Thank you for standing by. This is conference operator. Welcome to Potbelly Corporation’s Third Quarter 2020 Earnings Conference Call. As a reminder, all participants are in listen-only 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, Potbelly's Chief Legal Officer. Please, go ahead..

Good afternoon, everyone, and welcome to our third quarter earnings call. Our presenters here are Bob Wright, our President and Chief Executive Officer; and Steve Cirulis, our Senior Vice President and Chief Financial Officer. Please note that we provided a set of PowerPoint slides that will accompany our prepared remarks.

You may access these slides in the Investor Relations section of our website. After our prepared remarks, we'll open the call for your questions.

I'd like to call your attention to our cautionary statements on slide two, 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 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 future performance, nor should they be relied upon as representing management's views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and events or results could differ materially from those presented due to a number of risks and uncertainties.

Additional detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information that will be given today, can be found in our most recent Annual Report on Form 10-K under the heading of 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 hope you and your families have remained safe and healthy since our last update. The last time we spoke, I'd only been on the job for a few weeks.

Over the past three months, I've had the privilege of meeting many members of the broader Potbelly team and we immediately started putting pen to paper to plan how we're going to return the brand to growth. Today we will provide a preview of this new strategic focus.

We've built our plan on the foundation of the unique differentiated and lasting Potbelly brand promise as the sandwich shop, with the cravable quality and good vibes of A First Class Dive. Our plan utilizes five strategic pillars that work together with an ultimate emphasis on traffic-driven profitability.

We'll discuss that framework in greater detail later in the call. Now before I go any further, I want to extend my personal appreciation to our people. Everyone in the Potbelly system wakes up every day and practices the art of service for a living.

They work hard, because they care about each other and our customers and delivering safe and satisfying experiences, to bring our brand to life every day and I'm incredibly grateful that they are on our team, here at Potbelly. So to our employees, franchisees, supplier network and everyone in the Potbelly family, thank you.

Now I'd like to begin on slide three and provide a few high-level thoughts on how the business performed during the quarter. The business continues to show encouraging signs of stabilization throughout the period, as consumers demonstrated increased mobility and greater willingness to venture outside their homes.

As a result, we saw same shop sales steadily improve throughout the quarter and they have now improved for six consecutive months from May to October. Importantly, our shop level profitability also improved throughout the period and ended the quarter positive.

Much of this has been aided by stronger performance from our shops that offer drive-throughs, as well as a sustained increase in digital and online ordering. Our drive-through shops have posted positive comps for five consecutive months now.

Similarly, our digital channels have showed sequential as well as year-over-year positive comps, as consumers continue to emphasize off-premise and delivery options. In addition, our shops located in suburban areas are performing very well.

Increased work from home levels, along with our family meal deal options are driving better traffic at our suburban shops. Last quarter we told you that we relaunched our Perks loyalty program to be more simplified and engaging to our customers. The response has been great.

We now have roughly 2.1 million active Perks members, a 32% increase versus Q3 of 2019. This is a testament, both to the brand strength and the large base of loyal Potbelly customers engaging with us. Importantly, this is driving real financial success too, as we saw a $1 million increase in Perks-related purchasing on a quarter-over-quarter basis.

Additionally, we saw double the amount of Perks activity in the quarter, resulting from our targeted efforts and we plan to launch new promotions around refer a friend bonuses and engagements to further drive customer awareness and Perks' membership.

Meanwhile, the cost reduction actions we've taken over the last few months have stabilized our cash burn. We remain in line with the $0.5 million weekly cash burn projections we outlined for you last quarter, inclusive of lease termination cost.

This resulted in a cash balance of roughly $24 million as of quarter end and our total liquidity position of around $51 million. And while the pace of our recovery has slowed slightly, it continues to be up and to the right. Therefore, we're starting to take calculated steps to optimize our shop footprint.

For example, we reopened 14 shops in Q3 that had been previously closed in response to the pandemic and we expect to reopen an additional 10 more in the fourth quarter. We also opened two brand-new franchise shops in North Carolina and one company-owned shop in Illinois.

We currently expect to add two more franchise shops and one more company-owned shop in the fourth quarter as well. While reopening shops and adding new shops is great to see, we also continue to actively engage in the lease negotiation effort that we outlined for you in our last two quarters.

This program has been highly successful and we're nearing the end of the process. Steve is going to touch on it in more detail. But from a big picture perspective, we're lowering our expected permanent closures to just 25 to 30 shops and we've renegotiated 280 leases as of early November.

I'd like not only to thank the team that helped drive this important initiative, but also thank our landlords and their support. We look forward to growing together as we move forward. Now let's turn to slide four.

With the business on a more solid footing, we're taking steps to build on our pandemic response, with a focus on executing our turnaround and returning to growth. We've strengthened our team with the addition of Adam Noyes to our leadership as a new Chief Operations Officer.

Adam is a seasoned operator with a proven track record of driving top line sales, increasing traffic as well as expanding margins at the shop level during his time at Checkers and Rally's restaurants. He's already making an impact on each of these areas here at Potbelly and is a great addition to the team.

As dine-in restrictions slowly evolve at various levels across the country, customers are returning to our shops and we want them to feel welcome, safe and comfortable. We continue to do deep daily cleaning and thorough cleaning across all of our shops.

And we've reset every dining room to ensure customers' first trip back into a Potbelly is safe and enjoyable. Even as digital business continues to grow, when you consider that dine-in take out and digital order pickup customers cross our thresholds into our shops, we know that the shop environment is still incredibly important.

After all, all of those customers account for nearly 75% of our traffic. We're also expanding our hours of operations to accommodate our increased traffic, volume and better comps. Recently, we instituted a return of operating hours to pre-COVID levels in a number of shops with good initial success.

We expect to continue to roll out these expansions to even more of our shop footprint in Q4. And I want to again highlight, our new points-based Perks program, as it's beginning to deliver incremental results. For example, we're seeing between 3% and 9% sales increases when we focus Perks on a specific consumer need or business problem.

A good illustration of this was our Double Points Thursdays program. We weren't getting our fair share of Thursday sales versus our peers after COVID hit. But through this targeted effort across our loyalty base, we have improved our Thursday sales volume by about 9% from the prior period, using Perks as a driver.

We're also making investments on the digital front, as this channel is continuing to show strong comps. We've tested the performance of digital media in two markets and have a third one that is nearing completion. We're seeing a consistent profitable return of 4:1 revenue on this investment. It's made up almost entirely of traffic growth.

This leaves us increasingly confident, that we'll be able to scale our media spend in 2021, with great effect on the business. And lastly, we're finalizing our brand position and strategic framework, which as I mentioned, I'll discuss in greater detail later in the call.

But one of the components of that plan included a thorough review of our overall expense structure. We have a slightly smaller footprint, given the lease negotiations I've outlined, and we need to rightsize our G&A to better align with that, as well as our future strategy.

Thus, we are moving forward with a corporate restructuring to put Potbelly on a stronger path to profitable growth in the future. This will be accomplished through corporate expense optimization, consolidating our shop support services and through other expenses and staff reductions.

It's critical to note that no positions are being eliminated in our shops. After all this is where the extraordinary Potbelly experience comes to life. So this restructuring is not a general across-the-board cut, but rather we'll be focused on where we can gain efficiencies, while continuing to support our shops at the highest level.

These are difficult initiatives. They involve change and they affect people. My team and I will take great care to carry out this plan in alignment with our values.

I'm confident, that the work will better align our resources and provide a stronger base for us to build upon, as we emerge from this crisis, and that it is a necessary and appropriate step for Potbelly at this time.

This plan will be largely completed by the end of the year, and we expect to reduce our G&A cost by between $3.5 million and $4 million. To close these opening remarks, overall, I'm very happy with the stabilization of the business and the steady progress, we've seen over the past few months.

And as I sit here today, I have full confidence in our team and our strategic plan to restore Potbelly to growth, as we exit this pandemic. All of the intangibles and competitive advantages Potbelly possesses remain intact and will serve as the linchpins of our path forward.

So with that, I'd like to turn the call over to Steve to talk more specifically about our financial performance during the third quarter. And then we'll close with a deeper dive of our new five-pillar strategic framework, before we take your questions.

Steve?.

Thanks, Bob, and good afternoon everyone. Please turn to slide 5 of the presentation, where you can see the progression of our same-store sales. Company-operated same-store sales, declined by 21.0% in the third quarter, which was more than a 20 percentage point improvement versus Q2.

Breaking down same-store sales, our average check fell by 7/10 of 1% on a sales per entree basis. And traffic improved quarter-over-quarter by more than 21 percentage points. We were seeing steady improvement through the summer months, but had some noise in the September data, with a difficult comparable period for Labor Day.

Our comps continued to improve into Q4, as October came in down 19.4%. So as Bob mentioned, while the pace of our recovery has slowed slightly, as we expected, we continue to see month-to-month improvement. Along those lines, there's another encouraging trend on this chart, and that's our volume performance.

Sales volume levels have been steadily improving without the support of our CBD and airport location, which demonstrates the success of our off-premise and perks loyalty program initiatives. We are encouraged by these trends and believe that they are building consistent consumer behavior that will continue beyond the pandemic. Turning to slide 6.

I'll walk you through our income statement and specific financial performance for the quarter. Given the pandemic, we're going to highlight our performance this quarter, against the sequential quarter for Q2 of 2020. This should give you a better sense of our progress, as we continue to build momentum in our recovery.

We finished the quarter with total revenues increasing 29.4% sequentially to $72.7 million. Our general and administrative expenses were approximately $9.8 million in the third quarter or 13.5% of total revenue compared to $8.2 million or 14.5% in Q2.

The increase in G&A expenses is primarily driven by non-cash stock compensation expense that was recognized in the period for equity awards that are tied to our stock price performance. Please note, shop impairment charges were in our G&A figure in previous quarters. They are now on the impairment line.

Adjusted EBITDA loss was negative $7.3 million for the third quarter, compared to a loss of $14.4 million last quarter. The improvement was driven by increased sales and the impact of an income tax benefit in the quarter.

Cost of goods sold expenses were $20.7 million in the third quarter or 28.7% of shop sales, compared to $16.1 million, which was 28.8% of shop sales last quarter. The stability of COGS as a percent of revenue was primarily the result of minimal mix changes quarter-to-quarter.

Labor expenses, were $25.8 million in the third quarter or 35.8% of shop sales, compared to $21.9 million or 39.2% in the previous quarter. This was primarily driven by improved sales leverage in certain labor-related costs, not directly variable to sales.

Occupancy expenses were $13.9 million in the third quarter or 19.3% of shop sales, compared to $14.7 million or 26.2% in the second quarter, primarily driven by improved sales leverage and reduced expenses from closed shops.

Other expenses were $12.1 million in the third quarter or 16.8% of shop sales, compared to $11 million or 19.7% in the prior quarter. The decrease was attributable to improved sales leverage in operating expense items such as utilities and other expenses not directly variable to sales. Cash and now profitability are key priorities.

We responded to the pandemic disruption to our business by aggressively managing costs to preserve cash. Our cash burn rate in Q3 was $366,000 per week as we continue to defer some rent, while the lease negotiation work progressed.

Our burn rate will likely increase through the end of the year as we catch up on previously accrued but deferred Q2 rent, work through restructuring costs and evaluate accelerating investments in strategic initiatives.

We still expect to be at/or near the previously guided $500,000 per week rate for the back half of 2020 despite those additional costs mentioned. Importantly, we strengthened our liquidity position by $5 million in the quarter to $50.8 million. This was the result of acquiring the PPP loans and continued expense controls.

Our cash on hand was $23.4 million and we maintained $27.4 million of availability under our revolving credit facility. Our liquidity base cost, containment and improved comps allow us to increasingly focus on driving the profitability Bob mentioned earlier.

Our shop level profit margin for the third quarter was negative one-half of 1% shop sales as compared to a negative 13.9% in Q2. We passed a major milestone on the path to profitability in the quarter as our shops became profitable in the September fiscal period. This is critical. A shop profitability accounts for the payment of full rent.

We continue to improve shop profitability in the recently concluded October period. We are working toward a same-store sales level of negative 8.5%, at which point we expect to be profitable at the enterprise level on an adjusted EBITDA basis.

As we look to the future, we will balance top line growth with a culture focused on cost discipline and driving efficiency. As Bob previously mentioned, we will be reorganizing and restructuring our corporate team to put Potbelly on a strong path to profitable growth in the future.

These actions take our previously announced COVID related cost reduction effort a step further. These will be fundamental changes in the way we do business and fundamental changes to our cost structure. We are now looking to make ourselves one of the more effective and efficient operators in our space. And our work is underway.

These actions will start taking place from November through the end of the year. We expect to achieve between $3.5 million to $4 million in G&A savings on a run rate basis as we enter 2021. The costs to achieve this work are expected to impact the fourth quarter and should range between $1.5 million to $2 million.

We also wanted to provide more detail on our lease negotiation so please turn to slide 7. As of this week, we have successfully renegotiated 280 leases with our landlords and we have been pleased with the nature of those discussions. We have reduced our expected permanent shop closures to 25 to 30, much lower than the initial 100 we forecasted.

The termination fees that we have incurred to-date have totaled roughly $2 million and we expect to incur approximately $3 million of termination fees in total. However, the benefits from lease abatement, restructuring savings and shop loss totaled more than $15 million on a go-forward basis.

The 25 to 30 shops that will be permanently closed have yielded a pre-COVID trailing 12-month revenue of $13 million to $15 million and a cumulative EBITDA loss of between $1.8 million and $2.4 million.

And once complete, we expect the closures to reduce our annual rent expense by an average of roughly $1 million to $1.5 million per year for the next two to three years. Slide 8 shows the varying levels of performance by shop type. The biggest portion of our business comes from our suburban shops.

This was true prior to the pandemic and is still true today. In fact over 50% of our shops are in suburban locations. Sales in these shops have proven resilient and are down 8% versus Q3 2019. Our drive-through shops have been a powerhouse up 10% versus Q3 2019 volume. As a channel, drive-through sales are up 50% versus Q3 2019.

As you'd expect central business districts or CBD shops are a drag on our overall same-store sales comps and may remain so until workers return to offices at scale. While an important part of our volume, I should emphasize that with fewer than 65 locations opened CBD shops make up less than 20% of the units in our system.

Nevertheless, we have taken measures to strengthen the profitability of our CBD shops by reducing hours and closing on weekends where it makes sense. Excluding CBD shops, our same-store sales are down roughly 18% over 300 basis points better than our consolidated same-store sales. Turning to slide 9.

You can see that dine-in has recovered a decent portion of what the pandemic eroded as dine-in restrictions eased in the third quarter. That said, approximately half of our revenue today is off-premise. This compares with roughly 30% of our revenue on-premise prior to the pandemic.

While we could have never forecasted the events that unfolded this year, this shift in mix is a validation of many of the investments we made in 2019 to build our digital foundation. These include updates to our approximately, expanded partnerships with all the major third party platforms, mobile pickup and curbside.

It's important to note that while half of our business is now off-premise, almost three-quarters of our sales have our customers crossing the threshold of our physical shops to dine-in, carryout or pick up a mobile order. With this in mind, the unique design environment of our shops will continue to be critical for us going forward.

In Q2, we launched several new initiatives to bring our loyal customers back and to attract new ones. These efforts included Potbelly Pantry, family meal deals and curbside pickup. These initiatives remain popular with our customers as they address customer needs that have been amplified during the pandemic.

We are also continuing to explore a number of other ideas related to our strategic pillars and we'll have more specifics to share during our Q4 call. With that, I'll pass things back over to Bob..

Thanks Steve. Please turn to slide 10 as I'd like to give you a few insights into our brand position and the pillars of our strategic plan. Before I do, I want to be clear that our team has worked very hard this quarter and we've developed a comprehensive plan inclusive of a focused set of strategic initiatives to drive the business.

We're already activating and testing many of these initiatives in the fourth quarter. Others will be activated throughout 2021. But we have work to do that needs to be completed before we're ready to outline that level of strategic initiative detail. So on our next earnings call we'll do a much deeper dive into all of these elements.

Today, I'll discuss our brand position and the strategic framework that supports it. We're fortunate to possess a tremendous brand as evidenced by a set of loyal customers just keep coming back to Potbelly.

But there's more that 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. With that in mind, as you see on this page, we've honed in and improved on our brand position.

Potbelly is the sandwich shop, with the craveable quality and good vibes of a First Class Dive. Potbelly is a powerful brand. And we believe this statement declares just how special we are. And more importantly, what makes us so. We're not a sandwich shop, we're the sandwich shop.

With a focus on craveable quality food reflected in our exciting flavors, our ingredients, and our preparation. Customers love the good mood vibes they get from a Potbelly visit, even those digital visits.

There's just something special about a place that is so authentic and comfortable, while at the same time taking great care with our toasted sandwiches, hand dipped shakes and fresh baked cookies. I'd like to close on slide 11, with our strategic focus on traffic-driven profitability.

Profitability drives growth at the unit level and the enterprise level. And it drives value for all our stakeholders including our franchisees. Top line same-shop sales growth driven by incremental customer traffic is the healthiest way possible to expand profitability in the restaurant business.

This simple focused statement unifies our entire company a single-minded goal. And these five strategic pillars will serve as the core of our company and brand as well as the foundation for our corporate strategy. The first pillar is Craveable Quality Food at a Great Value.

Potbelly offers the most craveable quality sandwiches, soups, salads, and desserts in fast casual, with quality in every ingredient, expert handmade preparation, and surprising value across the menu. Our food is why our customers come to Potbelly. And why they come back again and again.

The second pillar, People Creating Good Vibes, is focused on the heart of what makes Potbelly a unique experience, our people. Potbelly is the home for people with personality that enjoy serving our customers. Our team members care about one another.

Every aspect of our food and ensuring our customers feel the good vibes every time they come to Potbelly. We embrace our hire-for-attitude and train-for-skills mantra to bring in people who offer those good vibes and love great food. Third, is Customer Experiences, that Drive Traffic Growth.

With our scale, we can build stronger unit level economics and shop margins, by enhancing the customer experience. We have an experienced operations team; now led by our new COO, Adam Noyes. Adam is leading our field and shop teams. And they have a passion for excellence, in ensuring our operations are once again a competitive advantage.

We will also build and implement competitive advantages in technology, new menu offerings a quick and easy service line and food quality. And while we have solid scale today, we still have significant opportunity for growth. Next is, Digitally Driven Awareness, Connection and Traffic.

And as I mentioned earlier, our relaunched and simplified Perks program is enjoying truly impressive adoption rates from a loyal customer base.

We know that there are ways we can leverage this data to better understand our customers, increase their awareness of Potbelly offerings and ultimately drive traffic to our shops, through targeted promotional activity. And finally, we're targeting franchise focused development.

Today 90% of our shops are Potbelly-owned which, is a tremendous advantage when you're executing a turnaround. We can leverage what works to generate growth across both company and franchise platforms.

The next wave of growth comes from leveraging Potbelly's operations, marketing and shop level economic models, to create a competitive advantage against other franchising options. So again, we look forward to sharing more details about the specific initiatives we have, in flight next quarter.

But you now have the framework, under which they were developed. We have an incredible opportunity in front of us to leverage a terrific brand and loyal base of customers to ensure potbelly, returns to growth in the fast casual space. I'm truly excited to share our future success with each of you. And I appreciate all of your support for Potbelly.

With that, I will now turn the call back over to the operator, so we can address your questions, Operator?.

Thank you. [Operator Instructions] And our first question comes from the line of Joshua Long with Piper Sandler. Please proceed with your question..

Great. Thank you for taking my question. And congratulations on the good work here in the quarter.

I wanted to go to some of the points that you talked about in terms of the marketing and the awareness that one of the elements of the story has always been a very strong following among core users with an opportunity to really expand that and drive unaided awareness.

And so I'm curious if, in this period of disruption you might be able to take advantage of some of those disrupted patterns for longer-term gain, in terms of getting some of those customers that hadn't been loyal or as frequent Potbelly customers to get them back into the funnel and really leaning into driving occasions among them going forward..

Yeah, Joshua, I think it's a great question. And you're absolutely right, especially when you look at the historical spending levels on marketing here, at Potbelly. So I'd have you think about two of the elements that we discussed.

Some of the comments that we had on perks those go straight to that relationship building and frequency traffic building that we can get from those loyal customers. And we found some -- we found some success with that. I indicated that in some of my comments. The digital advertising that we're doing, that we mentioned in another couple of comments.

We've done that in two markets. We're now testing a third, where we're getting that 4:1 return. That is more of a broad-based awareness campaign that is geared towards driving that awareness and connection and then converting those connections to traffic.

So that funnel you mentioned we're playing in the low part of that funnel, because we have done traditionally so little advertising. We're able to communicate with the types of Potbelly friendly users or lapsed users, because of what we know from our Perks program.

And then, capture them using the social media digital, that we can take advantage of and convert that into traffic. So, we've seen success with that. We feel like we've got some more work to do, before that's the significant part of what we embed into the ongoing plan.

But early stage results are very positive, 4:1 that works for us all day long, at least as long as you're in the bottom of that funnel. .

That's very helpful. Thank you for that. And when you're thinking about the top line trend, obviously there's a lot of pieces to the story and to the recovery and to the long-term opportunity.

But taking just the top line piece that you talked about on the call and provided a lot of great data on with trends leveling off here, improving solidly in 3Q and then leveling off here into 4Q, what do you think about as that next kind of inflection point or piece of the either story or environment that needs to change to really see that trajectory start ticking back up towards that down 8.5% that Steve highlighted for being profitable at the enterprise level.

Is that solely based on initiatives? Is that a mix of initiatives and capacity? Just kind of how are you thinking about that and positioning the brand and your teams going forward into 2021?.

Well, I think it starts with just a very unifying focus as we've said in that strategic plan on traffic-driven profitability. And there certainly are initiatives that we'll be talking about in fourth quarter that go straight to the heart of that.

And we've mentioned a couple of them already on the call today, digitally driven advertising that we're doing as well as what we can do with our purchase programs.

Adam Noyes coming on board, as our senior operations leader at the COO position, here's a seasoned operator that understands just how powerful great operations can be for driving additional sales. So while our sales are down from last year it doesn't mean – we're seeing peak business at lunch.

We're seeing our shops that have dinner business are seeing that business flow through in our ability to pick up that speed and take advantage of driving those sales the way that we can when we own it.

You're going to think of things in that world in that ops world like focusing on drive through speed of service times, in line times, cleaning up streamlining and simplifying the operations line as best we can. And then even the comments about resetting the dining room and cleaning up the dining room.

I think a lot of restaurants who stepped into this pandemic were almost in a bit of a retraction mode and we are on our front foot. We went through and reset every single dining room that we have, cleaned it and reset it and made the shops feel more welcome than they have in months.

So even if someone's coming in to pick up their food it's an energetic environment and it's a great service experience so they come back. A little bit I mentioned in my comments, a little bit of early testing about hours expansion.

Again, at the beginning of the pandemic, what was done to preserve cash flow and do all we could to put our brand in survival mode. We're not waiting for the economy to bring back that sales at full force. We're taking control of what we can.

And we've seen good early signs with those hours of operations, closer to normal or back to normal and we're going to continue to look to do that more where we can.

And then finally looking at ensuring that all of our people's incentives that they're driving towards even to the point that you look at incentives in the field, we want to make sure that people understand driving top line where we can is the most important thing we can focus on.

Look, this stuff that we're seeing in the news with the peaks with COVID with the dining rooms that are being closed, we're going to deal with that. And I think we've proven that we can deal with that and the ups and downs of those peaks and valleys even since the beginning of the pandemic and continue to move our sales numbers up into the right.

We also have seen – last thing I'll say about this, we've also seen the customers adopt much more flexible behavior as well. And I think that's really important here.

In states like Illinois, where in-shop dining is not allowed right now because of some of the peaks in cases, we have seen people continue to come in because that doesn't mean our doors are closed. It just means that you can't sit down at the table and enjoy that sandwich or that milk shake. But they're coming in. They're picking them up.

They're going through the line with their masks on and we're seeing people sitting in their cars eating their food, going outside finding a place that they can sit with friends. So customers have become more flexible which means we're able to continue to hold on to that business.

Look I've said it a couple of times in my response to your question but this is a team that is driving top line not just waiting for it to come to us..

Understood. And following on that point, driving the top line we see that nice improvement, especially coming out of April lows.

How would you queue up or kind of dimensionalize some of the profitability initiatives that you've put in place in terms of restaurant level profit turning – getting into profitable territory in September, increasing into October? And then if we could quantify that to some level that would be helpful.

And then how do we think about that with being balanced against some of the layering in of what I imagine are going to be incremental cost in terms of expanding hours and maybe on the labor side or pieces as we try to get the overall business back to normal.

Is there flexibility in there to still maintain those profitable levels at the shop level even on say flattening or longer-term opportunities for same-store sales improvements?.

Well I think you heard Steve say that and I'll let him speak to any of the numbers we want to get into very, very deeply. But look the answer is, we won't drive that top line at the expense of the profitability. That's why that's that strategic focus that it is.

And so a couple of things again with a new COO that has the experience in high-volume QSR that Adam does. You can deploy labor more efficiently and at the same time put more of the right people in the right place at the right time to be able to handle that business. So you get the leverage and you get the efficiency that goes with it.

And we're turning over every stone. Every place at the shop level and above that we are investing money in that's not giving us a return in terms of customer satisfaction or traffic growth, we're looking to see what we can do to economize on that. And even with those hours of expansion, we only do that where it's profitable expansion.

And that's – this has been around the restaurant business for a long time. If you're opening with restricted hours because of the pandemic and you see that you're opening and closing hours are well above breakeven numbers, you start looking at the shoulder hour on either side of that.

And the likelihood is that you can extend back into what was normal and stay above breakeven there too. And what we call as operators the shoulder hours those continue to build as well.

We're seeing an effort by our teams to get out in the marketplace and where people are coming back, are we able to push delivery? Are we able to push order – digital ordering that can be picked up? And even some incremental improvement within our catering business for those that are getting back into the market.

And the sooner we get out there and connect with them the sooner they'll start using our shops for their lunch experiences. And hey, if we're working on catering orders in the morning, there's no reason we can't unlock the doors and be ready for those customers that walk in too.

So no, we would not drive this at the expense of that shop-level profitability because that's the source of our enterprise-level success. .

Yes. I would just add to that. We saw great margin expansion in the quarter two versus quarter three time frame, right? We were down almost 14% in terms of our shop margin and we got to negative 0.5 of 1%.

We expect to continue to move that in the positive direction that we started with in September that we've already seen it in October and we continue to move. And certainly the increased sales leverage helps us on that margin line.

But as Bob alluded to, there's been a lot of activity and a lot of work on tuning the labor right, and expect more as we go and Adam gets a chance to really kind of sink his teeth into the shops. And so we've already experienced some of that benefit here as well.

And even as some expenses have crept back, like Q3 is a big quarter for utility costs, right, as air conditioners run and those sorts of things.

But even with some of those added costs of that and opening up temporary closed shops and retraining some folks and getting new uniforms for them, and so forth those added costs, we -- the scale of the business and the increased sales helps us outrun that.

So once we get through kind of even some of those things that aren't typical in your run rate, we would expect that that all helps the margin side. So we're optimistic on that and we're going to -- we obviously continue to watch it incredibly closely.

But it's going to be the foundation of our turnaround is starting to bring the shops back to profitability then we move to the enterprise level. And so there's momentum behind us and we're going to keep pushing..

Great, thank you..

Thank you. [Operator Instructions] Our next question comes from Matt Curtis with William Blair. Please proceed with your question..

Hi. Good afternoon. Thanks for taking the question. Just to stick with some margin-related items.

To clarify the response to the last question, I mean what -- given the comp run rate what it was in October sort of negative high teens, what do you think the restaurant-level margin would be? I mean based on the response you just gave, it sounds like modestly positive is the answer, but I just want to clarify..

In terms of the go-forward quarter?.

Yeah, that's correct..

I'd say, I can't give you an exact number, but yeah, we would expect to be in the low to mid-single-digits as it relates to our margin expansion next year -- I mean next quarter..

Okay. That's great. And then, I guess a separate question. I mean with Chicago being closed for indoor dining as well as I think nearly the whole state at this point.

How much of a revenue penalty do you think there's going to be your business, either in terms of lost revenue per week or however you think about it? Because, I mean I'd imagine you'd be able to recapture some of this through the digital channels. But just curious as to what extent you'd be able to do that..

Sure. I'll tell you, we've been -- go ahead, Steve..

Go ahead, Bob. Okay. Yes. I'll just say this quickly, and then let Bob go. But we've -- this just happened in the last couple of weeks in some of the outlying counties around Chicago and just happened in Cook County, which is where Chicago is over the past week, so we've obviously watched it pretty closely.

And we have not yet seen a big drop in sales because the dining rooms are closed. Because as Bob mentioned, there's certainly some resiliency in the customer base in terms of their ability to kind of move between channels to get their Potbelly sandwich.

And they could still come into the shop and have a sandwich brought out, and eat it in their car or take it home and/or have it delivered or pick it up and bring it to wherever they are going to consume it. So we will watch it closely, but so far we haven't seen a big shift with that -- with the dine-in orders being heavily restricted in Illinois..

Okay, great. And then last question for me. I guess now that looking in the years ahead, any unit development would be more focused on the franchise side I was wondering if the franchisees you're talking to are looking to have a new restaurant emerging place. I mean I know the prior management team is working on the store of the future.

And parts of that may have worked, and others may need some retooling.

But I was just wondering what your thoughts are on the store of the future or whatever iteration you prefer to think of going forward?.

Yeah. Look, there's no question that franchisees are going to be keenly interested in the facility itself for two reasons. One is, they're well aware of what those returns are required in order for them to make sense out of the investment that they're putting in there.

But the best kind of franchisees are the ones, who really love the brand that they're franchising and they've got a lot of passion for how that how that restaurant looks appeals to the consumer and how it operates.

The store of the future, the shop of the future was -- had three primary objectives attached to it when that project was undertaken, and it was to reduce the investment costs on the standard Potbelly build.

It was to reduce the operating costs and do that while making the operation more efficient for the consumer and to really build on and bring out the best of the brand. And we've objectively assessed that. It actually wasn't successful in any of those three. And so, you won't see any more shops of the future being built in our system.

Now, that does not mean that we don't want to, and actually we plan to modernize and update our shop design and so that we can refresh our aging for all restaurants are always aging and we've got to make sure that we've got a plan to keep them refreshed and keep them up to date.

And to optimize the shop for the new builds, so there will be and we have already made some -- I would say, more nimble adjustments to the last couple of shops that have been built in the franchise population with some success there too.

And I think that we are still focused on those same three objectives, but we're going to make sure that we're successful in all three of them..

Okay. I appreciate the time. Thanks very much, guys..

Yeah. Thanks..

That's all the time we have allotted for questions today. I will now pass the call back to Bob for closing remarks..

Okay. Well, thank you, and thanks again everyone for your time today and your continued support. As we've discussed, we've had a great opportunity to build a true growth engine here at Potbelly in the future.

And we look forward to shifting gears from this pandemic-driven response that we're in the middle of to continue our turnaround and growth in the near future. We are the sandwich shop with the cravable quality and good vibes of a First Class Dive, and we're excited to share that experience with new customers and our loyal followers for years to come.

Have a great evening, everyone..

That does conclude the conference call for today. We thank you once again for your participation and ask that you please disconnect your line..