Good afternoon everyone and welcome to the Potbelly Corporation's First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the call over to Ms. Adiya Dixon Potbelly's Chief Legal Officer. Please go ahead. .

Good afternoon everyone and welcome to our first quarter 2021 earnings call. Our presenters today are; Bob Wright, our President and Chief Executive Officer; and Steve Cirulis, our Senior Vice President and Chief Financial Officer. Please note that we have provided a set of PowerPoint slides that will accompany our prepared remarks.

You may access these slides on 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 2 and 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 2021 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 headings Risk Factors and MD&A and in our subsequent filings with the Securities and Exchange Commission which are available at sec.gov.

During the call there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles or GAAP.

Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this morning both of which are available in the Investors tab of our website. I'll now turn the call over to Bob. .

Thank you Adiya and good afternoon everyone. Thank you for joining us today. I hope you and your families have remained safe and healthy since our last update. As always I want to thank our dedicated employees for their ongoing hard work and positive energy.

I continue to be, so very proud of the team's contributions as we focus on future growth of Potbelly. When we reported our full year 2020 results back in March, we provided a glimpse into the quarter and I can tell you that the rate of acceleration continued in a very positive direction during the final weeks of the quarter and throughout April.

But first things first let's look on Slide three where I'll provide a quick overview of the first quarter 2021. Revenues of $78.1 million increased by 4.3% compared to the fourth quarter of 2020 and same-store sales decreased by 3.1% as compared to Q1, 2020.

This is a noticeable improvement when compared to the decrease of nearly 20% in the fourth quarter of 2020. Suburban, university and drive-through locations remain strong while CBD and airport locations continue to lag. However, we're beginning to see modest improvements in those shop types recently as well.

We've also started to see encouraging incremental improvements in our on-premise or dine-in business across most of our shops as vaccinations increase and economic activity accelerates.

The positive momentum we experienced in the quarter was driven by a combination of early returns of our traffic-driven profitability strategic initiatives operating efficiencies particularly within labor which is resulting in better performing shops and improved customer experiences, as well as the healthier macro environment.

We continue to see lifting or easing of dine-in restrictions in many of the core geographies where we do business. Importantly, we have seen resiliency in our digital business as it continues to perform well alongside the ongoing recovery of in-shop sales.

Also as we noted last quarter, we expect there to be a blending of sales as customers dine out while at the same time they've grown to appreciate the flexibility that digital options provide.

We leveraged our sales recovery and turned to shop level profitability during the quarter which is ahead of our previously forecasted time line of the first half of 2021. I'll get into the details a little bit later in the presentation on the progress we've made on several of our strategic initiatives as part of the traffic-driven profitability plan.

But I can tell you, that we are in various stages of testing development and even implementation for most of these initiatives and we are impressed with the early results. Our work here will continue to be refined as each initiative readies for national rollout.

Subsequent to the quarter end our leadership team was further strengthened by the addition of Scott Swayne, as our Chief People Officer. Scott has 25 years of experience in human resources and results-oriented leadership and we are thrilled that he's part of the team.

This is a critical role for Potbelly and is essential to ensure that we attract and retain top talent and the top talent necessary for our brands return to growth.

Steve will cover the balance sheet in his comments in a few moments, but it's extremely important that I highlight the fact that our balance sheet remains strong due to our recent capital raise and the credit facility amendment we successfully executed during the quarter.

We fully expect the balance sheet and liquidity to strengthen throughout 2021 which will be driven by improving cash flow dynamics through each quarter of 2021. This financial flexibility is crucial for us to be able to deliver on our commitments to return to growth.

Furthermore based on the progress made during the first quarter the company expects to be cash flow positive by the end of the third quarter which is ahead of expectations that we have previously presented. I'll now turn the call over to Steve to provide a deeper dive into the financials and the sales trends.

We'll close with an update on our traffic-driven profitability strategic focus and importantly the progress we have made on these initiatives before we take your questions.

Steve?.

one, the $15 million reduction in the revolver that resulted from our credit facility amendment; and two, the payment of $3.5 million from the $11.3 million of 2020 deferred cash payments. While overall liquidity decreased, our balance sheet strengthened significantly in the quarter.

Our net cash improved to $8.7 million at the end of the quarter compared to $4.8 million at the end of Q4. As mentioned earlier, we successfully executed a $16 million private placement an amendment to our senior secured revolving credit facility of $25 million which included extending the maturity to January 31, 2023.

This solid liquidity foundation coupled with our expectation of generating positive free cash flow by the end of Q3 affords us the flexibility to not only continue to work through our onetime deferred payments, but also to fund our ongoing operations and strategic initiatives.

Of note, we further enhanced our financial position today by filing for shelf registration for up to $75 million. This filing gives us the flexibility, control and leverage we need both near and long-term. We have no immediate plans to draw down on the shelf. Turning to slide 7. We show same-store net sales performance by shop type.

As previously mentioned when comparing to 2020, we are beginning to see the rollover effects on same-store sales performance as we lap the early stages of a pandemic. All of our shop types have rebounded significantly from 2020 low levels led by our suburban, university, urban and drive-through shops.

Those shop types are either approaching or are above 2019 volume levels and two-year comps in our suburban and drive-through shops are positive year-to-date. Recovery of CBD and airport locations continue to lag, but are showing consistent improvement period after period.

We continue to expect solid improvement throughout 2021 across all shop types as vaccine distribution accelerates and dine-in restrictions are lifted. As previously mentioned, we'll be discussing sales trends on both a 1- and 2-year view moving forward beginning in Q2.

Slide 8 shows how our revenue by channel mix has evolved so far over the course of 2021. As you can see January and February, we're almost equivalent both in terms of volume and mix despite the weather -- severe weather the country experienced during the month of February.

In March we saw a significant uptick in volume due to the impact of reopenings, warmer weather and pent-up demand. In-shop sales increased modestly to 50% of revenues, while at the same time digital sales proved to be sticky at 39% down just slightly from January and February.

As we discussed last quarter over the longer term, we believe we will see both digital and in-shop service modes as strong contributors to our overall business as the overall environment normalizes.

Potbelly's digital investments are flexible shop design that includes two production lines and consumer excitement to return to dining rooms sets us up to expand all of these sales channels. Moving to slide 9. We will remind you of our outlook for 2021 that we originally shared with you in March. Today we are reaffirming that outlook.

We continue to believe that the year will be a story of two halves driven by external or business environment factors as well as our Potbelly-specific actions.

Our strategic initiatives combined with the economic recovery that is already underway will support improvement in our sequential same-store sales and top-line quarterly performance through 2021. As we've discussed this has already proven to be the case in the first quarter. And for April with performance having exceeded our expectations.

We are projecting shop level profitability for the first half of the year and we achieved it in the first quarter ahead of our forecast. We continue to expect to return to positive cash flow by the end of the third quarter also ahead of plan and expect to achieve enterprise profitability in the second half of 2021.

While the recovery momentum is building somewhat sooner than expected, the majority of the company's operating earnings and adjusted EBITDA will still be delivered during the second half of 2021. With that, I'll pass things back over to Bob..

Thanks Steve. Everyone please turn to Slide 11, where we'll briefly remind you of our brand position as the sandwich shop with the craveable quality and good vibes of a first-class dive.

I can tell you that we're continually energized by this brand position and believe it resonates with both our loyal and prospective customers and positions Potbelly well for the future. Next on Slide 11, we'll review our strategic focus which has its foundation in our brand position.

Our strategy quite simply is to bring to life the very best attributes of Potbelly as a brand represented by our five pillars with a unifying objective of traffic-driven profitability. As we discussed in March, implementation is well underway for most of the initiatives with acceleration over the course of the year.

There are five core pillars to our strategy. And on Slide 12, we'll review a few of the focused investments we're making to drive traffic, reward loyal customers and prepare for future growth. Starting with the menu, which clearly falls under the first pillar of craveable quality food at a great value.

Our work to simplify the Potbelly menu continues with the ultimate objective to improve traffic, enhance the customer experience, as well as influence the customer perceptions of value. The results from the initial testing phase have been extremely positive. And as a result, we rolled out the beta test to more shops just a few weeks ago.

Menu simplification includes consolidating the menu boards, a wider price ladder, as well as other product enhancements like offering smaller sandwiches and half salads outside of our popular Pick Your Pair offering. We're also testing larger-sized portions with more meat, cheese and toppings too.

Overall, we expect fewer SKUs making for a more efficient system and faster customer experiences. Assuming the beta test goes as planned, we expect to roll out the new menu across all of our shops in the second half of the year. Our tech stack improvements are also gaining solid traction.

We're completely redeveloping both our app and our web interface to improve customer experience, allow for easier reordering and better leverage our Perks loyalty program. The decision to develop our own web and app gives us greater control over our data and much greater flexibility for future enhancements to the digital customer experience.

We've also already seen a positive impact from our efforts to implement differential pricing with third-party delivery, which contributed to our results in the first quarter. End-to-end testing is underway and we're on track to launch the pilot and go live during third quarter.

On the marketing side, we're making great strides with a focus on our scaled media and enhancing our local shop marketing in order to grow traffic and frequency. We have active campaigns, which are already proving their ability to drive additional sales.

Our recent success leverages a new creative approach utilizing Potbelly user and customer-generated-styled content, which has already performed well in expanded test markets. Under this approach, the marketing doesn't feel like an ad, but rather has the look and feel of a story which fits well with today's popular social channels.

More importantly, we're very pleased with the customer response and the sales lift we're seeing from our new media. In terms of third-party activation, we've executed a few successful campaigns here as well with great partners, such as Grubhub and Uber Eats during the month of March.

As an example our Grubhub exclusive Lucky 7 sandwich promotion drove a 24% lift in orders, and a 25% lift in sales versus the prior two weeks. With Uber Eats, we held a promotion around the NCAA tournament and that resulted in a 24% lift in sales versus the prior period.

We continue to make progress with our Perks loyalty program during the quarter by adding 132,000 members, an increase of 26% year-over-year. Perk sales increased by 11% year-over-year during the quarter significantly outperforming total shop sales and Perk transactions grew by nearly 20% versus 2020.

Some of the loyalty promotions we ran included Perks Appreciation Week double and triple points days Groundhog Day, Valentine's Day and others.

Our focus will be to continue to grow our loyalty base and enhance the rewards with these types of targeted campaigns to drive engagement until our tech stack launch, which again is slated for the third quarter. At that time, we'll have even more flexibility with our Perks program.

Our next phase of Perks technology will allow us to customize one-to-one relationship building and segmented campaigns well beyond our current capabilities. Lastly, as we mentioned last quarter franchise-focused development will be the last pillar to fully develop and implement.

However, our recent slate of franchisees remain active and committed to developing over the next few years as originally planned. There's a healthy pipeline of inquiries for potential franchisees given the brand's recognition and the fact that we are significantly underpenetrated across much of the United States.

We still expect to welcome three to five new franchise shops in 2021 and expect to see significant annual growth in that number as we work through 2022 and beyond.

The team is squarely focused on our strategic initiatives and we look forward to providing you with regular updates on our plan, which leverages our core capabilities and will enhance our future performance. With that, I'll now turn the call back over to the operator, so we can address your questions.

Operator?.

Thank you. [Operator Instructions] The first question is from the line of Joshua Long from Piper Sandler. Please go ahead..

Great. Thanks for taking my question. Wanted to see if we might be able to dig into some of the transaction or average check trends that you saw during the quarter, nice to see that overall top line and things are moving the right way and faster than expected.

But just curious what you're seeing from the consumer and how they're embracing the brand and kind of changing and/or not their activity as they come back into the store?.

Yes, sure. Thanks for the question Josh. We saw some good movement in our average check. We ended up quarter-over-quarter improving that I think partially due to our differential pricing with our third-party delivery partners. So we ended the quarter at $9.28 on a sales per entrée basis. On a sales per transaction basis, it's $14.64.

I think that was also an improvement over the prior quarter. Again, as we saw digital business, I think, which tends to have larger order sizes continue to be a strong part of our business as we talked about earlier in the call..

Great. That's helpful.

And can you remind us where you're at in that differential pricing with your third-party delivery? And have you seen any pushback to date? And is there a consideration of pushing that a little bit further? It seems like that's a topic these days in terms of finding where that real horizon is for what the guest will tolerate and/or embrace? Any thoughts there would be helpful.

.

Yeah, Josh, I'll jump in.

First of all, I think one of the things we're excited about is as we continue to develop the tech stack, what you're seeing here is our team's real thoughtful approach to taking a component of that technology that would have been middleware that we were able to implement prior to the web and app going into place and that's what allowed us to do this differential pricing ahead of the tech stack rollout.

We're not with all of our third-party providers and we did – to be honest with you we took a little bit of a middle tier increase as compared to what we knew that most of the competition was doing. So you're going to see that in the 20-ish-percent range. And we know that, there are competitors that have gone much higher than that.

And in the QSR space, I understand that there are some that have gone significantly higher than that. So we do have some plans in place to see how we can test what those upper limits are.

The key for us was to try to make that check that digital check more economical for us as a business to offset some of the costs that, we had with the commissions that we have to pay to these third-party delivery providers and still make sure that Potbelly doesn't become an unattractive digital option for our customers.

The – I think what you see in the stickiness of that digital business is that, we think we found the right balance for now, and I think we're going to try to strive to push that a little bit further where we believe we can, but not give up the traffic that goes with it. So I'm very, very pleased with the early goings. .

Great. Thank you for that. And it sounds like the simplified menu test is coming along nicely. I understand that, we're early on and the expectations are referred to roll out later in the year.

But curious, on any sort of early learnings or observations you've seen from it in terms of what's been most attractive to guess what they've embraced and/or, how that relates to kind of your expectations going into this test? Obviously, things are good because you're planning to expand it.

But just curious, if you could provide any other details there in terms of, just how that guest journey in the in-store has been evolving?.

one simplify the menu that presenting to the customer when they come in both in the shop and the digital menu that, they get to see. Make it easier to navigate easier to understand and really highlight the very special nature of our toasty sandwiches, while also holding the competitive advantage we have in soups and salads and our desserts and so on.

And I know we've shared in previous quarters one of the other targets that we had with this wider price ladder, was to not only attack, but also unlock the value of ensuring that we've got value infused in all tiers of whatever guest experience people might choose.

People shop menus differently depending on the time of the month, depending on how they're feeling about their own personal economic model at that time, and certainly evaluating what they're trying to do with that day's lunch, or that day's dinner.

And so the sizing that we've done has infused value across the menu regardless of which size sandwich that you choose. And so where customers had given us feedback that, they felt like they're looking for a little bit more for what they pay, we've solved for that.

We've also unlocked a lower level entry point, if you're looking for a little lower price point to get started in the menu. We've got that too.

We've learned how valuable our Pick Your Pair option is, but we also see customers enjoying the fact that they can get components of what was only available in Pick Your Pair as a stand-alone item off the menu too. And so on the operational side of things, and this is a very important component to this.

We've streamlined and simplified so that we removed SKUs and we've had a chance to make the operation much more simple. There are some details in the ops, we obviously won't reveal, but we've made it easier and faster to train, while we're giving a few more options to our customers, particularly in our sandwich line.

We're able to get our crew and our associates up to speed on the ability to do that, and work each of those stations more efficiently. And we're already seeing some of that in customer satisfaction and speed and throughput numbers..

That's very helpful. I appreciate the color there. And earlier on in your prepared comments you touched on some labor initiatives that really came to fruition during the quarter.

I imagine some of those are what you just outlined there with the test you're doing with the simplified menu, and I imagine that just as sales improve things get a little bit easier in-store. But curious, if you might be able to provide a couple of thoughts on the labor initiatives that you've put into place.

How those are working? And then maybe also tie in, how the addition of Scott, as the Chief People Officer side expect to play out over the year? I know, human capital and culture has been a very important part of the story historically and will be going forward.

So just curious, how you're going to bring all those together and what he might be tackling first?.

Yeah. Thanks for that. We're super excited about Scott joining the team. He's got a tremendous depth and breadth of background and has been an HR professional his entire career. He would tell you that, it's his life's work, and it shows through in his engagement. Scott's already been in shops. He's done two days of training, right alongside managers.

He's already been traveling in only two weeks of being on a job and engaged rather deeply. So I think that behavior alone exemplifies the kind of people leadership that we're very happy to have here at Potbelly. He'll be a partner to us all.

But that partnership with the operations team, especially on your question about labor is going to continue to be an area of significant focus for us. We got very scientific with those labor initiatives that we talked about in past conversations.

There's a model an hour-based labor guide model that we're using, so that we know where and when we need the associate staffing to better support our customer experiences and where we might have been maybe a little bit heavy. And not only do we have that labor guide in place in all of our company shops.

We've offered to our franchisees for their implementation as well. And having the guide in place means that we can scale this business up and down as sales volumes go up and down. It works really well with our sales projections and it's put our managers in a position to know that they're well prepared for the day.

The other element of that is that in addition to the number of people that are needed. Adam Noyes is leading our ops team and partnership with his team has put in the positioning guidelines. So it's one thing to know how many you need, but where might they need to be in order to best serve the customer.

Steve made comments about the fact we have two production lines with all our digital business that has changed our business a lot. So having five or six or seven people online during lunch today is different than it was two years ago and the positions they need to staff are different.

Providing that guidance really helps our operators manage for success drive throughput and of course, that throughput gives us leverage and efficiency. And we were able to pull out some of those inefficient hours. So we're very pleased with the results on the labor initiative for sure. .

Great. Thank you for that. And one more -- then one quick one for me. On the quick side you might have said it and if so I missed it my apologies. But how many Perks members do you have now? It seems like there's a lot of really great initiatives there and I imagine we would expect to see that sign up increase going forward.

But just curious just for kind of a housekeeping item where we're at now in terms of the total members in the system?.

Yes, proud to share that. We're 2.3 million members. And you're right, we have a target ourselves to accelerate the acquisition of our traditional annual membership significantly this year on top of that.

And as you may have picked up in my comments, we're getting a lot smarter and we'll be even smarter with this when we get our tech stack in place because our ability to segment these customers provide them with the kind of one-to-one communication that really further increases their traffic patterns into our shops is really important to us.

But we're pleased so far and see those numbers continue to accelerate. So that's where we are today. .

Great. Thank you for that. And then my last one just going back to that same-store sales by type chart on slide 7, very helpful to see and interesting to just see some of the seasonality across all those different pieces coming back in particularly university as some of the students are probably getting back on campus.

But curious when you think about some of the better performing units maybe in your suburban or urban or maybe even drive-through however you want to frame it up? But just curious what you're seeing in some of those better performing units that might give you a glimpse into what the system looks like once we get reopened vaccines are distributed and things get back to somewhat of a more normalized trend?.

Well, I think in broad terms, what we've seen is we continue to see those drive-through and suburban shops leading the way and I'll let Steve expand a little bit on the numbers here. But not only -- the other business has changed. It's not only across the shop types, but we see far stronger business across all seven days.

And we think that's driven by certainly how we're improving the operations in the shops, making sure that we're staffed in all dayparts all days. But the digital business is showing up in dayparts and days of the week that may have been traditionally in the past, a little weaker for us as a brand.

And we're holding serve if you will on some of those sales throughout the week and the days in those shops too. .

Yes. And I would just add one thing to that. It's also -- as part of the labor initiative honestly, taking a deeper look at operating hours too. We've expanded operating hours in many shops to take advantage of collecting some of those digital sales earlier.

And so not only are we changing the profile or seen a change profile in kind of the sales volume by day of the week, but we're also seeing benefits of expanded shop hours through all these efforts. .

Great. Thank you for taking my questions..

Thanks, Josh..

Thanks, Josh..

We have no further questions. I'll turn it over to Bob Wright for closing remarks. .

All right. Well, thank you and thank you again for your time today everyone. We're very encouraged about how our 2021 has started out with the first quarter performance exceeding our expectations. We continue to have confidence in Potbelly's future and we are just at the beginning of reaching our full potential.

We hope to meet many of you virtually in the various conferences that we'll be attending in June including the William Blair conference, the Piper Sandler conference, the Stifel and the Oppenheimer conference as well. Please refer to our Investor Relations website for the dates of each of these events.

We appreciate your interest and support in Potbelly. Hope you have a great day. .

That does conclude the conference call for today. We thank you for your participation and you can now disconnect your lines..