Thank you for standing by. This is the conference operator. Welcome to the Potbelly Corporation's Second Quarter Fiscal 2019 Earnings Conference Call. As a reminder, all participants are in listen-mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

[Operator Instructions] 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 second 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 2019 or 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 at 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.

Our presenters today are Alan Johnson, our Chief Executive Officer; and Tom Fitzgerald, our Chief Financial Officer. After our prepared remarks, we'll open the call for your questions. I'll now turn the call over to Alan..

Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. I'm going to spend some time discussing how our strategic efforts to reposition Potbelly are performing, and then let Tom provide more specific details on our second quarter results. I'll get started with a few high level results for the second quarter.

Same-store sales were down 4% driven by weaker traffic trends. While the softer traffic hindered our results, this quarter contained a number of important points of progress as we continue to transform our company.

Tom will give you a deep breakdown of these results in his presentation, but I'd like to start today's discussion more strategically and reiterate the key pillars that are driving our strategy. As we have said before, turnarounds require an exceptionally high level of focus and patience. More specifically, we need to focus on the right things.

We need to test, tweak, retest, and make smart decisions on what we launch and what we don't. But improving same-store sales and traffic trends is our number one priority and we believe we are on the right path and there are a number of new initiatives that are starting to take hold.

The four pillars of our strategy to improve comps and traffic are; one, menu optimization. By far this is the area that we have made the most progress on. We need to continuously make sure our menu is working hard to drive profitability. Two, grow off-premise and digital. Our off-premise and digital channel consists of catering, pickup and delivery.

While we have made a lot of progress in these channels, we feel like the new initiatives we're rolling out will allow us the opportunity to drive even more growth by creating better convenience for our customers and more platforms to service their needs. Three, improve retention. This is one of the most important components of our strategy.

And the one that is linked to our traffic trends. Four, grow share of our target customers. This revolves around improving our unaided awareness in finding the right mix of message media and creative to build awareness and to retain customers. Those are the four pillars we are continuing to focus on to drive improvements in comp and traffic.

Separate from those. The fifth pillar of our strategy is to focus on a more aggressive use of franchising to drive strategic, geographic growth. I'm sure most of you saw the press release. We put out last week outlining our significant progress on these efforts last quarter. I'll spend some more time discussing our franchise progress.

But before I do, let's take a similar approach as last quarter and talk through the initiatives that are clearly working and those that need more time to perfect. As I said before, our menu optimization work has been one of the most successful efforts of our turnaround. And we continue to receive very positive customer feedback.

The bundling option to either pick your pair or have a meal deal, where you can add chips and a drink continue to make up a meaningful percent of our transactions. This quarter's check growth, was up significantly, with over 80% of that growth coming from an increase in the number of units per transaction.

In past years, most of the check growth came from charging more rather than getting customers to buy more when they visit. We still have a number of initiatives that we are testing in the back half of the year, to help drive traffic. Menu optimization is a process of continuous learning, where we test and refine products like innovative LTOs.

For example, we have traditionally focused on check-building LTOs And while a number of those initiatives have proven successful. We have made a conscious decision, to shift some of our focus to traffic-building LTOs.

We are testing some of these traffic LTOs in the third quarter, with the intent to roll out the successful ones in the fourth quarter and early Q1 next year. I would also like to commend Chef Ryan our Michelin-starred chef, on the delicious and inspiring creations he has put together since joining the Potbelly team.

And we are very excited to share his new menu creations as we move throughout the year. Another area of our business that is working is our off-premise and digital initiative. Sales for this business were up 10.1% in the quarter and comprised 20% of comparable sales.

All three channels of our off-premise and digital business, namely catering, pickup and delivery were up year-over-year. Our off-premise and digital channels have produced positive same-store sales comps for seven consecutive quarters. 18 months ago, we were way behind in our off-premise and digital offering. We made a commitment to catch up.

And I believe we have made substantial progress. To that point, I believe, Potbelly is now one of the most convenient and easiest to transact sandwich options in the market today.

For sure, we have more work to do, but the changes from where we were 18 months ago are dramatic and seven consecutive quarters of positive comps is confirmation that this part of our strategy is working.

I'm proud of our team for embracing this challenge and executing with excellence and a sense of urgency to pave the way for accelerated growth in this critical channel.

As it relates to our Catering business, the largest of our off-premise and digital channels, we're excited to tell you we have recently launched a refreshed catering site just a few weeks ago. Previously, we had shoehorned a catering tab onto our website, which required the customer to build the order themselves.

The new site provides a seamless experience, allowing users to more easily find what they're looking for, by offering catering bundles and making it much easier to order and pay fast and with fewer clicks.

We spent a lot of time talking with customers about ways to improve the site and the new site has a number of additions, including recommendations based on your party size and showing what's popular right now, to spur ideas to easily and intuitively build the order and drive check.

Turning to the second of our off-premise and digital channels, Pickup. As of today, we now have pickup racks in all of our shops. Having these racks allows delivery drivers to walk into the store and grab the order without having to wait in line or ask an associate if their order is ready.

This saves them time and allows for the food to be delivered quickly as well. The racks also benefit our pickup customers, as they also no longer need to ask if their order is ready. They simply walk into the shelves, grab the order and enjoy. Customers' remark how convenient and easy it is to order and to pick up from the designated pickup shelves.

We've made it much easier and convenient for our customers and our results show it, confirming this part of our strategy is also working. Now moving to Delivery, the third off-premise and digital channel. We are excited to announce that we rolled out our national partnership with DoorDash in the first week of July.

We tested the platform in two markets and we saw great results. Now we are officially on the DoorDash marketplace in each of our markets, so if a customer logs onto DoorDash and searches for sandwiches, Potbelly will show up, or they can search for us directly by name.

We know that customers are loyal to the app that they use and we believe DoorDash is an excellent partner to help expand our presence in the all-important delivery channel and to build our brand awareness.

Whilst we don't break out our results of our off-premise and digital channel, in the initial weeks since our launch the growth rate of our delivery business has increased nearly 10 times from where it was year-to-date prior to the national DoorDash launch.

We'll be working with DoorDash in the third and fourth quarter to take advantage of promotional windows, funded by DoorDash, to introduce Potbelly to their customers and enhance our presence in the site.

Before I transition to Tom, I want to give you a comparison of where our off-premise and digital channels were a year ago, versus where they are today. Delivery, last year some shops delivered some of the time. Now, all shops deliver every hour they are open and you can order Potbelly via DoorDash in all of our markets.

Pickup, last year, we did not have anyplace for the customer to pick up their order. They had to wait in line to get their orders. Now every shop has dedicated racks, which makes it very easy for our customers and our Dashers.

Catering, last year, we did not have a catering-oriented platform and therefore placing a catering order was time-consuming and often frustrating. Now we have a site that we are proud of and is focused on the catering customer. It makes it easy to order and helps build the check with suggestive selling.

Now you can order on the Potbelly website, on the Potbelly app and on the DoorDash app, providing a seamless customer experience. You can order ahead, you can pay in advance and can easily pickup your order in the shop or have it delivered either by our drivers or Dashers from DoorDash.

If you want Potbelly to cater, you now have a vastly improved experience on our new website. That's substantial progress. The important point I want to make here is that our off-premise and digital momentum has mostly occurred in the last few weeks and therefore didn't impact our first half results in a meaningful way.

We launched our catering website two weeks ago, pickup racks were officially launched in all our shops three weeks ago and we launched our DoorDash partnership five weeks ago.

The first half of the year laid the foundation with a lot of heavy lifting, but we're excited to see how these initiatives perform throughout the second half of the year, and they obviously support some of the improved outlook that is implicit in our guidance.

So that's a great summary of a number of proactive steps that were taken that are clearly working. And while we are encouraged by the amount of progress we have made and the number of things moving in the right direction, there is still a very important issue that we need to address. The biggest headwind for us right now is traffic.

While the number of Potbelly perk registrants increased from 1.3 million registrants to nearly 1.5 million and we are very proud of the base that we have built, our perk registrants only make up 17.3% of our sales.

We need to focus on reminding our loyal followers why they love us creating innovative ways to get our lapsed customers back and acquiring new customers. Therefore, we are shifting our marketing message in the second half to do just that in both email and social messaging.

Additionally, through our loyalty program, we now have insights and data that can be leveraged to help drive improved retention. Historically, most of our promotional messaging was only directed to our perk registrants. By primarily promoting to that one audience, you potentially could be training your customer to wait for a promotion.

Our focus now is on finding the right balance between marketing and promotions that will drive comps and build brand awareness. As an example, you've seen us offer offers to Nurses Week and Teachers Week, where we broadcast a promotion to a much larger audience.

The goal is to create promotions that are more efficient and incremental than what we have done in the past. The soft traffic has also been a challenge in growing our share of the target customer. The two clearly go hand-in-hand.

Relying on customers coming more often and spending more each time certainly has its benefits, but attracting new and lapsed customers, who are going elsewhere for lunch is a huge focus for us going forward. We continue to work to find the proper balance between mix, media and creative that resonates with our customers.

In the first month of the second quarter, we invested a lot in advertising and marketing. Results were positive, but not commensurate with our level of investment. And therefore we put a hold on our elevated marketing investment to reassess what we can do differently.

We have a number of tests planned through the rest of the year, and will keep you updated on our progress. As we discussed in our last call in June, we launched our Summer of Smiles three-month loyalty program to test our virtual punch card approach where you receive a $5 reward when you spend $50.

While we don't have a full view of the results until the program ends, we are already seeing encouraging results through the first six weeks. One important outcome is that, we saw a 33% decline in the time between purchases for our perk members. That means, the test program is driving frequency a very good thing indeed.

This is something we have not seen for some time and proof that we are beginning to see measurable progress. I look forward to sharing more results on our next earnings call. Switching gears, I want to briefly update you all on our shop of the future.

As some of you may have seen, we provided a few renderings of what the new store would look like in our latest investor presentation, and we would encourage everyone to take a look. The new shop is a complete redesign from the bottom-up based on extensive customer research that has a whole new look and feel, but still is uniquely Potbelly.

There are a few key elements of the new shop of the future design that I would like to highlight. First, customers will order and pay in one place at one time. Today, some customers find our ordering process confusing and sometimes frustrating.

As I've said before, currently we ask customers to open their mental wallet a few times during today's ordering process. The new design requires customers to open their mental wallet only once, just before they open their physical wallet.

Second, there will be one consolidated menu board directly above where the customers will order and pay versus what we have today where the menu boards are scattered throughout the shop. Third, navigation will be vastly improved where it will be obvious where you go for pickup versus ordering to eat in or take out.

Fourth, transparency – customers will be able to see their food as its being lovingly made by one of our team members. This is a big plus and allows customers to see the quality and freshness of the ingredients we use to make great sandwiches. Finally, the dine-in atmosphere is a very important aspect of our brand and experience.

The new shop will be comfortable and relaxed to eat in something that is not true at most of our direct sandwich competitors. The new store experience will be more intuitive and easier for pickup customers and delivery drivers to find the orders without disrupting the dine-in customer.

Further, the shop will also improve the ordering process and get customers through the line faster. As we have shared before, the new design will reduce the capital investment by 25% compared to the current model and reduce the payback period for a new company shop or franchisee by one year.

We expect the two shop of the future remodels to open in the Chicago area in Q4. Let's shift to another strategy that will help us increase our geographic reach and drive future growth and that's franchising. We have made tremendous progress during the first half of the year on these efforts and some of those you may have seen.

We recently announced that we have signed three franchise agreements that when fully built out over the next several years will nearly double our U.S. franchise footprint. These multi-unit development deals will be for a total of 38 units spanning Las Vegas, Tampa and the Carolinas.

Importantly, in the past six months we have signed up as many shops as we have in the previous eight years since we began franchising in the U.S. Our new partners are experienced operators all very well-capitalized.

As everyone knows in this business once you get some momentum in franchising the effect really begins to snowball and what's highly encouraging about these three agreements is that each individual deal exceeds our previous franchise record of four shops. Thus, we believe we are at a significant turning point in our franchising business.

We continue to have positive conversations with accomplished and experienced franchisees who are beginning to see our turnaround initiatives take shape. Our enhanced menu expanded off-premise and digital business and shop of the future are really resonating and we feel like the proof of our transformation lies here.

It's great to see growing franchise momentum and we believe we'll see more success in 2020 and beyond with this low-capital approach to future growth. With that I will now turn the call over to Tom who will walk us through the financial performance in the second quarter..

Thanks, Alan and good afternoon everyone. I will walk through our financial performance and then briefly discuss our 2019 outlook before handing the call back to Alan for his closing remarks. All comparison are versus the comparative prior year period unless otherwise stated.

Starting with the top line, total revenues decreased 4.3% to $105.6 million in the second quarter driven predominantly by a 4.0% decrease for our company-operated shops. Breaking down same-store sales our average check grew by 2% driven by a combination of price and mix.

As a reminder in Q2 last year, we delivered virtually flat comps at minus 0.2%, which was a 340-basis-point improvement from the prior quarter. It was also the first time we had seen flat comps in six quarters.

This year our second quarter comps were up 70 basis points compared to the first quarter of this year and our two-year stack was up 410 basis points compared to Q1's two-year stack.

Same-store traffic was 90 basis points better than the first quarter and our two-year traffic stack was 440 basis points better compared to the first quarter's two-year stack for traffic. Our traffic GAAP to Black Box also improved from Q1's minus 1.2% to negative 0.7% in the second quarter.

In the quarter, we opened three new shops, all of which were U.S. franchise shops. We also closed two company-owned shops for a total of nine year-to-date as well as two U.S. franchise shops.

As part of our strategy to hone our focus on the turnaround of our core business and exit international markets, this quarter we closed six international shops, leaving one remaining international shop, which is in the Middle East. We expect to close that shop in the second half of this year.

Our shop level margin for the second quarter was 16.6% of company-operated sales as compared to 18.8%. Cost of goods as a percentage of sales was 27.0% in the second quarter, an increase of 80 basis points primarily due to traffic driving investments and product mix.

For the quarter, labor was 30.6%, an increase of roughly 100 basis points driven by wage inflation and sales deleverage. Occupancy expense was 14.5% in the second quarter, an increase of 80 basis points due to sales deleverage and inflation in certain occupancy-related costs, including lease renewals, real estate taxes and common area maintenance.

Other operating expenses were 11.3% in the quarter, a decrease of 40 basis points due to our focus on expense management. Our general and administrative expenses were approximately $13.8 million in the second quarter or 13.1% of total revenue, an increase of 90 basis points. The increase was driven primarily by our increased advertising expense.

Adjusted G&A, which excludes store closure costs, CEO transition costs, restructuring costs and proxy-related costs, and which we believe is the better indication of the core G&A expenses in our business was $12.2 million in the second quarter and 11.6% of total revenue. Adjusted G&A was up $1.1 million in absolute dollars relative to last year.

Our adjusted EBITDA was $6.8 million for the second quarter compared to $11.5 million. The decrease was driven by the decline in same-store sales, our increased advertising investment, as well as labor and occupancy inflation. During the quarter, we had income tax expense of $0.2 million.

Our adjusted net loss for the quarter was $0.5 million or $0.02 per diluted share as compared to adjusted net income of $3.3 million or $0.13 per diluted share. In the second quarter, we repurchased approximately 351,000 shares of Potbelly common stock in the open market for a total of roughly $2.3 million.

At the end of the second quarter, we had $39 million available from our board authorized program for repurchases. Our capital expenditures came in at approximately $2.7 million in the quarter and our balance sheet remains strong with a cash balance of $18.1 million at the end of the second quarter and zero debt.

As we look forward, we want to fund the investments in our turnaround, while ensuring we maintain our target cash balance of $15 million to $20 million on the balance sheet. Our Q2 results were generally in line with our internal forecasts and thus we are reiterating the same-store sales and profitability guidance we gave you last quarter.

For 2019, we currently expect flat to low single-digit decrease in company-operated comparable store sales; adjusted EBITDA between $25 million and $30 million including the impact of ASC 842; cost of goods sold to be between 26.5% and 27.0%; labor as a percentage of sales to be between 31.5% and 32.3% of sales; adjusted G&A expense to be between $42 million and $43 million; and 15 to 22 shop closures including 9 to 12 company-operated shop closures.

We are slightly lowering our outlook for total shop openings from 12 to 18 to 10 to 15. We also expect four to five company-operated shop openings this year, a reduction from the previously communicated 6 to 8. We remain focused on balancing the initiatives to profitably drive same-store sales and traffic with tight cost control.

I will now turn the call back over to Alan for his closing remarks..

Thanks, Tom. In closing, I'd like to repeat that we strongly believe that our turnaround efforts are starting to take hold. Our menu optimization continues to be a bright spot in our turnaround as exemplified by the fact that this quarter's check growth improved significantly.

We have a number of LTOs that we plan to roll-out through the end of the year and we're excited about all of them. Our off-premise and digital channels have undergone a significant transformation over the last year and more so over the last few weeks.

We expect to see strong contribution from all three of our platforms here including catering, pickup and delivery. Lastly, our franchise initiatives are gaining momentum. We closed on three new franchise agreements that will nearly double our U.S. footprint and are continuing to have positive conversations with experienced and accomplished franchisees.

With that I would now like to conclude our prepared remarks and turn the call over to the operator for Q&A..

Thank you. [Operator Instructions] The first question comes from Nicole Moore who's with Piper Jaffray. Please go ahead..

Thank you. And appreciate the update this afternoon.

If you could talk a little bit about the topline performance maybe what were some of the things that you did in the quarter that had the upside that you did expect or didn't maybe something that went the opposite way things that were in your control that you thought as expected things that were extenuating circumstances? And I'm thinking a little bit along the lines of the industry benefiting from off-premise or digital orders where you really have a unique opportunity and relationship with the customer on the catering side.

So, just broadly on the top line and then as it relates to delivery and catering in particular? Thanks..

Thanks Nicole. Certainly, I think the one thing that worked pretty much exactly as we thought it would work was menu optimization. The bundles as we mentioned before we very successful. You saw the lift in the check. The mix has held up to the same levels or slightly lower than levels before it about 24%.

That slight decline was driven by the fact that at the same time we had an LTO which was the chicken mozzarella sandwich, which is not available as a Pick-your-Pair option. So, menu optimization worked very much like we thought it would. Off-premise and digital, again, seven consecutive quarters of positive comps.

We were expecting that and that held up. It's about 20% of our business.

And I think the one thing that changed in the quarter significantly was the amount of progress that the team made relative to the first quarter and by that I mean we had launched a new website, we launched the pickup shelves, we launched the marketplace on DoorDash, we closed a franchise deal.

Whilst that doesn't affect the topline, nonetheless, it's something that we had hoped and had signaled in the last earnings call. So, I think that we proved that a lot of progress could be made in a quarter. I think the other thing--.

So, it sounds--.

I'm sorry.

The other thing I just wanted to mention is we also signaled that we wanted to launch a new loyalty overlay which we did which was Summer of Perks and while that is not fully complete yet after six or so weeks, we saw significant improvement in the window between purchases and I think that was a pleasant surprise, but there are still more insights to come from that..

And on that last point could you talk to us a little bit about how you split up your consumer profile? And is it a loyal coming back -- guest coming back -- a value guest coming back or an infrequent guesting coming more often or a new guest altogether? Thank you..

I think I have to wait until the completion of the program. Six weeks in, I want to make sure that I don't give a false read. Obviously, we're encouraged by it because anything we can do that shortens the window, means retention.

And if you remember maybe it was last earnings call, maybe the one before, our insights indicate that when you get a customer to come X times in 91 days, the retention doubles and so it's very important that we find that -- a way to get that loyalist to become more loyal and to come that one extra time..

And just a final question on your prepared commentary around the franchise agreements. Congratulations on that. What's the timeframe? I think you mentioned it would double your store base. If you could talk us through the regions and the timeframe, that would be very helpful. Thank you..

Yes certainly. So, three deals for 38 shops over five to seven years. The three territories are Tampa, Carolina, and Las Vegas..

Thank you and again congratulations on those new agreements..

Thank you. And I'm glad you appreciate that because the team has really worked very hard and when I look at the caliber of the franchisees, I'm really excited.

I mean one of the franchisees is a very large pizza franchisee with deep restaurant experience and really knows how to particularly harness the off-premise business, so these are well-capitalized, very well-experienced franchisees and quite frankly I look forward to actually learning a lot from them..

The next question comes from Sharon Zackfia, who's with William Blair. Please go ahead, Sharon..

Hi, this is Matt on for Sharon.

Given the improvement in second half comps that's implied in your guidance, could you maybe flesh out a little bit more what's going to be the primary driver of that? I mean, you mentioned the DoorDash relationship as well as a ramp-up in email and social marketing things of that nature, so if you could just maybe rank those and detail exactly what they entail that would help..

Certainly. In order of biggest impact number one off-premise and digital, the catering website. I mean we've seen -- don't forget that customer spends 10 times more per transaction than the walk-in customer. The DoorDash marketplace, we've seen a tenfold lift in our growth since going on DoorDash.

The pickup shelves -- I mean the customer wants speed and convenience. It's critically important. If you can't provide that they'll go somewhere else, so all of those in the last five weeks. The second most important one in terms of impact is phase two of our menu optimization.

We made a conscious decision on this occasion to launch a 48-shop test where we're testing a traffic-driving LTO something we have not done before, something that we're excited about. It's only one week in -- actually this is the second week and so I look forward to sort of reading those results and depending on how that performs rolling that out.

And then the third biggest impact would be Perks retention which I just answered for Nicole, but retention is critical and I'm glad to see that we're seeing some momentum here with the 33% reduction in the repeat window.

That pretty much lines up -- I'm assuming you're talking about topline growth because we also have shop of the future which is very important to get that open and get those learnings under our belt so that we can plan for 2020..

Okay, understood.

And then, I guess just given the magnitude of the implied improvement in the second half, would you be willing to share what trends have been like quarter-to-date on comps?.

Yes Matt, it's Tom. In the last couple quarters, we've given a little peek into the subsequent month just based on what was happening in Q1 with weather and early Q2 with the marketing program.

So the way I'd frame it up is we don't want to continue that pattern to go into great detail, but I'd sum it up by saying, Q2 was quite close to our projection. It was a slight beat. July was also in line with our expectations on the top line.

And we're very optimistic by what we're seeing in our off-premise and digital channels and the other elements of our business that are working that Alan mentioned. So as a result we felt comfortable affirming our previous guidance..

Okay. Thank you. Good luck..

Thank you..

Thank you..

The next question comes from Gregory Francfort who's with Bank of America. Please go ahead, sir..

Hey, thanks for the questions. Just maybe going back to kind of the guidance for the year and looking at EBITDA, I think the implied math is that to get to the low end of the EBITDA range you kind of have to do flattish year-over-year EBITDA in the second half, and I think the first half has been down 40% to 50%.

Is there a comp level that is necessary? How should we think of what kind of comp you would need to deliver to hold kind of flattish EBITDA growth in the second half?.

Yeah, Greg. It's Tom. Thanks for the question. So actually to hit the low end of the range, it would be minus 10% on second half adjusted EBITDA. So as we look at our comp range that we've provided plus the other cost controls that we're implementing and have implemented, we see that we fall within the range and therefore we affirmed our guidance.

The other change that I would just call to mind is we had the pretty significant increase in advertising in the second quarter, which obviously affects the first half that you're quoting and that is much more comparable year-on-year, which for us is a big number in terms of our base.

So when you rack and stack all the things that we guided to, we felt comfortable affirming the $25 million to $30 million adjusted EBITDA full year..

You answered my follow-up question before I asked it. And then maybe just a second topic. In terms of the relationship between Potbelly delivery employees and third-party DoorDashers I think they're called.

How is that going to work when you have delivery orders coming in you have someone on staff and that's, I guess, managing the relationship between kind of having delivery personnel as well as having third-party personnel coming in and picking up orders? Is that something that you envision being a challenge to kind of manage through from a management perspective?.

Yeah, Greg. Good question. The way we see it -- and it differs by shop based on their mix of business, but we want our Potbelly associates primarily delivering the large catering orders. That's an important part of our brand experience we believe and one that we want to be the ones delivering it most often.

The second order of importance for lack of a better term or sequence is our delivery drivers will then deliver orders that come through our site or through our app. Any overflow of that is picked up by Dashers.

So we know what our capacity is for our drivers and as soon as they're tapped out -- and sometimes it's as little as one in a shop but it's not like anything what you see at Jimmy John's in terms of just the absolute number of drivers, but once our drivers are tapped out then it sort of diverts over to ring up DoorDash to pick up the order and deliver it.

And then, of course, it works differently on marketplace where we're not involved at all..

I'd just add to that one of the things that we're very cognizant of is trying to increase our reach and penetration and I think the delivery model actually does that very nicely, and we're beginning to see some proof of that.

And the best way I can demonstrate that is, if you look at our delivery business in P7 versus our delivery business same time last year, a couple of things stand out. Our weekend mix where we have capacity has actually grown by 4x.

Our midday mix which is between lunch and dinner has actually grown 3x, but what's really exciting is we have a lot of potential at dinner and the dinner consumer spends a lot more and that dinner mix has grown 5x time.

And we truly do believe that that's a signal that those are highly incremental occasions that were it not for the combination of all the options that, Tom laid out, we wouldn't be able to capture that. So I think that's really, really important to keep in mind.

And I'll also remind you that, the seasonality of delivery actually peaks in Q3 and Q4, particularly in our markets when bad weather forces you sometimes to stay home..

Thank you for that perspective.

And then maybe just one follow-up, can you talk about what you're expecting or seeing – but it may be too early on the margin profile of the third-party delivery orders and then what assumptions are going into that calculation or expectation depending on if you're seeing it or if you're projecting it? Thank you very much..

Sure, thing Greg. So, yes, obviously the best margins for us are people coming into the shop and either taking – doing take-out or eating in the shop.

And the way we look at it is from there the shop is sort of fixed costs, and then we look at the incremental margins associated with either, our folks delivering it, or Dashers delivering it through those orders that come through our application, or marketplace.

And actually, there's not a lot of difference between the margins of those three delivery mechanisms for lack of a better term. So, it's actually quite close and quite accretive. So, again it's not quite what it is in-shop, but certainly attractive.

And as Alan said, particularly with marketplace we see the day-part expansion as being highly incremental. And so we're quite enthused by that and that's all before DoorDash has made any promotional noise to enhance our presence on their site..

Thank you very much. Appreciate it..

You bet..

We have time for one more question. The next question comes from Stephen Anderson who's with Maxim Group. Please go ahead..

Yes. Good afternoon.

Just taking a look at your expectations for net store closures, I note that some of the progress you've made on off-premise, and I'll ask you off the call about this too, but being that your comps have been down 10 straight quarters and restaurant-level margins have been down 11 straight quarters what would behoove you from not getting more aggressive with getting rid of some of the less productive stores and maybe focusing more on the more productive restaurants and building from there or maybe having that as a template for store of the future?.

Yes, Stephen its Tom. Good question. I think in terms of the less productive stores what we call our bottom 25; the good news is we've closed a lot of the ones that were really negative. And as I think we've said on prior calls, the unfortunate part is those shops were not built that long ago, so the checks to exit those leases are not small.

But I think we've been measured and the good news is they've been modestly accretive to our shop margins. But more importantly the stores that are now on the bottom list, as those bigger drains have been pulled away, are really not nearly as negative as the ones that we've pulled back on.

So, -- and as we look across markets, I think in a couple markets where we're subscale and relatively unknown, our comps are quite a bit more negative, but they're not really pulling the average down by any means. And then as we look across our results are fairly consistent across the market.

So, I think encouragingly the things that are working and particularly the momentum in off-premise and digital and we have more initiatives for the back half of the year that should bode well for all of the shops.

But we will continue to monitor that and be willing to exit those shops where economically it makes more sense and will help the overall averages in our business of the key metrics..

You talked about some of the lesser-known markets where they -- you don't have as much of a presence.

I mean would you perhaps earmark those perhaps for refranchising maybe selling to a franchisee -- like I noticed your franchise agreements that you've signed in the past week and maybe looking at those as sort of a way to build out the franchise system?.

Yes, that's absolutely right and we are open to refranchising.

We've had some discussions with folks on refranchising and it has to be the right deal, but certainly I think that the good news is as our franchise development team is working with more experienced operators like the ones that we've signed, who I think have a higher burden-of-proof on signing up with us than a mom-and-pop franchisee would so -- I think that's also an encouraging signal.

But importantly, some of those want starter kits and they may want three, four, five, 10 shops in a market that they know well and they believe they can improve the operations and the economics of the current shops and then build more beyond that.

So, we're very willing to engage in those discussions and have the appropriate expectations on the refranchising structure..

As a final comment, what's your percentage of digital sales as of Q2?.

Our total off-premise and digital sales are 20%..

And you'll break that out separately..

Yes and we don't provide detail on the components -- the three components, but importantly all three are growing and there are a lot of initiatives in the second half that weren't baked in the first half..

Okay. Thank you..

You bet..

This concludes the question-and-answer session. I would like to turn the conference back over to Alan Johnson for any closing remarks..

Great. Thank you. Thank you again for your time today and your continued support. I look forward to updating you all on our progress on the next earnings call. Have a great evening..

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