, pickle, and Potbelly mustard. We also introduced our Kids Meal which includes a kid-sized sandwich on a ciabatta square, apple sauce and mini oatmeal choc-chip cookie, and your choice of water or milk.

The early feedback on these product initiatives has been very positive and we believe product innovation and menu engineering will continue to be an important driver of incremental sales. In addition, we are pleased to introduce Chef Ryan LaRoche as Vice President of Culinary Innovation, where he will head up product innovation and menu design.

Chef LaRoche is a Michelin-starred chef with 20 years of success in culinary production. As our Chief foodie, Chef LaRoche offers a skilled perspective that will provide tremendous help with sales and growth channels for Potbelly.

He will build on the success of recent innovations like the Turkey's Fresco, the Gyro Flat and now, Cuban, and to make Potbelly's menu even more craveable. Third, we will increase investment and focus in marketing and technology.

We have underinvested in marketing, which has inhibited our ability to maintain our share of voice and drive unaided brand awareness. We need to connect our customers with this great brand through improved storytelling and more targeted customer engagement.

And we expect to devote greater resources that will be strategically deployed to bridge this gap. We are reinforcing our commitment to testing something new and innovative in order to tell the Potbelly story in a way that connects with our passionate customers.

As an example, we have produced a 30 second ad designed specifically for programmatic TV and social media, to support the launch of our latest premium product, the Cuban sandwich.

The 30 second spot takes place in a Potbelly shop and really captures the unique Potbelly experience with a celebration of fun, music and dance, but done in a quirky way and featuring Cuba Libre, rum not included. In addition, we plan to increase our focus and investment in customer-facing technologies.

It wasn't that long ago that we were excited to break through the 400,000 member mark for our Potbelly Perks customer engagement program. Over the past few months, we have doubled that figure to reach over 800,000 members.

While we are pleased with the early customer adoption and feedback for our mobile app and our Potbelly Perks program, we recognize that we are still very much in the early innings of what is possible in these critical points of engagement and we expect to make further investments to build on the features, functions and optionality to drive greater productivity and customer convenience.

Fourth, we will continue to invest in growing our off-premise business to harness the catering and delivery potential of the brand. With a craveable product that travels well and is perfect for most occasions, we are vastly underpenetrated in our off-premise business.

And we see opportunities for growth across catering, delivery, grab-and-go and curbside pickup. We have recently hired a seasoned executive with substantial marketing and sales experience, who'll be coming onboard soon to focus exclusively on driving off-premise business.

In addition, during the first quarter, we opened up a catering kitchen in the Dallas market to support our off-premise growth. Fifth, we plan to invest strategically in new shop growth, decelerate company-owned shop growth and increase the mix of franchise growth.

Many of our markets are underpenetrated and lack scale to gain leverage and drive efficiencies. Therefore, we expect our future company-owned growth to focus on infilling underpenetrated markets as well as incremental shops in mature markets such as Chicago, where we continue to see opportunities for profitable growth.

As we have previously discussed, we have decelerated the pace of our company-owned shop growth as we focus on our traffic-building initiatives and re-evaluate the capital cost of the box, which in turn will provide a solid platform to accelerate the growth of our franchise business.

2018 will be a pivotal year for our franchise business as we invest to build the foundation to support our future growth. I am pleased to announce that Jeff Welch has joined has the Potbelly team as Senior Vice President, Franchise Development, to develop and execute our vision, strategy and tactical plan for the franchise growth.

Jeff brings to Potbelly many years of domestic and international operations and franchise and real estate experience across organizations such as Krispy Kreme, Pizza Hut, Taco Bell and KFC. And we look forward to his leadership to accelerate our franchise development and to capture the tremendous market share opportunity ahead.

Finally, we will continue to find opportunities for savings in our cost structure, along with productivity initiatives and to reinvest these savings to fund our traffic-building and investment initiatives. In addition, we expect to have an increase in cash flow from our strategic decision to decelerate the pace of our company-owned growth.

We expect to reallocate this capital, in part, to invest in technology and brand building initiatives, but also to return capital to our shareholders through our share repurchase program.

As part of our comprehensive business review, we have assessed our talent needs and are taking the opportunity to build the right team required to execute our strategy to turn around the business.

We have made great progress with the addition of talent and experienced leaders to drive our off-premise business, our franchise development and our menu innovation to the next level.

As you can see, we have undertaken a thorough review of our business strategy to analyze every aspect of our business with the ultimate goal to maximize shareholder value.

As I mentioned earlier, we have concluded this review and have incorporated much of the valuable learnings and analysis into our strategy to turnaround the business that I had outlined earlier.

As part of our strategic review, the Potbelly board formed a Strategic Review Committee and with the assistance of our financial advisors JPMorgan we explored the potential sale of the company.

After a thorough and wide ranging sales process, ultimately this effort did not result in a transaction that the Potbelly board determined to be viable or in the best interest of the company and our shareholders. We are confident that executing on our strategic plan is the best way to maximize shareholder value.

While early, we are encouraged by our progress and believe we are making significant strides in building the leadership team required to implement our strategies and affect a successful turnaround.

I am proud of the entire Potbelly team for their energy, passion and willingness to embrace change which will be essential to the successful implementation of our turnaround plan. I thank them for their commitment and effort, which already positively taking shape in our shops and yielding results.

We still have much work to do, but I am confident that our best days are ahead of us. I'm excited by the opportunity ahead including the celebration of our forthcoming milestone of opening our 500th shop. I'm optimistic that we can and we will achieve our full potential.

I will now turn it over to Mike who will go through the details of the P&L for the first quarter as well as our plan or expectations for the remainder of 2018. Mike..

Thanks, Alan, and good afternoon, everyone. As Alan mentioned I'll review the P&L and give you some of the highlights associated with our first quarter results. I will also provide a summary of our outlook for the remainder of 2018. Starting with the top line, total revenue increased 1.2% to $103 million in the first quarter.

We opened four new shops including two company-operated and two franchised. During the first quarter, our company-operated same store sales decreased by 3.6%. Breaking down same store sales, our average check were approximately 3.2% driven by a combination of price and mix.

Our shop-level margin for the first quarter was 16.4% of company-operated sales as compared to 17.8% in the prior year period. Cost of goods sold was 26.1% in the first quarter, an improvement of 30 basis points to the prior year period.

Labor was 30.9% which was an increase of about 70 basis points from the prior year, primarily driven by wage inflation and partially offset by price increases and improved productivity.

Occupancy expense was 14.4% in the first quarter, an increase of 40 basis points compared to the prior year due to sales deleverage and inflation in certain occupancy related costs including lease renewals, real estate taxes and common area maintenance.

Operating expenses were 12.2% in the first quarter, an increase of 70 basis points compared to the prior year, due largely to sales deleverage and operating expense items such as repairs, maintenance, utilities and other expenses not directly variable with sales.

Our general and administrative expenses were approximately $12.2 million in the first quarter or 11.8% of total revenue. I would note that our G&A expense in the first quarter included approximately $342,000 of CEO transition costs, $608,000 from proxy related costs and $574,000 of store closure costs.

Excluding these discrete items, our G&A expense would have been $10.7 million or a 10.4% of total revenue. Our adjusted EBITDA was $7.6 million for the quarter, which was a decrease of 17.9% from the prior year period, mostly driven from our decline in same-store sales and inflationary pressures in labor, occupancy and other operating expenses.

During the first quarter, we had an income tax benefit of $500,000. Our adjusted net income for the first quarter was $700,000 or $0.03 per diluted share compared to adjusted net income of $1.3 million or $0.05 per diluted share in the prior year period.

Our capital expenditures came in at approximately $4.9 million, our balance sheet remains very strong with a cash balance at the end of the first quarter of $28.9 million and we have zero debt.

As Alan mentioned, we have strategically decelerated the pace of our company-owned shop growth and we expect to reallocate that capital towards our share repurchase program.

As we highlighted in today's press release, the board has authorized a $65 million share repurchase program that replaces a previously approved program under which approximately $14.7 million of authorization remained. We will continue to be opportunistic with our share repurchase program to return capital and drive value for our shareholders.

Now turning to our outlook for the full year fiscal 2018, we reiterate our guidance for flat company-operated same store sales growth with negative comps in the first half of the year improving to positive comps in the second half of the year.

We continue to anticipate cost of goods sold in the range of 26% to 26.5% for 2018 and labor as a percentage of sales to trend around 30%.

For the year, we continue to 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 CEO transition costs.

Our G&A outlook does not contemplate cost related to the proxy expenses or store closure costs which may occur as we remain focused on opportunistically optimizing our existing company-owned portfolios. We expect our adjusted net income per diluted share in the range of $0.37 to $0.39.

We expect an effective tax rate in the range of 24% to 26% for 2018 excluding the impact of Accounting Standard Update 2016-09, which could have a material impact on our effective tax rate. We expect to open 10 to 12 new company-operated shops in 2018 and 12 to 14 new franchise shops all of which will be backend weighted.

Finally, we expect to spend between $23 million to $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 am confident that we are implementing the appropriate brand and traffic building initiatives and making the right strategic investments to position Potbelly for sustainable growth over the long-term.

In addition, we are making significant strides in building the leadership team required to affect a successful turnaround strategy. We will be bold and will act with urgency while striking the right balance of long-term thinking with short-term execution.

I am excited by the opportunity to fulfill our brands potential and I truly do believe that Potbelly's best days are ahead. Thank you all for your time today. We appreciate you being on the call and the support of our business. I look forward to providing you with an update on our progress on our next earnings call.

Now, we'll turn it over to the operator and open it up for questions..

Thank you. We will now begin the question-and-answer session. The first question comes from Nicole Miller of Piper Jaffray. Please go ahead..

Thank you, good afternoon. Can you talk either, in same store sales, either in terms of what the negative impact was from weather and the holiday shifts you mentioned or can you talk about current trends, are they actually positive in terms of being better or less negative? Thanks..

Yeah, I'll, I'll start in, Nicole. It's Mike.

So, yeah, what I would say is the trend during the quarter, as we talked on our last call, we were in I think third week of February when we had that last call, and that first month and a half of the year was very challenging from both a weather perspective as well as the various calendar and holiday shifts.

So, we were at – as we talked then, basically at being down about mid-single digit at that point in the quarter. And so, moving our way to the minus 3.6% for the full quarter shows that we've had improvement as the quarter went on. And so, our March was much better than was our January and February, and April looks actually a lot like March.

And I would say that March and April got into a world that I would say were flattish. Okay? So you average that out, you hit the minus 3.6%, but the trends are definitely improved and continue at a rate that we saw in March..

Thank you. And a bigger picture question.

When you talk about menu engineering and product innovation, are you targeting innovation that things have to be new? Are you targeting a certain day part to stay within the core lunch or do something else? Or maybe just taking the core items that you have and transitioning those into platforms? What is the strategy?.

Yeah. Thanks for the question, Nicole. This is Alan. So the number one strategy is to maximize both traffic and profitability. It's been a long time since we've menu engineered and redesigned our current menu. I think I shared with you the last time that we've got over 116 items at 66 unique price points. I mean that's very, very complicated.

So, all this year active ordering at Potbelly, we don't make it easy on our consumer, but we're also wanting to sort of understand do we have the right assortment, do we understand what the traffic drivers are. If we understood what the traffic drivers are, we might treat them differently than those items that build the basket.

We need a frame of reference to make intelligent pricing decisions and that includes understanding who our competitive set really is, and when they do something, what should we do. And if they're not in the right competitive set, then maybe we should just ignore what they're doing.

And then, I think critically important is, as we look to simplify and grow the average check and drive traffic, we need to consider whether we organize our menu in a particular way that encourages people to spend more and come more often.

So a very good example is, right now, if you were to look at our menu, our salads might be organized, which they are, from the highest price point to the lowest. And our sandwiches, by alphabetical order, they're not by price, they're not by calories, and 66% of the menu is dedicated to price.

The sheer square inch of the menu is dedicated to price, which would imply that price is the most important element when deciding, which is clearly not the case. So, anyway, that gives you a sense of what it is that we're trying to achieve, and maximizing both the profitability and traffic is critically important.

And then, one last aspect is, let's say, there was a category that we were under assorted that if we were to offer it, provides greater depth, then that would be something important to know and to build into the menu.

The other question that you asked around innovation, look, I'm absolutely convinced that menu innovation is critically important to driving interest and keeping our loyalists engaged.

And that's one of the reasons why we've hired a Michelin-star chef in Chef LaRoche to lead that, along with making sure that every single day part, whether it be breakfast, lunch and dinner, is assorted the right way, priced the right way, presented the right way..

That's extremely helpful. So thank you, and just the last quick question. In terms of talking to the board about the share repurchase authorization, where did you leave the discussion or conversation around leverage, taking on debt to do even more? Thank you..

Yeah. Sure. Nicole, it's Mike. So as we've talked on previous calls, we have certainly considered possible changes in our capital structure. We've talked about debt, the advantages, the costs associated with it.

As we completed our strategic review and looked at all of our kind of cash position and the resulting cash flows over the next couple of years, we could – the board authorizing a $65 million repurchase without the need to take on any debt to execute that. We felt comfortable with that at the time, right. So we sit here with nearly $30 million in cash.

We have – we do have ample access to our line of credit which has availability up to $75 million. And our cash flows from our operations more than fund our needs in operating investing, especially with our change in approach to our owned stores.

So we can do a whole lot of buying back of shares without taking on debt at this point, but we will continue to revisit that with the board as time goes on..

Thank you..

The next question comes from David Tarantino of Baird. Please go ahead..

Hi. Good afternoon. A couple of questions on the Q1 trends. I think, Alan, you mentioned some discrete items or events last year that hurt the year-over-year comparison. I don't think you called anything out specifically.

So can you talk about what that was and how big of an impact that might have been?.

Yeah. I'm going to defer to Mike..

Yeah, it's really just what I was alluding to a little bit ago there, there were changes, and I mentioned on the last call as well that as we move from the 53-week year to the 52-week year, we had some different calendar comparisons including early on with New Year's Day being in one year and not the other New Year's Day.

New Year's Day actually shifted from a Sunday to a Monday which hurts us. There was then the inauguration and the resultant marches. So those were the ones that we talked about early on. We obviously have Easter to contend with later on.

But the ones that were very impactful early on were those, and they contributed to that mid-single – being down mid-single digit in that first couple of months of the year..

Understood. Okay. I thought maybe there was something else.

And then on the commentary on the recent trends, you said you were flattish in March and April, are you making any adjustments for Easter in those numbers? I think it might have hurt March and helped April?.

Yeah. That's exactly right. And so my comments actually about flattish really work on a – I'll call it reported basis as well as an adjusted basis. So yes, every – we look at our reported numbers and then your former colleague helps me analyze that to say, okay, what really happened.

And so, yes, Easter was an obvious one to adjust for both March and April and to the extent there's any other significant weather impacts, we adjust and even doing that looking at underlying trends, we have this – we have a fairly significant improvement from the Jan, Feb period to the March, April period.

So my comment of flattish works really on a both a reported and an underlying basis..

Great. Thank you.

And then on the guidance, did I hear correctly that the G&A outlook you gave is inclusive of the CEO transition cost?.

Yes. And we had mentioned, even when we gave the range at the beginning of the year, we noted that there would be, at the time we noted there would be approximately a $1 million, little over a $1 million in CEO transition costs and yes that's embedded in that range..

And then, but the $0.37 to $0.39 on EPS, does that exclude those costs?.

No that excludes that as well..

Includes the CEO transition costs. Okay, great. That's helpful. And then I guess on the initiatives, I think, Alan, you mentioned that you hired a senior....

Hey, David, it's Mike. David, it's Mike. So on the one hand, sorry, I just want to clarify and correct. Yes, we included the CEO transition cost when we gave that range, okay, of the G&A.

But we, when you look at our adjustments to both EBITDA and – to adjusted EBITDA – to get adjusted EBITDA and to get to adjusted net income, we do back off the CEO transition costs. Sorry, I needed to clarify..

Oh, great. So the $0.37 to $0.39 excludes those costs, okay, great. Thank you.

And then, Alan, on the hiring of the senior VP of franchising, I'm just curious to know kind of how you see that playing out and when we should expect to see progress in terms of franchise openings and I know it takes a long time to sort of build a pipeline and what not and build a case for prospective franchisees.

So just wondering what we should expect to see over the next 6, 12, 24 months on that front?.

Yeah. I mean at 50,000 feet, Jeff's job is to develop that detailed execution plan to lay the foundation in 2018, so that when we get to 2019 that pipeline is nicely stocked with well-qualified franchisees and a team that can support that accelerated growth.

And it's critically important that, that execution plan considers what markets, how many shops, whether we cluster them, whether refranchising makes sense, obviously if it makes sense, we should do it, if it doesn't we shouldn't, put the right team in place.

And you'll see that in every single one of the moves that I have made, I've made sure that the executive coming in is as friendly and knowledgeable about the company run stores as they are franchise.

I don't want an organization where they can only sort of serve one master because as we – as the pendulum shifts between company and franchise and maybe at certain times back, one never knows, is that I want a flexible organization that can handle being leveraged across both of those pods of growth.

And very important in that is us articulating to the franchise community what it is that we are looking for from that franchisee. And then lastly, we're also – and we covered this openly in last earnings call is making sure that we fully understand the cost of the box and making sure that we get that just right.

So as we work on getting the fundamentals of our business working nicely, which is you know improving the comps, figuring out what works in the business, sharing best practice with our franchisees, getting the franchisees lined up to for accelerated growth in 2019, I think these things are all coming together nicely.

But I really want to give Jeff, who has done this multiple times in his career, I mean I was blown away with what he achieved for Krispy Kreme's.

When he was there, Krispy Kreme's had kind of somewhat similar challenge to what we did where the company stores had negative comps and he was charged with growing it internationally and took it from almost 0 to 650 in – 650 units in just over five years.

So I want to give him the time to develop that plan, but I think it's going to – we'll be able to each quarter we'll give you an update because this is a mission critical part of my growth strategy..

Thank you very much..

No worries. Thank you for the question..

The next question comes from Gregory Francfort of Bank of America. Please go ahead..

Hey guys.

Maybe the first question, did you give the breakdown of price mix and traffic or maybe I missed it, but could you give that again if I did?.

Yeah. No. We – I hadn't said it yet. So the – what we said was the minus 3.6% in comp was inclusive of an average check that grew 3.2%. And then within the check, the price impact is roughly a plus 2% and the mix is the difference of roughly a plus 1.2% or so..

And most of that mix was due to the sort of the LPOs with this quarter with the – that you guys have rolled out..

That's exactly right..

Okay. Got it, that makes sense. And then just in terms of the improvement that you're seeing, it sounds like the industry has gotten better in March and April. But I guess it also sounds like your improvement is probably greater than what the industry has seen.

What do you think is going on just in the environment in sort of what have you seen your business that sort of gives you the confidence that the improvement is sustainable, and sort of what do you attribute sort of the change in trend to?.

Yeah. Look, I mean this is the one occasion I'm going to actually talk about the things we're doing as opposed to all the things that are happening around us. I mean, I think you're right. The environment out there in just the last sort of six weeks, there's been less weather impact and all that good stuff.

But we deployed in about week six and seven of this year a major battery of segmented offers, quite literally over a 100 different offers where we would test it across the board.

What works, what doesn't work and when it worked, we adjusted it to see whether offering one less dollar or one more dollar or one more item or one less item made a difference, so quite literally over a 100 different segmented offers. So, I'll give you a very practical example.

Traditionally, if we ran a BOGO, we would run a BOGO and test whether the redemption period in seven days actually produced incrementality. As soon as we got a read on that, we said, okay, now let's change it to five days and then let's change it to three days, two days and even one day.

Because what's important to understand, if we got somebody in on a Monday, could we get them back on Tuesday. That gives a lot less time for someone else to hijack our customer. And we learnt a heck of a lot from that test, learn, role process.

So as week seven through to the current week 18, whatever it is, we got smarter about what worked, stopped doing what didn't and then expanded into the various different markets, the things that we're resonating.

So, the fantastic byproduct of all of this is we are in a much better position to understand when we need to react to the business that we can.

And I think we've demonstrated that we can run, move fast, and I was critical of the organization when I first joined that we were slow to act and we weren't bold and we had stopped trying to learn new things. So, I think absolutely a lot of the improvement is stuff that we did to ourselves.

And I'm pleased to say, when I do compare our performance against the industry, we are closing that gap..

And the way you were able to sort of make that marketing change or that sort of specifically tailored offer change, is that because of the mobile app or is it something else that's different from, I guess, how you carried that out beforehand?.

Yeah, so good question, because when I first joined, I was surprised that we know almost nothing about most of our customers. Maybe 5%, 6% of our customers were loyalty members. And so, we had no choice but to speak to the customer that was already in our shop, but only coming 12 times a year, when we know there's many, many more opportunities.

So, we deployed – all these offers that I mentioned, we deployed simply using the cash receipt, no capital investment, no system changes, just simply giving every customer a receipt and at the bottom of the receipt an offer tailored towards what previously worked, didn't work, or what we were trying to test.

So we have very strong evidence to support the fact that we actually – I shared with you my strategy on OneMore. We got customers to come one more time, buy one more item or spend one more dollar. So there was no technology delay or technology investment. We'd simply use the cash receipt..

No, that's really helpful. And then maybe just one last question.

Mike, just if you guys put up flat comps, any sort of help in terms of where other operating costs would be? Like, would you be able to kind of hold that from having material de-leverage kind of on a flat comp or sort of what would that shake out to?.

Yeah. No, good question. We said on the call that we lose a lot on a couple of these lines, occupancy and other. The single biggest negative impact is due to the deleverage on traffic, right, in overall top line.

So if we can improve that by many hundreds of basis points here, which is what we said implied in our guidance, that will help significantly remove that deleverage. So I don't want to state a specific number. We try not to guide specifically on that line. But the cure here as much as anything is the top line.

Will we get smarter about how we buy things within other operating? Sure, we will, right. But the biggest single thing we can do to help is to do what Alan's driving here, which is improving traffic and improving comps..

Great. Thank you, guys. I appreciate the thoughts..

Thank you, Greg..

The next question comes from Stephen Anderson of Maxim Group. Please go ahead..

It's Stephen Anderson from Maxim. A couple of questions I wanted to ask. So if I understand correctly with regard to re-franchising, Alan, Mike, is this mostly going to be driven by particular markets where franchising might work better than company-owned model? And then, I have a follow-up..

Yeah. Let me address the refranchising question.

I mean, Jeff's number one priority is to lay out the whole map and look at every single state where we have concentration, where we don't, the quality of that franchisee, how the franchisee is performing, what the appetite is to grow, what the substance behind that appetite is, whether they can live up to the contractual obligations that they have signed up for.

So, right now, it's a bit of a work in progress. But, obviously, if it makes sense for us and create shareholder value, absolutely considered..

Okay. My follow-up question is, one of your major competitors in the sandwich base announced say more than 600 restaurant closures.

And so I wanted to ask if you're seeing any positive impact from those closures with regard to any traffic improvements?.

Yes. Hey, Steven, it's Mike.

Yeah, I talked on prior calls, we do have our handful or two as I've described it before of our least profitable shops and we've been, I'll say, fortunate enough to be able to close down a couple of those even in the last couple of months, and they have substantial, they lead to substantial improvement at the shop margin line as well.

What I mentioned before just in a sense to manage expectations is, it is somewhat challenging to get out from under some of these leases, right, where a terrific credit risk and landlords aren't eager to let us out of that 10-year obligation that maybe has you know five or six or so years left on it.

So, as I mentioned before, we had hired an outside firm and still have them engaged, continue to work on our behalf, so that work continues and every one of them that we do will be an improvement to the shop profit line..

Okay. And the thing I wanted to ask though is, this major competitor closing restaurants certainly in the magnitude of the hundreds.

Are you seeing any impact from increased traffic standpoint from those closures?.

Oh, I'm sorry. I thought you were talking just about our world. I apologize. Well, I think that major competitor, if we're talking about the same one as nearly 30,000 of these around right and so I don't know exactly where the 500 are. And I think it would be very, very difficult for us to discern a pickup related to that.

So, sorry, Steve, I misunderstood your question the first time around..

Yeah. I would echo that..

Yeah. Thank you..

We have a follow up question from Gregory Francfort of Bank of America. Please go ahead..

Maybe I could just sneak one more back in. As you guys look out to 2019 and 2020, I know you've taken down the unit growth somewhat for this year. What are your – do you have any early thoughts in terms of kind of directionally if that's going to come down sort of further or if this is kind of the right level the 22 to 26 total openings.

Is that sort of the right level for where we should be thinking about kind of longer-term growth?.

Yeah, I mean, this is Alan. No, my expectation is that we will look to accelerate that growth. I mean, the reason why we're slowing down is not to slow down forever, it's to slow down and speed up so that we can be much more thoughtful and strategic about that growth and have that discipline that is critical as we step on that accelerator..

Okay, great. That's helpful. Thank you..

Yeah. Thank you..

Yeah. So listen, I think we're at the end of our questions. So I just like to sort of make a couple of points. One, I'm encouraged by the trends.

I'm glad that most of the questioning was around that because I know looking at my team that they're working desperately hard to stay very focused and be very strategic about addressing our same store sales comps.

I'm really excited by the fact that we're shifting gears from talking about the strategy to executing the strategy and that's much more exciting, and we get to taste the sausage shortly.

Our priorities is getting the right team in place and I made certain commitments on my very first call that if we were a food company, we should have a chef, we've got a chef. If we're thinking franchise is important, we've got a senior executive to lead that. I said, we're going to lean in on off-premise, we've got an executive to lead that.

So I think we're getting the right team around us to execute the strategy. And lastly, it's a journey and I want to remind everybody as much as we're pushing hard and being bold and moving fast, it is a turnaround and this is a transition year, but steady progress that results in both predictable and results that the team can be proud of.

So I just want to thank everybody for their interest. And we look forward to talking to you again on our next earnings call..

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day..