Good afternoon, and welcome to the Potbelly Corporation Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Matt Revord, Chief Legal Officer. Please go ahead..

Good afternoon, everyone, and welcome to our second quarter earnings call. Our presenters today are Bob Wright, our new Chief Executive Officer; and Steve Cirulis, our Chief Financial Officer.

Please note, we have done something new today and provided a set of PowerPoint slides will accompany our prepared remarks and access these slides on the Investor Relations section of our website. After our prepared remarks, we'll open the call for your questions.

I just call your attention to our cautionary statements on Slide 2 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 2020 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 the future performance nor should they be relied upon is 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, the factors that could cause actual results to differ materially from the forward-looking statements and other information we've given 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 Bob..

Thank you, Matt, and good afternoon, everyone, and thank you for joining us today. I'm excited to be here today on my first earnings call with Potbelly. And while I've only been on the job for about two weeks, I can tell you that I'm even more excited about the opportunity that we have in front of us than I was when I accepted the position.

Now before I go any further, I think it's important to recognize the outstanding contribution of all the Potbelly stakeholders over the last few months. This has obviously been a fairly unprecedented quarter in the restaurant space and it took the extended team's efforts to navigate the pandemic short-term impact on our business.

From our team members and franchisees on the front lines who are working extremely hard to service our customers safely and to protect our communities to our vendors and landlord partners who understand that we are all in this together and everyone in between. I offer my most heartfelt thank you.

For those of you I haven't met yet, I'm looking forward to meeting all of you in the near future. And I look forward to the growth that I know we can accomplish together. As you turn to Slide 3, you can see some details on my background. I'm a restaurant guy and have been for over 30 years with experience in both fast casual and quick service.

Most recently, I was the Chief Operations Officer at Wendy's, which as you likely know is the third largest quick service restaurant company in the hamburger space, with over 6,800 restaurants globally. Previously, I served as President, Chief Operating Officer and Interim Chief Executive Officer at Charley's Philly Steaks.

And going way back in time, I started in this industry delivering pizzas for Domino's the summer after my freshman year in college, before moving up the management ranks there. Now someone who has been in the restaurant industry, my entire career I've admired Potbelly both as a brand and one of my favorite sandwich spots.

And at this stage of my career, I'm fortunate to be in the position to be able to decide what I wanted to do next. So let me reinforce why Potbelly is exactly where I want to be. First, it's the brand. Potbelly has a brand that is centered around quality and freshness.

Great brands have staying power that others simply don't have, and we have that here at Potbelly. One thing I've learned in my decades in the business is that building off a great established brand is a significant competitive advantage. Second, fast casual.

We're fortunate to be in what is still one of the fastest growing segments in the restaurant space. Fast casual and fast casual sandwiches are strong growth areas where I know I can leverage my skill set and experience to be successful as we move forward. It's also a space that has shown true resilience in spite of today's challenging times.

And we're going to talk about those and walk you through just how resilient this organization has been over these last few months, and how it has adapted quickly to a rapidly evolving marketplace. Third, store mix. We have a blend of company-owned shops and franchise shops in our business today.

In fact, 90% of our shops are Potbelly owned, which has a tremendous advantage when you are executing a turnaround. This also allows us to test, tweak and succeed across our entire platform, and then leverage those successes to generate growth across both platforms. Fourth is scale. With our scale, we can build stronger unit level economics.

We can build and implement other competitive advantages in technology and menu offerings. Now we can offer exciting career growth opportunities for our team members. And while we have solid scale today, we still have great opportunity for growth in the future.

I've been highly impressed with the team that I've had the chance to interact with so far here at Potbelly, all of which have shown true dedication in helping this company navigate this crisis.

I've also enjoyed my first of many days in shops, working with our team members and engaging with our customers and we have plenty of work to do, but many of the intangibles are in place for us to build upon. And I'm truly looking forward to the challenge.

I'll now turn over the call to Steve, to talk more specifically about our execution and performance during the second quarter. And then I'll come back at close with a few big picture thoughts before we take your questions.

Steve?.

Thanks Bob, and good afternoon, everyone. Please turn to Slide 4 of the presentation, where I'll walk you through some of the key takeaways from the second quarter. As Bob outlined, our team faced what was clearly the most challenging quarter in the company's history. We not only stabilized the business, but we strengthened it for the future.

That includes solidifying our management team with Bob's hiring, my own in April and the addition of two new Board members also with significant restaurant experience.

While I have only officially been in the CFO role for about four months now, and I've only had the opportunity to work with Bob for a few weeks, we are excited about the caliber of this leadership team and about our road ahead. So let's recap the quarter and where we ended up as of June 28.

Building off our update in early June, we said that our business trough at the end of March had a negative 68% same-store sales comp, driven by dining room closures and stay-at-home orders. We acted decisively by implementing aggressive cost controls. As the quarter progressed, we began to see significant adoption of our off-premise options.

We innovated with new offerings and our comps improved significantly over the large majority of the quarter. These improving same-store sales in conjunction with our proactive cost mitigation actions reduced our weekly cash burn by approximately 75% in the quarter.

We had cash flow neutrality at the shop level in late May, and it remained above that level since, even though we have started to pay the majority of our rent again starting in June. We ended the quarter with $45.8 million in total liquidity. This includes cash on hand of just over $29 million and access to our revolver.

Total liquidity was flat quarter-over-quarter. As a result of proactive operating tactics and improving health of our business, the factors that led to the going concern disclosure in the company's first quarter financial statements have been resolved.

We've also continued to have constructive conversations with our landlords across all of our shops as we look to build a stronger long-term partnership for both parties. To this work, we are improving the profitability of our shops, and the health of our real estate portfolio.

As of this week, we reached agreements to close 16 shops permanently, and renegotiated over 187 of our leases. Given our business trajectory, we now expect to close fewer than 50 shops as we finalize these conversations with landlords in the coming months. This is much lower than the 100 shops we initially contemplate at closing.

Lastly, we've had collaborative discussions with our lending partner and amended our credit facility, resulting in lower borrowing costs with the same level of available liquidity through early 2021. Now let's get into how we achieve those results, starting with our cost reduction efforts. Please turn to Slide 5.

As the second quarter began, it was clear that our entire industry was in crisis. Our team reacted quickly and cut costs across the board.

This included significant reductions in G&A, the pairing of over one-third of our salary headcount above the shop level, the deferral or elimination of all, but break, fix maintenance CapEx and the non-payment of non-triple net related rent in April and May.

As we project some of those costs forward, we estimate that we've removed over $25 million in expenditures in the business. As a result of those efforts, we reduced our weekly year-ago cash burn from $2 million a week in week 13 to roughly $500,000 per week by the end of the quarter.

Our assumptions that support this forecast are fairly conservative and include the following. First, no substantial recovery in same-store sales in the third quarter and slightly improving comps in the fourth quarter. Two, relatively stable expenses from where we stand today and the inclusion of full rents in the second half of 2020.

And third, current and projected lease termination costs that will primarily hit the third quarter. Under those assumptions, we would have total cash usage of approximately $14 million for the back half of 2020. It's worth noting that without these lease termination costs, our projected burn rate would fall to approximately $200,000 per week.

Now the intent of providing our investors with this information is not to offer guidance. Rather, we wanted to show that even under today's still muted conditions with nearly $46 million in liquidity, which includes $29 million in cash. We have the ability to self fund our path forward. Please turn to Slide 6, which outlines key Q2 actions.

First, we remain fully committed to prioritizing safety for our people, our customers, and our communities. We installed plexiglass barriers in all of our shops.

We're implementing an automated solution for health checks for all of our team members, masks are required for all of our employees and we've instituted regular required temperature checks as well. Lastly, we've enhanced our cleaning protocols and continue to constantly monitor new health guidelines.

All of these procedural enhancements have been met with support from our team members and customers alike. We also continue to leverage the critical digital investments that we made last year.

This includes updates to our app, expanded partnerships with DoorDash, Grubhub, Uber Eats, and we recently added Postmates to put us on all the major third-party delivery platforms. Innovation was especially critical to our rebound.

We launched several new initiatives during the quarter to bring our loyal customers back, including Potbelly Pantry, Family Meal Deal and Curbside Pickup. We're currently testing a number of other ideas now, including additional off-premise convenience channels. We hope to outline some of those for you next quarter.

To stay more connected with our customers, we relaunched our Potbelly Perks program during the quarter. As a reminder, our goal was to simplify the program, but it was also to enhance the organizations use of data analytics moving forward.

There's much more we need to do on that front, but the early success of this relaunch program was very exciting as we saw a 53% increase in our membership quarter-over-quarter and now have over 2 million members. This is a great first step and lays the foundation to enhance our usage of data analytics and building of capabilities in the future.

Lastly, as I previously outlined, we've made tremendous progress in managing our overall real estate portfolio and its associated leases. We had to temporarily close 55 shops, but have reopened four of those so far and are planning to open up another nine by the end of August.

Many of those are university related shops where schools are planning to reopen at least partially if not in full I'm also pleased to report that all of our franchise partners remain healthy and are pushing forward with their programs.

We opened two new franchise shops in the second quarter and expect to see another two to four open by the end of the year. Please turn to Slide 7. Here we provided a more detailed look at our same-store sales comp progress in fiscal Q2.

For the most part, we've seen a steady improvement throughout the quarter with a brief dip in week 23 that coincided with some of the nationwide protests and curfews.

While the pace of the recovery has slowed somewhat with recent virus outbreaks, the trend is still highly encouraging as our customers established new behaviors and access us across our channels. You can see that we've been cash flow positive at the shop level since May.

We will be cash flow positive at the enterprise level before lease termination costs if we achieve same-store sales in the negative high teen. Of course market conditions are changing all the time as the number of COVID-19 cases modulate and restrictions on dine-in capacity vary market-by-market.

We can't precisely predict when we'll reach those levels, but with some easing of pandemic related restrictions and as people become more comfortable with the nation opening up. We should continue to see positive progress over the second half of the year.

I think it's helpful to offer some store level examples of how our business improvement varies with changes in pandemic-related restrictions. First, on our Sunbelt markets of Phoenix and Texas were outperforming other markets on a same-store basis, up until the recent resurgence of COVID cases.

They are still strong performers, but their momentum was temporarily paused than it's not rebuilding again. In markets like Chicago that have opened up more slowly, we are seeing solid improvements and the pace is continuing to improve. In July, Chicago cut at a same-store sales deficit in half.

In general, we saw an average jump of around 8 percentage points to same-store sales comp across the two weeks after markets opened their first and then their second 25% of diamond capacity. This is highly encouraging and tells us we can continue to recover lost sales when new cases of the virus weighing for extended periods.

Also, our shops performed differently depending on the real estate type. Our suburban shops have consistently outperformed our other real estate types and continue to improve. Our CBD and airport locations, however, remain challenged, but our smaller part of our mix. Slide 8 provides a summary of the shift in our revenue mix over the last five months.

Our mix shift from 70% on premise to 70% off-premise during the early stages of the pandemic, validating all the investments we made in 2019 to build our digital foundation, delivery, pickup and drive through all became larger contributors to our business in Q2.

This chart also shows the positive effects of easing dining restrictions as both May and June saw an acceleration in visits to our dining rooms, which corresponded with improvement comps. Before I leave this slide, I think it's important to note that Potbelly has historically been seen primarily as a sandwich option for weekday lunch.

But one of the bright spots to this situation is that we've seen solid strength in the dinner daypart and weekend business that we didn't have in the past. We've helped faster that trend with options like our Family Meal Deal. Now, while we can't say the shift is permanent, we're encouraged by these results and the daypart expansion.

Please turn to Slide 9 and I'll walk you through our income statement and specific financial performance for the quarter. We finished the quarter with total revenues decreasing 46.8% to $56.2 million, company operated same-store sales declined 41.5% in the second quarter.

Breaking down the same-store sales, our average check grew by 5.3% that was offset by traffic decline of 44.5%. Our shop level profit margin for the second quarter was a negative 13.9% of sandwich shop sales as compared to positive 16.6% in the prior year.

Our general and administrative expenses were approximately $8.2 million in the second quarter or 14.5% of total revenue compared to $13.8 million or 13.1%.

Adjusted G&A, which excludes store closure costs, restructuring costs, and proxy related costs, and which we believe is the best indication of the core G&A expenses in our business, the $7.3 million in the second quarter or 13.0% of total revenue. We will continue to tightly manage to control or G&A expenses in light of the current environment.

Adjusted EBITDA loss was $14.4 million for the second quarter compared to a positive $6.8 million last year. The decline was driven by lower sales related to the impact of COVID-19. G&A, our other costs areas were up as a percentage of sales due to deleveraging.

However, those costs areas were generally down in absolute dollar terms as we aggressively managed costs throughout the quarter. Cost of goods sold expenses were $16.1 million in the second quarter or 28.8% of shop sales compared to $28.3 million or 27.0%.

Outside of COVID-related impact, which was primarily driven by cost inflation on certain products and by a shift in product mix due to increase in off-premise sales partially offset by menu increases. Labor expenses were $21.9 million in the second quarter or 39.2% of shop sales compared to $32.1 million or 30.6%.

This was primarily driven by sales deleverage and certain labor costs, and not directly variable with sales and was partially offset by a decrease in expense from close shops. Occupancy expenses were $14.7 million in the second quarter or 26.2% of shop sales compared to $15.2 million or 14.5%.

Drivers included sales, deleverage and inflation and certain occupancy-related costs, including lease renewals, real estate taxes and common area maintenance. Please note that while we may not have paid some of our revenue in the quarter, we fully accrued for it. So you'll see a cash flow benefit, but not a direct expense one on the income statement.

Other expenses were $11.0 million in the second quarter or 19.7% of shop sales compared to $11.8 million or 11.3%. The decrease was attributable to sales deleverage in operating expense items, such as utilities and other expenses, not directly variable sales. I'd also like to point out the increase in our accounts payable this period.

This represents a negotiated restatement of payment terms with our vendor partners. As Bob mentioned, our vendor partners have been supported of us through this process and we look forward to fostering these relationships. Cash preservation remains a key priority.

Our team move quickly at the onset of the pandemic to radically adjust costs and preserve capital. We continue this conservative cash posture and dramatically reduced our cash burn rate.

As of June 28, cash on hand was $29.1 million and we maintained $16.7 million of availability under our revolving credit facility, yielding total liquidity of $45.8 million as of June 28, 2020. With that, I'll pass things back over to Bob for his closing remarks..

Thanks, Steve. We'll close our prepared comments on Slide 10. Again, my first two weeks with the company have been exciting. I have a strong sense for the things that we do well and the things that we need to improve.

But the team and I will need another quarter to fully develop the key components of the next leg of our turnaround strategy, and I look forward to sharing these with you on our next earnings call. In the interim, however, we have four immediate priorities. Number one is brand strength.

Potbelly is a tremendous brand, and I often hear from my friends and colleagues that travel to areas where we have shops that Potbelly is a must stop for them.

And as you saw by the same-store sales data that Steve shared and the 53% acceleration in our recently relaunched Perks program, we have a fantastic set of loyal customers that keep coming back, but there's more we can do to reinvigorate and better leverage our brand, expand its reach and continue to build even stronger connections with our customers across the country.

Number two, invest in our people. Potbelly couldn't have survived the last few months without the dedication, sacrifice and resolve of our people both inside and outside of our shops.

But beyond this crisis, our people are our most important asset and we must and will invest in them to ensure that we're putting the best most talented teams safely on the field. Number three, prioritize cash. As Steve discussed at length, cash and cash flow are the lifeblood of any company.

We have done an incredible job reacting to the crisis and we will continue to do what's necessary to return to positive cash flow generation. We're on the right trajectory. And as we execute against that goal, we will look to prudently invest a future free capital into areas that will help us grow going forward. And number four, execute and then grow.

And thus our last priority is execution and setting the table for growth. We need to enter and exit the third quarter with the same resolve was shown during the second quarter. Excellence and execution has always been a premium in the restaurant business.

We keep up this focus as we operate our shops every day to the highest standards while doing the same and every other aspect of our business. We need to execute and adapt and then execute and adapt again.

As the economy continues to strengthen and as the restrictions on our dine-in facilities lesson, we will return our focus to driving long-term growth and value for all of our stakeholders. I look forward to the journey and appreciate all of your support for Potbelly.

With that, I'll now turn the call back over to the operator, so we can address your questions.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Nicole Miller with Piper Sandler. Please go ahead..

Great. Good afternoon, and thanks for the update.

I wanted to ask first about the transition because that in and of itself isn't necessarily unusual, but transitioning in a virtual world certainly is, so how are you going to get out and know the team and know the store base? And then the second part of that would be, what did you learn when you studied the brand and thinking about the core legacy probably more narrow positioning versus where it is today? And when you think not a year out, but really long-term into the future, how narrow versus broad do you see the Potbelly positioning be?.

Hi, Nicole. Thanks for the question. And you're so right. This is a time where I think any transition is something that it really is kind of unprecedented. I will tell you that the virtual workforce has really cracked the code on how we stay connected.

And so with not only the senior leadership team, but with others deeper in the organization, it has been a very busy couple of weeks for me in terms of those connections. We've had our face-to-face meetings. And as I mentioned in my opening comments, I've already had my first of many shop days.

I worked a full day in one of our shops right alongside one of our training managers who did a marvelous job exposing me to loading positions and the other positions in the restaurant. I got to interact with our customers and experience that that world and transition to with COVID and the – all of the safety enhancements that we've made in our shops.

And I think we've done a nice job with that. In terms of getting out, travel restrictions continue to be lifted and ease a little bit. So fortunately, we have shops in number of locations and we have.

As Steve mentioned during the call that the different shops types should be a priority of mine as I spend more time in the field, not only in the shops, but with the team spending time in the shop. So I think that given where we are that transition has gone quite well, and everyone's been very supportive.

Business is still about our shops and where our customers are interacting with us. In terms of the legacy of the brand, I think that I've mentioned the brand a number of times in my comments, and there are genuine strengths here. And you always start in the restaurant space with the food.

And the way this concept I think was developed is still where we turn to our core strengths. We have the best toasted sandwiches in the business. And I will tell you after spending a lot of time eating Potbelly, I was a fantastic consumer before, but it's a daily occurrence for me today.

We have healthy options and I don't believe we have a soft spot in the menu. So it's about enhancing that and making our menu maybe a little more approachable, but also using the leverage of the food itself.

The experience is something as I've studied some of the research that's been done, that is a leverage point for us, and I want to make sure that we don't let go of that going forward.

And then I've mentioned it already as well, but our people are a big part of the legacy of the brand, we get that feedback even if you look at some of the social media commentary about customers' interactions with Potbelly. There's a lot of people centricity to that.

The engagement that our employees have with our customers and how we move people through the line, the engaging process all along can work really well. In terms of the final part of your question about the breadth of the brand appeal going forward.

Actually, I think that there are some things that are in place and some strategies that we will evaluate over the next quarter that could open up that breadth for us a little bit. And menu appeal that I mentioned already, the different shop types that we have.

So in terms of the demand space that Potbelly can play in, I think there's a ton of potential for that. As we strengthen our unit level financials, I think we've got a very attractive investment model that we can look towards and tailor that accordingly.

And then just as importantly, Steve talked a lot about some of the numbers we're seeing in the digital appeal and the off-premise appeal that our Potbelly brand has. And I saw that in spades. And you know what the design is set up to handle that off-premise business at the shop level too. So I won't stray too far from the core essence of the brand.

That's what makes brand – this brand special. But I think the breadth of appeal is pretty broad, and it's exciting for the growth for sure..

Thank you for taking the time to unpack that in just a second. And final question from me this afternoon, it was really interesting kind of the way you closed out the commentary. And I think this is an exciting brand and it could be tempted to try a lot of things because, that's what restaurant turnarounds can be about.

But it sounds like maybe you're thinking more of almost stage gate process so that you can control and understand what is working and what's not working.

How do you expect to basically execute the turnaround and prioritize one thing over another?.

Well, I think that one of the important things to think about in terms of prioritization, of course, is to get our strategy set really well first. And we have some near-term challenges that we have to continue to work on it and we've outlined a lot of those looking back to Q2.

We are still looking forward to Q3 and the remainder of this year, and we're confident in the future. But we don't want to lose sight of what is super critical at this point in time. That's why I outlined those near-term focus areas for us right now.

But I would tell you this generally and sort of a generally governing principle for me is that the things that we do include in our core strategies, our objectives and our tactics are going to be insight-driven. We need to understand exactly where the strengths are that we can leverage and outcome-focused.

Because turning those insights into true outcomes and growth outcomes is what benefits us the most. So there's not a lot of value, I’m just throwing things against the wall to see what sticks. I do think we have some very good insights that the brand has on the shelf. And I think we're going to desire a lot more.

Data makes a big, big difference in these decisions that we're making. And we're going to figure out how to unpack that even better in the future..

Best of luck, and thank you very much..

Thank you, Nicole..

The next question is from Matt Curtis with William Blair. Please go ahead..

Yes. Hi, thanks for taking the question.

I guess on the renegotiated leases, could you share any detail on what the level of savings you're expecting to get from that will be going forward perhaps on an annualized basis?.

Yes, sure. So I can give you a couple of thoughts, right. So let's talk about the closures for a second. Last time we talked, we were contemplating up to a 100 closures, and as you know, we announced we're now pulling that number back to closer to 50, and largely due to the fact that we've got a business that is responding.

And we've also had some productive conversations with landlords where we've had some shops that were unprofitable, but based on a new lease structure, those shops are profitable to operate and then come off the closure. So that's all good news. Yes, so we expect to save – and I'll give you some sort of rough numbers here.

We've got abatements, we've got deferrals, and then we've got closures. We've got already at least $1.6 million in abatements that we've been able to work through. We expect right now at least $3 million in deferrals that we've worked through.

And then on the closure side, if you take the shop performance from 2019 and apply that, we would expect to save, call between $3.5 million to $4 million on the EBITDA side for the closures..

Okay. And then for the up to 50 closures you're looking at, when you're looking at those locations, it sounds obviously like a lot of them are still unprofitable or expect it to be once we kind of get through the current situation.

But are there any other commonalities between those 50 that you can share with us either in terms of where they maybe located or anything else?.

Yes. We don't really have a pattern not by design. It's just that these shops tend to perform differently based on different conditions. There are some things – some are market related for sure, but some are very micro related to the actual block that these things are on or they're distanced from public transportation or otherwise.

So we don't have a sort of a focus as it relates to any particular market or any particular real estate type that we're working on. It's a pretty broad group of targeted closures..

Okay. Understood.

And then finally, I guess, just given the plateauing, I guess you could say that you're seeing in the Sunbelt, could you perhaps share what your trends have been like in the month of July you’re [indiscernible]?.

Yes. I can give you sort of a rough look. Our P7 number so far have been roughly similar to the way that we ended P6. And I think what's interesting to note is we've got different performing shops in market based on the COVID resurgence or the COVID dulling if you will. So I mentioned Chicago as an example, right.

Chicago, to finish the quarter was not performing all that well when you blend it across the three months. But it kept getting stronger and stronger and stronger as the periods went on. And in July, we saw the deficit cut in half. So that was a strong performance out of Chicago. That's our biggest market and we have 114 shops in Chicago.

So that's good news for us. Weather helps a little bit. We've got a lot of patio dining and shops are still between 25% and 50% dine-in capacity in many of these markets. So that makes a difference for us as well. Similarly, our suburban shops continue to outperform the rest of our real estate types.

And even accelerating in through July, our suburban shops are continuing to strengthen kind of week-over-week even in amongst the challenges that we're seeing in some COVID resurgent place markets. And then also drive-throughs, right.

So our drive-throughs in the quarter weren't positive comping for the year, but coming out of the P7 period, believe it or not, our drive-through shops are positive comping. So again, the story is not just at the high level. The story kind of is one level deeper as you look at markets and some real estate types..

Okay. Thanks very much and good luck going forward..

Thank you..

Thanks, Matt..

We have time for one more question, and that question will come from Gregory Francfort with Bank of America. Please go ahead..

Hey, thanks for taking my question. I actually had two, if that's all right. But the first was on the family bundle that you rolled out. I'm curious how that done and it seems like a really good value to the consumer.

And I guess, as it's – as you've rolled it out, what's been the balance between food costs and sales in terms of kind of managing that and what's from the consumer reception? Thanks..

Great question. Yes, we've been excited about the family meal option that we've offered, and it's provided us with relevancy in a daypart where Potbelly traditionally hadn't had relevancy and puts us I think in good company with folks like pizza and wings those things that are kind of family oriented shareable products.

The fact that our sandwiches are toasted, I think creates that relevancy for the dinner daypart as I think a lot of folks look for hot items for dinner. We've seen and continue to see the – our performance be incremental for us even with the discount. So that's helpful, and it is a great deal.

I mean it is among the best you'll see out there in the marketplace. So we're excited to continue it as it does remain incremental for us. I think it is not performing at its peak and how to kind of build, and then it has plateaued a bit, but we continue to energize it with new offerings.

We are introduced like a more kid version for families with smaller children. We have a slightly bigger version with more sandwiches included. So it's a platform for us that we'll continue to work with and so far as we can see, it continue to drive business for us in the daypart in an incremental way.

But let's not – the ultimate focus, which is, we know our biggest daypart is lunch. And that's the part of the business where I think a lot of our turnaround will be built not necessarily on alternate dayparts at this point..

[Indiscernible] add to the. Sorry..

Greg, if you don't mind, the other thing I'd add to the family meal deals is it's a good example of how we can expand the appeal not only across those dayparts, but that's an option that seems to play pretty well in our off-premise business and the digital business.

And we're seeing that consumers are enjoying the opportunity to stay in their car and pick-up the curbside. And if they're going to do a home meal replacement for the whole family, this is working, it's another way for that brand to work harder for them outside of our core dayparts..

That's helpful perspective. And just if I could ask one last one.

A bunch of restaurant companies are – I think one of the key questions for investors is as you get out to, I don't know if it's next year or the year after where you get a full sales recovery, where margins will go? And I don't know if that's – you guys are cutting menu items at this point in time or anything like that.

But I guess if you get back to full AUV's, do you think margins, I mean, given some of the work you've done on the rent side maybe versus some of the headwinds and tailwinds of the different channels for off-premise, where do you think margins would shake out on kind of a 100% AUV recovery at this point in time, if you can even say?.

Yes, it's hard to give you a number right now because it's hard to say when we're going to hit that level. But I can say though is, harking back to the earlier comments around cost management and focus on cash. I mean, we really worked hard to get our expenses and our costs to a point where we felt that they are working for us.

We are much leaner, much more efficient I think than we were in the past. And we don't necessarily expect to build costs back into the business at any great rate. Now Bob and I have to work hard on what the strategy looks like. And if there are places where we might add cost in, that provide us with a great return, we'll certainly consider that.

So we expect going forward as sales continue to recover and we manage our costs kind of closer to the level that we've got right now that we would expect to see margin expansion. I mean that's ultimately where we expect us to go..

Thank you guys for the thoughts..

Good weather on the upside should help us, yes..

Okay. Thank you, both..

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

Well, thank you again, everyone for your time today and your continued support. As we've discussed today, we have a once-in-a-lifetime opportunity here to leverage a strong brand founded on the basis of quality and freshness. We have the tools to be successful and to return to growth.

I look forward to updating you all on our progress, until then have a great evening and stay safe..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..