Matt Revord - Chief Legal Officer Alan Johnson - Chief Executive Officer.

Nicole Miller - Piper Jaffray Sharon Zackfia - William Blair Stephen Anderson - Maxim Group Gregory Francfort - Bank of America.

Good morning, everyone. And welcome to Potbelly Corporation Third Quarter Fiscal 2018 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. I would now like to turn the call over to Mr. Matt Revord, Potbelly’s Chief Legal Officer. Please go ahead..

Good morning everyone and welcome to our third 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 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.

I'll now turn the call over to Alan Johnson, Potbelly’s Chief Executive Officer..

Thanks, Matt. Good morning, everyone. And thank you for joining the call. The purpose of this call is to provide an update on our business and financial results for the third quarter as well as to share our perspective on the revisions to our full year 2018 outlook.

However, as I am approaching my one year anniversary at Potbelly, I would like to provide a broader update on our progress against our turnaround strategy, highlighting what we have achieved, what we have learned so far, and where we go to from here.

As I stated in our fourth quarter earnings call in February, 2018 would be a transition year for Potbelly as we worked to reposition the company to return to profitable growth. That repositioning foundation was built on starting with one key priority, reversing our negative traffic trend.

We renewed the road to driving sustainable same-store sales growth, began with attracting new customers and earning repeat visits from our loyal fans. I am pleased to report that our third quarter performance year-to-date demonstrates we have the ability to impact against this very important priority.

During the third quarter, we delivered same-store sales of negative 0.2% which was consistent with our performance during the second quarter, and a significant improvement from the negative 3.6% in the first quarter.

In particular, I would like to highlight the significant improvement in our underlying traffic trend, which has improved to negative 0.3% in the third quarter from negative 3.5% in the second quarter and negative 6.8% in the first quarter.

Our third quarter traffic of negative 0.3% is the best traffic performance Potbelly has achieved since the fourth quarter of 2015, and marks an improvement of 850 basis points year-over-year. If you take a minute to contrast our performance against the Black Box fast casual industry trends for our market.

In Q1, 2018 Potbelly lagged the industry traffic count by approximately 180 basis points. And in Q3, we outperformed the industry by 190 basis points. This marks the first time Potbelly has outperformed the competition on traffic in over two years.

While we are encouraged by these positive trends, unfortunately, Potbelly was not immune to the unexpected softer trends that impacted the broader restaurant industry towards the end of the third quarter. Consequently, our third quarter comps did not finish in positive territory as we had planned.

And we decided, it was prudent to revise our same-store sales outlook for the full year 2018. Our performance demonstrates our ability to meaningfully drive traffic through investments in resources that we have dedicated, which we believe are building the foundation to drive improved traffic and profitability over the long-term.

Let me spend a few minutes to walk you through several investments we have made during the third quarter to support some of the key strategic initiatives I have outlined as core to our efforts to turn around the company.

First, as part of our menu optimization initiative we recently launched our first test series of concept menu boards of concept menu boards in 58 select locations with the objective to not only simplify the ordering decision in turn improving the customer experience but to also maximize guest check, profitability, productivity and traffic.

Bottom-line, a more shoppable menu provides the path to delivering all of these objectives. By way of example, if we reduced the ordering process by only 20 seconds this would add approximately $1 million to the shop margin.

Another important aspect of our menu optimization initiative was to test for the first time in our history the inclusion of combos and bundles on our menu boards. We believe this to be an impactful way to deliver value to our customers while driving spend, traffic and profitability.

Unlike virtually all fast carrier restaurant concepts, Potbelly historically has not offered any combos or bundles on its menu. If you look at the customer that shops at Potbelly, will no eat elsewhere for lunch, about 60% of them typically purchase a combo or bundle except when they shop at Potbelly. Why? Because we don't have any.

We are testing two versions of the pick and pay option that bundles a half sandwich with a half salad. We are also testing a third option, make a meal, which is a combination of a sandwich, chips, and fountain drink.

These tests are also designed to improve our beverage attachment and add-on incidents which I have highlighted as a big opportunity in prior earnings calls.

Through several weeks of testing, we have seen an increase in the percentage of customers who are ordering combos or bundles, resulting in an incremental lift in both sales and margins in these select markets.

While it’s still very early days for our menu optimization initiative, we are pleased with the initial results and we remain focused on enhancing our customer experience to maximize their engagement.

Second, we continue to invest in digital marketing which provides a cost effective and targeted channel to tell the Potbelly story in a way that really differentiates the brand.

An example of how we've been able to inject Potbelly’s unique personality into our messaging was demonstrated well with our campaign to support the launch of our premium Cheesesteak LTO. Leveraging digital social media, we stood a passionate debate between the two kinds of favor of the Cheesesteak, either with Whiz or without.

If you take a look at any one of our social media platforms such as Twitter, Facebook or Instagram, you can actually see the progression of how Brandon our new CMO and his team have been able to capture the voice with share worthy campaigns that really showcase the quirkiness of the Potbelly brand and most importantly, encourages customer engagement which has been lacking to-date.

In addition, during the third quarter, we tested several new campaigns to understand how we might drive traffic in a way that is more successful than past endeavors and to learn what message media and creative combinations would be most effective.

The best example of this was the two week Wreck Bros campaign, not dedicated to an LTO as we had done as we have done previously, but to a most recognized sandwich the Wreck.

The campaign consisted of traditional and digital media, a significant social media asset supported with an offer to encourage trial and a unique creative approach appropriate for the target customer. The good news is we tried something new and we achieved newer coleslaw traffic. Something as I mentioned, we have not seen in a long time.

We received great feedback from this campaign and we will continue to look for other opportunities to extend our efforts to enhance our unaided awareness with brand-focused messaging initiatives.

It is also important to note that we ran the Wreck advertising during our Barbecue Pulled Pork Sandwich LTO, which performed well despite not having significant media behind it. It proves how telling the Potbelly brand story can be an effective and not compromised the impact of our menu innovation.

We also continue to make investments in our Perk program as we continue to test and learn what motivates our existing customer, and how to attract, and most important, retain new customers. To enhance daily offers such as burgers, drink and chip giveaways with purchase of an entree and down specs, we drove a significant amount of new Perk engagement.

We’ve finished the third quarter achieving a major milestone of over 1.1 million Perk registrants. Finally, we continue to invest in growing our off-premise business to leverage the catering and delivery potential of the brand.

Our off-premise business was 17% of total sales during the third quarter, which is an improvement of 130 basis points year-over-year, driven by solid growth in pickup and delivery. While we are pleased with our early traction, we recognize that there is still a long runway of opportunity ahead.

During the second quarter, we started to test all day delivery at a select number of Potbelly shops. We are encouraged by the early results particularly within our dense urban markets. And during the third quarter, we expanded our testing into additional markets.

We also continue to engage a variety of third-party last mile delivery providers to complement our Potbelly team and to better understand how this could potentially help drive incremental off-premise growth.

In addition, we expect our strong customer engagement through Potbelly Perks and our mobile app to provide opportunities for growth across catering, delivery grab & go and curbside pick up.

While we are encouraged by the early reaction to some of these new strategic investments I just highlighted, and the positive trajectory of our traffic trends, the shift in the composition of our same-store sales comparisons didn't make any impact on shop margins and profitability in the third quarter.

As we prioritized traffic building initiatives, unfortunately, the traffic comes with a lower flow through than pricing. Consequently, shop margin was 16% of sales during the third quarter as compared to 18% in the prior year period. We are not satisfied with our shop margin performance during the third quarter.

But we need to continue to learn by doing. And the choppiness in our near-term results is a necessary part of our transition. However the pressure on our margins in the near term does not represent a permanent shift in our shop margin aspirations over the long-term.

We are confident that our investments and initiatives to increase brand awareness, acquire new customers, drive frequency, improve retention and spend will support our long-term margin outlook In summary, we proved for the first time in a long time that we could drive comp through improving traffic trends with our performance during the third quarter.

We are pleased with the positive trends in our business but we also recognize there is still much work to be done to turn around the business. We continue to learn, adapt and evolve the process around how we are driving traffic and each interaction improves our future decision making.

The third quarter marked our first full concerted effort at driving traffic and we learned the full effect this has both in visits and in-shop profitability. We remain committed to testing new ideas to improve our traffic driving tactics while striking the right balance to drive profitable growth.

I will now review our third quarter financial results in greater detail. Total revenue increased 0.8% to $107 million in the third quarter. Company operated same-store sales of negative 0.2% was driven by traffic of negative 0.3%.

Our check growth remained positive at 0.1% but eased from the recent quarters due to the various traffic driving sales tactics and investments that we tested during the third quarter. Consequently our shop level margin for the third quarter was 16% of company-operated sales as compared to 18% in the prior year period.

As I mentioned earlier, we expect near-term disruptions to our margins during this transition period but we believe it is necessary to make the upfront investments to understand how to keep our current customers satisfied, how to attract new customers, and most importantly, how to drive customer retention and repeat visits.

We believe our investments to drive brand awareness, interest and purchase intents are necessary to support our top-line, margin, profitability and growth aspirations over the long-term. Cost of goods sold was 26.8% in the third quarter, an improvement of 20 basis points on the prior year period.

Relative to the first two quarters of 2018, the sequential higher COGS ratio primarily reflects traffic driving investments and initiatives. Labor was 30.5% an increase of approximately 90 basis points from the prior year primarily driven by wage inflation and sales deleverage.

Occupancy expense was 14.2% in the third quarter, an increase of 60 basis points as compared to the prior year due to inflation in certain occupancy related costs, including lease renewal, real estate taxes and common area maintenance and sales deleverage.

Operating expenses were 12.6% in the third quarter, an increase of 70 basis points compared to the prior year, due to increases in operating expenses such as repairs, maintenance, utilities and other expenses not directly variable with sales, costs associated with sales driving initiatives such as our updated mobile app and off-premise initiative.

In addition, the timing of certain investments such as early production of our menu boards in Q4 and marketing calendar updates, sales deleverage and other inflationary pressures. Our SG&A expenses were $10.1 million in the third quarter, or 9.4% of total revenue.

When excluding costs incurred during the quarter relating to restructuring activities, proxy expenses and store closure costs, G&A was $9.6 million or 9% of total revenue. We continue to tighten control of G&A expenses as we simultaneously work to optimize and repurpose spend towards sales and traffic driving initiatives.

Our improved Q3 G&A figure as compared to previous quarters reflects those activities in addition to the timing of certain one-time costs, and the impact of our revised 2018 outlook and performance-based compensation. Our adjusted EBITDA was $8.8 million for the quarter as compared to $9.6 million for the prior year period.

During the third quarter, we had an income tax benefit of $909,000. Our adjusted net income for the third quarter was $2.4 million or $0.09 per diluted compared to adjusted net income of $1.9 million or $0.07 per dollar share in the prior year period.

Regarding our share purchase program, in the third quarter, we repurchased approximately 700,000 shares of Potbelly common stock in the open market for total of approximately $9 million. At the end of the third quarter, we had $52.6 million available from our Board authorized program for repurchases, which will continue as we move forward.

Our capital expenditure came in at $5.1 million. Our balance sheet remains very strong with a cash balance at the end of the third quarter of $26.7 million and we had zero debt. Turning now to our outlook for the full year fiscal 2018.

Based on our performance through the first three quarters and the softer industry trends we have seen at the end of the third quarter and into the fourth quarter to-date, we are revising our full year guidance for same-store sales comp, from flat to decrease in the range of 1.5% to 2%.

We now anticipate full year cost of goods sold near the high end of our previous stated range of 26% to 26.5% for 2019. Labor, as a percentage of sales is now projected to trend slightly above 50%.

Turning to G&A, as a reminder, our G&A outlook does not include costs relating to restructuring, costs relating to proxy expenses or store closure costs, which may occur as we remain focused on optimizing our existing company-owning portfolio.

For the year we now anticipate our G&A expense to be in the range of $42 million to $43 million, down from our previously stated $46.5 million to $47.5 million range.

The reduction primarily represents our actual results to-date, the expected continuation of the aforementioned tight controls around spend, our commitment to continue to look for more productive ways to do business and reductions relating to certain performance-based compensation items.

Specifically I would like to note, our G&A outlook does not rely on a reduction in our advertising spend, consistent with our stated strategy of driving sustained improvement in our traffic performance. Based on these revisions we now expect adjusted net income per diluted share in the range of $0.26 to $0.27.

We expect an effective tax rate in the range of 29% to 31% for 2018, excluding the impact of accounting standard update, 2016-09, which could have a material impact on our effective tax rate.

As we expect to open 10 to 11 new company-operated shops in 2018, and eight to 10 new franchise shops, we expect to spend between $22 million and $24 million in CapEx in 2019. In summary, while I am greatly encouraged by early progress that we have achieved thus far. We continue to have work to do as we execute this turnaround in the coming quarters.

I have always maintained that 2018 was going to be a transition year for Potbelly. And the areas that we are working diligently to course correct will take time.

However, I believe we have the right strategies in place and are executing on the appropriate traffic building initiatives to build the proper foundation for long-term sustainable and profitable growth. Results are trending in the right direction. We have made significant progress but we are still in the early innings of our turnaround efforts.

In the end we will be rewarded for remaining focused and thoughtful. In that spirit I ask for your patience as we continue to move forward and execute our plan. I am optimistic that we can and we will achieve our full potential. I am excited about our progress so far and I am confident that our best days are ahead of us.

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. I will now turn it over to the operator and let open up for questions..

Thank you. [Operator instructions]. Our first question is from Nicole Miller with Piper Jaffray. Please proceed with your question. .

Really appreciate the update. The first question I want to ask is that as you discuss there’s clearly some pushes and pulls in terms of the fast casual results in the third quarter and fourth quarter to-date.

Could you drill down a little bit and talk specifically more about your sandwich competitor set and the trends that you're seeing?.

Thanks Nicole for that question. Yes. I mean the best comparison we have is what we get from Black Box, right. So we take that industry data which lags about two weeks.

We eliminate the states that we don't have any businesses in, so a very good example is Black Box includes California, we exclude for many shops there and then we compare our results against, if you like our weighted fast casual category. So that's how we arrived at a comparison to our performance versus the industry. .

Okay, great. And then, on your conversation around comps, I mean now that comp is treated equal as you discussed the traffic is dramatically better, is there anything you would tell us about periods where same-store sales are may be better than other periods? I'm just thinking to your commentary around throughput.

Is there peak periods that do better or certain days or week or dayparts that are doing better than others, where is the real opportunity?.

I mean, we're a lunchtime business, that hasn't changed. I think what has changed is how we drive that traffic. Yes, I'd love to point to just sort of one thing that we did that made all the difference but actually it's a combination of things, really different message during the quarter in a number of weeks.

And the best example I can give you is Wreck Bros focused on promoting the Potbelly brand and the sandwich that we are the most recognized for, which was the Wreck. In past, our focus has been on promoting an LTO that you never tried necessarily at Potbelly, so it’s very different strategy.

Now, we did have an LTO at that same time, which was Barbecue Pulled Pork. And interestingly enough, typically we would put all objects on promoting the LTO. And even though we shifted the investment and the focus to a brand message, the LTO Barbecue Pulled Pork did actually very well and actually in the line with our expectations.

The other thing that we did different was different communication strategy. We also for the first time deployed segmentation in our -- and -- with different layers of segmentation in our Perk members, so not every member got the same message. We changed the ways trying to sort of find a way to sort of grab attention in a fun, quirky way.

That's why we linked in on the sort of Will Ferrell, Step Brothers movie and that got great reaction. So it's a combination of all those things. And bottom line, we tried something new and we achieved something new -- different..

Great. And just the last question from me.

How is it going on your CFO search?.

Good. I don't have anything specific to announce but I’m very pleased with the progress and the response has been encouraging, great quality folks. And hopefully between now and the next call, I will be able to make an announcement on that front but very encouraged..

Great, thanks again..

Thank you, Nicole..

Our next question is from Sharon Zackfia with William Blair. Please proceed with your question. .

Hi. Good morning. I guess a couple of questions.

Can you talk about, particularly with Perks, the balance between discounting and driving traffic?.

In what regard..

What drives Perks member and I think I got a BOGO a lot this past quarter.

So first of all, I'm wondering if that's why the ticket was weaker in the September quarter, was it because of discounting? And then secondarily, as you drive more traffic, it seems like there might need to be more investments in labor behind the counter or thoughts on how to redeploy that labor more efficiently.

So just if you could walk us through kind of how you're approaching discounting where historically Potbelly hasn’t really discounted that much to the labor investment, because I don't think we've talked a lot about investment in labor, we've talked a little bit about minimum wage or wage inflation and things like that but I'm unclear as to whether or not there is more investment in the people in the shops as well?.

Yes, sure. So the beautiful thing about the Perks program is we all win a half when you come we know what you like when you do come. So, retention is critically important in this game. If all we do is attract one and done, then this doesn't make any sense.

So whilst, you’ve felt that you received a lot of offers you did because we don't typically do a lot of that. So for sure we're testing the extremes of what works, what doesn't and what does it take to get you to -- the fantastic thing that Perks allows us to do is to work out where's that magical inflection point.

Because in every business that I’ve looked at, there is a point in which you can get your sort of your new customer to that inflection point, then the retention rate is dramatically different.

So by way of example of that is the Insights team has figured out that if you get the customer to come x times in 91 days the retention rate doesn't go up 10% or 30%, it actually doubles. So it's critically important to get both existing customers to that loyalist category.

Does that make sense?.

Yes, I guess I'm just wondering do you run the risk of people just come in and when they get BOGO?.

Forgot. Well that assumes, I mean there's always value of did you just purchase it right. The big assumption with that is and all we attracted was one and done as and that would take a lot of talent to just actually attract people who only come once.

They come, they try, they get a great sandwich in a great environment with friendly service and great value. Why wouldn't you come back? Now to -- the other question that you asked which is actually very valid. Is there is -- you correctly identified, there is a big difference between the flow through on when you -- on price versus traffic.

With traffic, obviously the sandwiches and the way we calculate traffic obviously is through on close. So the entree doesn't make itself up, there’s labor and there's food involved in that, whereas when you get the comp through price, the flow through is significantly higher than for traffic.

But the big payback on the traffic is future visits not fully discounted because yes, if all we have to do is every single time to get you back is to give you a free sandwich that doesn't make any sense.

So the challenge in the third quarter was when you predominantly get your comp which we did through traffic initiatives, you pay for it, right? The cost of acquisition is in the third quarter. I haven't figured out how to extend the closing date of the third quarter a couple of periods.

But as the Q4 and Q1 of next year comes, and we track this, we'll be able to see what happens to the frequency rate which is critically important. .

So as we think about the business through this transition period, should we think about flatter ticket and the comp mainly be in traffic up or down.

Yes. I think it's more a matter of balance, the -- all price and no traffic that's not a winning proposition. Remember, we've tried that for years, right? Trying to get a lot more money from this people and that didn't work out. So it's more a matter of balance.

And the truth be known, somebody walked into office and said we're going to show 850 basis points out of the traffic year-on-year, I would have said, wow, that would be an amazing feet. And then double up buffet and beat whatever is happening in the industry by 2 points -- 200 basis points, I would think that would be quite remarkable.

Well that's what we've done. And yes, let's be clear, this is a short-term investment. But if we don't invest in the funnel, we all know that we have low awareness, right? But in order for us to have loyalty which is what we're after, you have to have awareness.

Before you have awareness, there's no consideration if you don't have awareness and there's no purchase or loyalty if you don't have consideration. So that funnel is critically important that we monitor it and that we monitor it and that we also figure out how to get to that magical inflection point. .

That's really helpful. And then my last question is just on delivery and I may be spoiled some at Chicago but I feel like you already have all day delivery, but that might just be because I'm in the home market.

So when you said testing all day delivery, what did that mean?.

So this -- you all spoiled but you would have not -- we don't actually have all day delivery and we’re trying to sort of figure out all the incremental day parts of the week and the day that we can augment with third-party and providers.

So very good example is between sort of breakfast and lunch is an opportunity, after lunch and between lunch and dinner. And it varies in suburbia. And it -- I think the big opportunity kind of for all day is actually not lunch, it's actually dinner..

Okay. .

And so the test that we're doing is in a variety of suburban and urban locations. And so far it's proving out that there is opportunity there and we need to just get at it..

Hey. Great. Thank you. .

Thank you. Appreciate that, Sharon..

Our next question is from Stephen Anderson with Maxim Group. Please proceed. .

Yes. Good morning.

I want to just follow up with some comments you’ve made in prior quarters about the -- about refranchising, now you've hired somebody from Yum! Brands to take a look at that, so I just want to know about the progress on that initiative?.

Thanks Stephen. Yes for Sure. So we're making real solid progress, Jeff, Peter and the franchise team. We got a number of things underway that -- are exciting, I think I shared some detail around shop of the future, that kicked off a couple of months ago, a very exciting project.

I personally attended a number of discovery days here in the support center with franchisees that we haven't seen before have come in to get a download and meet the team, understand where we’re going, understand our strategy and the reception that we have received has been very encouraging.

Also we have a good sense around the inbound calls that we’re getting, I'm also encouraged by that. But yes, I got to remind you we’re starting from ground zero. And this is a work in progress, it’s going to take time to build momentum.

But everything that I'm seeing is supporting the fact that qualified franchisees which by the way you know we've changed the profile of the folks that we're looking at, are recognizing that we're beginning to get some progress here, it's beginning to look exciting and, yes, I’ve said to every single one of them.

Look if you want to -- you've got to be in this for the long-term. It's going to take time to turn things around. But you're getting in at the right time. So overall I've actually been very encouraged by the reception that we have received. .

Thank you. .

Thanks, Stephen. .

[Operator instructions]. Our next question is from Gregory Francfort with Bank of America. Please proceed with your question..

Thanks, Alan. I have a couple questions.

Just on the industry softness, what do you think is driving that? Is that sort of a change in the consumer at all or maybe I guess through your business what are you seeing where the consumers changing?.

Yes, Greg, seriously I have enough trouble time to actually figure out what's happening in my business. If I -- honestly I don't really have a strong opinion.

All I can do is use it as a bit of a range finder for figuring out whether all the boats in the harbor are going up or down, because sometimes when we saw what we saw that happened at the end of Q3 sort of over the last two to three weeks, sometimes that makes you think hey you’ve got the wrong strategy but you haven't done anything different, right? And unfortunately, I get a daily report card.

But I don't get an industry report card every day. So two weeks in areas I have to go back and say oh wow, it wasn't that we were doing anything different. Just the industry got soft and a couple of points here, a couple of points there, makes a little bit difference.

Yes, this last week I don’t know, did the election have any impact on how people were feeling? Who knows? Anyways I think the thing that makes me feel good about the progress we are making is the spread between our performance and the industry has not only maintained but it's grown in our favor in the last -- since sort of near the end of Q3 and into Q4.

So that just gives me some reassurance that we're actually getting a bigger slice of the pie. .

Understood, that makes sense and I totally appreciate that. Just in terms of the G&A spend, I think you said it was 9% on an underlying basis.

I guess there was some lower performance comp in there but is that maybe a -- what was that x at sort of a normal performance comp and I guess is that rate sort of a fair rate to use on a go forward basis?.

Yes, look it is all sorts of puts and pulls in the quarter on G&A. At this stage I'm not ready to provide any guidance for Q4 2019 on G&A. I mean there isn't a single day that goes by that we don't talk about how to do things differently and do things better.

And as you can see in our guidance for G&A we had actually lowered how much we're going to spend. But at the end of the day every dollar that I can repurpose from non-sales generating to sales generating is what my number one priority is.

And also then figure out how to do business differently but -- than to anticipate that number coming down by a lot..

Understood. And then just maybe on the bundles and the efforts you're putting in there. I guess how big of a deal do you think this can be in your tests? Kind of how much I don't know what metrics you can share.

But in terms of customer acceptance or customer preference for the platform, anything that would be helpful just to get a sense for sort of how big of a sales driver can be?.

Yes, sure. And so just to remind you that the goal here was to drive traffic profitability and repeat visits. We have 58 shops with three different versions. So, when you think about it, that's a lot of shops to taste in when you have 150 or so shops, it was very important that we tested a combination of suburban and urban et cetera, et cetera.

What I can -- what I do know is the customer likes it. The P&L likes it and therefore I like it. I mean, it's early days, but the results are encouraging. And the first is, our customer when they shop elsewhere with the competition already show a preference on 60% of occasions buying on combo and bundles.

So why are we not taking advantage of that? And, if I can sell a larger transaction simply by offering something the customer already wants, it's a win-win..

Thank you very much for the thoughts. I appreciate it. .

Yes. Thank you..

Our next question is from [Mary Hughes] with Baird. Please proceed with your question..

Good morning and thank you for taking my questions.

Alan, you're comment suggested that trends flowed as you exit Q3 and so I guess the full year guidance implying a pretty wide range for Q4, would you be willing to comment on the expense which that faster momentum is carried over into Q4 and maybe how you're tracking to-date?.

Yes. Sure, I mean, regarding Q4, as I mentioned, was a weak trends near the end of Q3. They persisted into Q4 to-date. The good news is that we continue to outperform the industry and actually that spread widened. If you remember, Q4’s comps actually get more difficult. So that needs to be kept in mind.

But the team has decided we're going to stay focused on learning and executing on our strategies. And I don't see big changes between now and the end of the year..

Thank you. And then as a follow-up, what are you seeing in your business that's leading you to conclude that it's something in the industry that’s negatively impacting you rather than something internal.

Is there anything in your brand scores or anything that would suggest that there may be something internal going on?.

Well the good news is that we do have almost a daily report card based on an initiative that we launched about nine months ago which gives us customer feedback all day, every day.

And when we look at the attributes that are important in this business value service selection, atmosphere, cleanliness, all the normal pieces are attributes, Potbelly strings all in the right direction, so there's nothing to point that if something sustained that.

We're doing wholly in fact quite the opposite and up until nine months ago we had very little sort of third-party verification that we were executing well. .

Thank you.

And then could you just elaborate further on why the change in the competition had such a dramatic effect on the margin in Q3 and if it is this elevated discounting that you referred to and you’re sharing, to what extent do you expect that to continue in Q4?.

Yes. Good question. Thank you. So there were three factors affecting the margins. Since after Q1, sales were softer than we were projecting. The composition of the same-store sales comp was vastly different in Q3 versus Q2. As a reminder Q3 we primarily got there through traffic whereas in Q2 we got through check.

Seasonally it's also important to remember that Q2 is the peak season of the quarter versus Q3. So there are some natural deleverage that occurs there. But when the composition of the comp changes from check to traffic that leads to a different flow through. .

Yes, understood, okay, thank you.

And then on the menu optimization initiative seemingly a positive impact to sales and margins there, how quickly are you thinking about rolling this initiative out more broadly going forward, is that a first half of next year initiative or still some things to work out there?.

I think between now and next year we've got to make that decision. And in the meantime we are continuing to do things on those different options. That's one of the reasons why I had some time -- and the charges hit would be in Q3 as we accelerated changing out some of those menu boards to continue the agenda of test, learn and roll.

So at this stage given the encouraging results that I'm seeing, I would anticipate for sure that this would be rolled out in the first -- certainly in the first half of 2019. .

Okay, that's it from me. Thank you. .

We have a follow-up question from Stephen Anderson of Maxim Group. Please proceed. .

Yes I want to get a little bit more deeper into the bundling question and I just I wanted to see, of the two tests that you're finding out right now which you find that you're getting more feedback from customers?.

Well actually we've got through two versions of the ticket pay option and one version of make a meal, interestingly enough at 50,000 feet, is all actually big -- and then the customer likes, the average spend is going up, having a positive impact on margins. Where this thing is required is actually believe it or not in the execution in the shops.

We also used to offer 41 days, not 41 days -- 41 years of promoting an LTO and focusing on sort of other things when an initiative like this comes along we've got to sort of learn to have a singular focus and push that.

One of the steps that I shared with you very early on was the fact as an organization we've gone from almost no suggestive selling to over 40% of occasions at the counter suggesting something additional for the customer to buy.

But one that -- I don't think we're going to get that 40% up much more than where it is now without changing things like the menu because at the end of the day virtually everybody looks at the menu, so the menu if it's configured with these bundles which is the side-in seller, right.

The menu is the side-in seller and it doesn't bet every single time 100% of the occasions. So I think that's where the magic lies. And just not under estimate the impact of simplicity.

Right now if you looked at the center of our menu board where the sandwiches are, the existing menu that the most of the shops has about 44 price points, just an all sandwiches. That 44 has now been trimmed down to like eight to 10. So I think that's all of those combinations together make me feel optimistic about the impact of this..

[Operator Instructions]. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation..