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00:04 Good morning, everyone, and welcome to Potbelly Corporation's Third Quarter Twenty Twenty One Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. 00:31 I would now like to turn the call over to Ms. Adiya Dixon, Potbelly's Chief Legal Officer. Please go ahead..
00:40 Good morning, everyone, and welcome to our third quarter twenty twenty one 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.
00:56 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 twenty twenty one or any other future periods should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of Nineteen Ninety Five.
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.
01:51 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 management's discussion and analysis of financial condition and results of operations, and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.
02:35 During the call, there will also be a discussion of financial metrics 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 yesterday evening, both of which are available in the Investors tab of our website. 03:02 I'll now turn the call over to Bob..
03:06 Thank you, Adiya. Good morning, everyone, and 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 begin by thanking our Potbelly Family for their continued dedication strong work ethic and commitment.
Our top priority is to provide our customers with a great, safe and fun dining experience and your loyalty makes this possible. Twenty twenty one has continued to exceed our expectations on a number of levels, including the most recent quarter. So, let's get into the highlights and our expectations for the last quarter of the year.
03:43 Beginning on Slide three starting with a top line, revenues totaled one hundred and one point seven million dollars an increase of forty percent compared to the third quarter twenty twenty. With same-store sales increasing by thirty three point seven percent as compared to the pandemic impacted Q3 twenty twenty.
Same-store traffic, which measures transactions improved by twenty one point three percent compared to a year ago. This improvement was largely driven by higher volumes across all of our channels, led by dine-in sales, which were up fifteen percent sequentially. Despite the impact of the Delta variant.
04:22 Importantly, our sales and traffic were also driven by the continued implementation of our strategic initiatives during the quarter. Namely our new menu rollout, which was launched nationwide in August. Our new tech stack, which launched in early July, and our continued successful investment in digital media and marketing.
04:41 Average unit volumes or AUVs were four percent sequentially and have continued the trend in the right direction throughout the year.
In fact, on an annualized basis, Q3 AUVs reached approximately one point fifty thousand million dollars and it's important to note that we achieved these volumes despite the lagging recovery of our CBD and Airport shops. In terms of performance by shop type, we saw continued strength across our urban, suburban, Drive-thru and university locations.
While our CBD and airport shops made meaningful progress towards recovery. 05:16 As we said last quarter as well, these currently lagging shop types continue to trend in the right direction and offer further upside for Potbelly’s overall growth moving forward.
Top line strength led to positive EBITDA and adjusted EBITDA for the second consecutive quarter. We also had our third consecutive quarter of shop level profitability, [Indiscernible] slightly lower sequentially due to market driven labor and other inflationary pressures.
It's worth noting that despite the significant environmental margin pressures, we were able to keep the impact to only an eighty basis point degradation of shop profit, quarter-over-quarter. Steve will cover this in more detail in his section later in the call.
05:59 We completed the staffing of our executive leadership team with the appointment of David Daniels as our Chief Marketing Officer in mid-August. David brings over twenty years of direct restaurant and CPG experience leading some of the world's bestselling brands.
[Indiscernible] few months, David is already making an impact on advancing the Potbelly brand vision, digital marketing and customer loyalty strategy that will drive further brand awareness and traffic growth, franchise and field marketing, as well as consumer insights and innovation. 06:33 Turning to slide four.
As I mentioned in early August, we rolled out our new and approved menu to all of our shops nationwide. You can see the new menu layout here.
Some of the key features include the addition of skinny size sandwiches across the menu, larger, original and big sizes with more meat and more cheese, expanded pick your pair options and some new sandwich offerings including the all new Chicken Club, Steakhouse Beef and Avo Turkey with our hand-sliced fresh avocado.
We're pleased to report that the launches performing in line with tested results and delivering a very healthy blend of traffic and check growth. The social media response to the new menu has been extremely favorable as you see here.
07:17 On slide five is a recap of the new Tech Stack that we launched in July, including new mobile app website, digital ordering integration and Perks Loyalty Program integration. We touched on the Tech Stack a bit in our last quarterly call again confirm that the benefits have made a positive impact on our results.
And importantly, consumer reaction continues to be very positive. The new design is better aligned to our brand, more authentic as well as more user friendly for our loyal customers. 07:50 On slide six, I'd like to highlight the success of our continued investment in digital media and marketing.
Q3 advertising spend was zero point nine percent of revenue. An increase of zero point six percent over the same quarter a year ago. We've leveraged our placements to highlight the very best aspects of Potbelly’s experienced namely our high quality menu offerings and our Good Vibes customer experiences.
08:15 We were also able to market our customer facing initiatives such as the new menu and Tech Stack. Our testing and control methodology confirms that we're driving awareness, traffic and sales, that deliver favorable returns.
I'm confident that the power of the Potbelly brand coupled with the outstanding customer experiences has delivered by our associates makes the continued investment in marketing, an impactful part of our growth strategy going forward. 08:41 I'll now turn the call over to Steve to provide more details on the financials in sales trends.
Steve?.
08:47 Thanks, Bob, and good morning, everyone. Please turn to slide seven of the presentation where we will discuss the progression of our AUV and same-store sales for the third quarter of twenty twenty one and the month of October.
Reviewing trends in AUVs over the last few quarters, we are seeing ongoing acceleration as we progress through twenty twenty one and notably, we achieved weekly AUVs of over twenty thousand dollars or both the third quarter and the month of October. In addition, this is our highest quarterly AUV since twenty sixteen.
09:19 Company operated same-store sales continue to show significant improvement over twenty twenty levels. Given the current year quarter-over-quarter AUV expansion, We are pleased with our same-store sales increase of thirty three point seven percent for the quarter and twenty seven percent for the month of October.
Further demonstrating our businesses year-over-year recovery. Breaking down Q3 same-store sales, our average check grew by ten point two percent while traffic grew by twenty one point three percent compared to the third quarter of twenty twenty.
09:53 Turning to slide eight, I'll walk you through key areas of our income statement and specific financial performance for Q3 with a slightly different presentation as compared to the past two quarters.
To highlight our recovery momentum, I'll review our performance this quarter against the sequential quarter of Q2 twenty twenty one as well as some year-over-year results. 10:13 During the third quarter, total revenues of one hundred and one point seven million dollars increased forty percent compared to the prior year period.
Driven by strong recovery versus the Covid impacted Q3 twenty twenty as well as solid performance of our strategic initiatives Bob shared earlier. It's worth noting that labor shortages and some Covid related temporary shop closures put some pressure on sales.
10:39 We delivered our second consecutive quarter of positive EBITDA and adjusted EBITDA in the third quarter. EBITDA was relatively flat at zero point nine million dollars and was up sharply compared to a significant EBITDA loss in the third quarter of twenty twenty.
Adjusted EBITDA was two point seven million dollars for the third quarter, an improvement on the one point nine million dollars for the second quarter. Driven primarily by increased sales and lower G&A expenses.
11:07 We are pleased to report this is our fifth consecutive quarter of adjusted EBITDA growth, even in the face of the microeconomic challenges we like our industry faced in the quarter.
Our general and administrative expenses were seven point six million dollars in the third quarter of twenty twenty one or seven point five percent of total revenue compared to nine point two million dollars or nine point five percent of total revenue in the second quarter of twenty twenty one and nine point six million dollars or thirteen point two percent in the year ago period.
11:37 Primary drivers of the decrease include our continued spending discipline and an accrual adjustment for annual incentive bonus. Year-over-year G&A as a percent of sales decreased substantially due to our restructuring efforts late last year and our ongoing expense discipline.
As Bob mentioned, our Q3 shop level margins, a non-GAAP measure step back only eighty basis points from Q2 to nine point eight percent inclusive of cost and wage pressures. I'll break down the key components of shop margins starting with cost of goods sold.
Cost of goods sold COGS expenses were twenty eight point two million dollars or twenty point nine percent of shop sales, compared to twenty six point three million dollars or twenty point two percent of shop sales in the second quarter of twenty twenty one.
And twenty point seven million dollars or twenty eight point seven percent in the third quarter of twenty twenty.
12:32 The increase in COGS on an absolute and percentage basis quarter over quarter was due to higher costs associated with increased volume and higher discounting associated with the launch of our new web and app as well as overall COGS inflation.
Our successful maintenance of COGS margins and year over year improvement occurred in the face of substantial supply chain and cost of material headwinds. Our ongoing strategic cost initiative has yielded two point eight million dollars in savings in twenty twenty.
Through a combination of skew reductions, in shop process improvements and pricing partnership with our vendors. 13:08 Labor expenses were thirty three point one million dollars, or thirty two point eight percent of shop sales compared to thirty two point zero million dollars or thirty three point zero percent shop sales in the second quarter.
The increase on an absolute dollar basis was primarily driven by current labor of market headwinds. Potbelly is taking aggressive measures to recruit new workers, including referral bonus programs, pay-band modifications, and investing in our applicant tracking system.
We believe that we're trending better than the industry, but the environment obviously remains fluid. As we continue to combat this challenging market dynamic, we will remain extremely proactive in our recruiting and staff retention efforts.
13:51 Other operating expenses were sixteen point three million dollars or sixteen point two percent of shop sales compared to fourteen point seven million dollars or fifteen point two percent of shop sales in the second quarter.
The increase is due to costs associated with the launch of our new web and app as well as shop repairs and maintenance associated with our new menu launch. 14:12 Turning to our balance sheet.
We ended the quarter with total liquidity of twenty eight point three million dollars including nine point eight million dollars cash on hand and eighteen point five million dollars available on credit facility.
Net cash decreased roughly seven point zero million dollars on a sequential basis primarily due to timing of payroll and capital expenditures.
We also paid approximately two point zero million dollars of the eleven point three million dollars of twenty twenty deferred cash payments in the quarter, bringing the cumulative amount paid to approximately eight point zero million dollars most of the remaining three point three million dollar balances related to repayment of payroll taxes deferred under the Cares Act, which will be paid in Q4.
14:58 The combination of inflationary headwinds, the deferred payments mentioned earlier and investments in our five pillar growth strategy, have us on track to be a cash flow generator during twenty twenty two. Additionally, as I'm sure you saw in yesterday's filing, we announced the forty million dollars ATM program.
This move further strengthens our financial flexibility under the seventy million dollars shelf filed earlier this year. We have no immediate plans to sell shares back into the market. However, the ATM is a prudent step and good corporate hygiene at this time.
As it provides additional financing flexibility that we lacked during the most challenging months of the pandemic. 15:38 Turning to slide nine, clearly, we have seen dramatic improvement across all our shop types as compared to twenty twenty. As we all painfully recall, Q2 twenty twenty was the peak of the pandemic with lockdown orders in place.
So, it's no surprise that Q2 twenty twenty one rebounded so dramatically. We continue to experience strong same-store sales in Q3 across all shop types, recognizing, of course, that same store sales percent will likely moderate even as AUVs increase because of the significantly depressed sales early in the pandemic.
16:13 An important note on our CBD and Airport shops. We are pleased with the sequential improvement in those shop types, while recognizing the benefit of their full recovery is yet to come. October same-store sales are strong and consistent with the trend we saw at the end of September.
16:30 Slide ten shows how our revenue by channel mix has evolved over the course of twenty twenty one. In the third quarter, we saw a meaningful increase in in-shop sales reaching nearly sixty percent of sales due to pent up demand from consumers returning to dining rooms.
This is despite the delta variant impact, which was sharpest during the second half of the quarter. Also worth noting is the durability of our digital business as we retained eighty two percent of our digital business as a mix of sales from the Q1 peak, while also growing digital sales six percent in dollar terms since the beginning of the year.
17:05 We are particularly excited about our digital retention, even as our customers return to in-shop dining and greater numbers. As we have previously discussed, over the long-term, we anticipate a blend of digital and in-shop service modes as the overall environment progresses towards normalization. 17:22 I'll now turn the call back over to Bob..
17:24 Thanks, Steve. Moving to slide eleven. I'd like to first provide a quick recap of our achievements in the first three quarters of twenty twenty one followed by the priorities for the final quarter of the year.
We've achieved three consecutive quarters of shop level profitability and our suburban Drive-thru and urban shop same-store sales are all above twenty nineteen levels. With our CBD and airport locations, making consistent sequential progress.
We've completed the rebuilding of our senior management team with the additions of Scott Swayne, Larry Strain, and David Daniels. 17:57 We successfully implemented the new tech stack as we discussed earlier as well as the nationwide launch of the new menu and the successful expansion of our digital media and marketing efforts.
While we are extremely proud of our accomplishments for the year, we still have plenty of work left to do.
We have a number of priorities that we are squarely focused on for the fourth quarter and as we look into next year, as Steve already mentioned, and as everyone is aware, labor continues to be a challenge for the restaurant industry and the broader economy. Both from an availability standpoint as well as on the cost side.
18:34 To ensure, we stay ahead of the curve, we have several programs in place to both motivate our associates as well as attract new employees to Potbelly. We're leveraging performance based bonuses to recognize our employees for their hard work and drive retention.
We're also introducing referral bonuses to encourage employees to participate in the hiring process in a small meaningful way. 18:56 Our second priority is to continue to drive AUV growth.
We'll keep making selective investments in digital marketing aimed at attracting new Perks Loyalty members increased traffic as well as user frequency through targeted campaigns. And we'll continue to fine tune the tech stack with enhancements that support convenience conversion and higher checks.
19:19 On the inflationary side, we're taking several mitigating actions to help offset margin pressure. This includes strategic price increases and adjusting our contracting approach with our vendor partners to manage food cost inflation.
On the labor side, we continue to leverage our previously announced hours based labor guide to manage staffing to peak business needs while controlling labor throughout the day, including overtime, along with wage systems to ensure proper controls.
Finally, we will build on our 5 Pillar strategy and we're in the process of finalizing our three-year value driving objectives. 19:56 On slide twelve we show a quick snapshot of the status of our various 5-Pillar initiatives. Much of which have already covered.
That said, this slide provides a powerful visual for what has been completed and what remains to be done. I couldn't be prouder of our franchisees and associates both in the field and at the support center for how they have embraced and successfully implemented so many important initiatives.
20:21 On slide thirteen, we are providing a glimpse into our three-year strategic growth plan that will become the foundation of Potbelly’s value creation model. We're building on the solid foundation of our 5-Pillar strategy and our unique brand position.
Twenty twenty-one is unifying objective has been traffic driven profitability and we're proud of the performance we've shared regarding that objective. We will always view these goals as foundational to success in the restaurant business.
20:51 I'm excited that we're expending our vision now to include objectives that will once again drive value for our stakeholders. The plan is still being finalized, but what I can tell you that the value driving objectives are one, accelerating AUV is meaningfully above historical levels.
Two, expanding margins back to previous high ranges and three, escalating new unit development as we transition to a more franchise system. We understand that you were all anxious to hear the detailed objectives and we're also excited to share more information once the plan is complete.
We intend to provide further updates on our goals in early twenty twenty two. 21:32 With that, I will now turn the call back over to the operator so we can address your questions..
21:37 Thank you. [Operator Instructions] Our first question comes from the line of Matt Curtis from William Blair. Please proceed with your question..
22:21 Hi, good morning and thanks for taking the question. So, I guess my first one is on the commodity and wage environment, which is obviously top of mind right now.
Could you tell us how much worse will things likely be in the fourth quarter versus the third quarter, both in terms of the COGS line as well as labor?.
22:46 Yes, Matt. First of all, thanks. Thanks for the question. I'll let Steve expand on that a little bit, but we really see some of the fourth quarter trends as a continuation of what we've seen so far this year and especially in third quarter.
We're looking around the corner to next year as we see some of the contracting opportunities that we talked about in our prepared remarks as where there maybe – maybe an opportunity to manage this a little more closely. The rate of that inflation it's hard to predict. Honestly, it's been hard to predict up to this point.
Wages do seem like they're settling a little bit, but there's no question that the competition for great talent is going to continue to drive that market and we definitely believe that our people are biggest asset. So, staffing appropriately is going to be critical and that means we have to manage to the market.
We mentioned some strategic pricing, we're not eager to take price even as much as we hear from so many other brands that have. We still believe that convenience and affordability are always going to be king in the restaurant space.
So, we are looking at that strategic pricing even in this quarter to offset some of those cost inflation elements but we're doing it very, very carefully and kind of planning that out over the next year as well..
24:18 Yes. Thanks, Matt. Bob is right.
It's tough to predict, but we're – we've seen inflation increase quarter-over-quarter throughout twenty twenty one and with an acceleration in Q3 as I’ve most if not all of our peers and so it's an effort across the board certainly on the operation side and we're looking at pricing as a strategic path, so making sure that we can keep our margin strong, but it's also a weapon in our arsenal, should we need to pull it at different times not just in the quarter, but then looking into twenty twenty two..
25:07 Okay. Thanks for that. And then, I guess, have a few questions on the new menu obviously.
Is there any way you could perhaps dimension wise the benefit of the new menu so far in terms of what lift you've been seeing to top line items like revenue, traffic, check anything of that nature?.
25:28 Yes, we're not going to give you this as you might expect for competitive reasons. We're not going to give some specifics on the direct impact of the menu, but as we've said in the past and we would look at this and you should expect that there's a balance of check and traffic that comes through with the menu.
By design, adding the third size with skinnies across all of those flavors and as we told in the past or we discussed in the asked increasing the size of the original increasing the size of the big. We did take a price increase on those larger sizes, but not commensurate with the amount of food that we’re giving the customer.
So even though it's a larger check driven by the original and the big, it's still a better value for the customer than getting more for what they pay than they pay did before, the proportions there. We found the blending of those margins and other places on the menu, the skinnies has helped that and pick your pair certainly helps with that.
And so, we think we've got a great combination of solution. And as we said in our prepared remarks, it's performing in line with how it was tested.
26:41 The larger portion of it is, I would say it's a little more tilted towards average check growth, but I think it's very, very important for all of us to keep in mind that there's a big difference between check growth, when you're delivering more for what the customer gets than just straight up price increases which have been so common across the industry..
27:04 Okay. Just a follow-up on that. I mean, given that the pricing architecture on the new menu is very different from the old one.
Could you tell us anything about what the margin profile the new menu looks like relative to the old one and just for the Sake of simplicity, it might be easier to think about it in terms of gross margin?.
27:28 Yes. The power of the hydraulics that I just mentioned is that while we may have, we may have given up a little bit of margin on a few items by trying to drive more value into that for the customer.
We found that food cost margin elsewhere in the menu with how we price some of the other elements to pick your pair, the soups, the salads and the simplification of the menu that pulled so many of those skews off. So, our shakes are much more simplified than where they were before.
There were a lot of savings that were extracted from things that really were complexity drivers, but not really value drivers and certainly top line drivers. 28:13 So that's some of the hydraulics and the food cost.
Now, if you expand that to the rest of the margins, the beauty of the check lift portion of this is that we see, we see the hydraulic work in the other direction for us on the labor.
So, when you take into account our hours based labor guide that we've talked about before, we now have that in place, and we have the mechanics that allow us to address any check increase like we did with the menu or price increases that we may take in the future and extract that efficiency out of the labor guide.
And so, when you put it, all together let just say we're seeing the benefit of a top line and the benefit of the margin that goes with all of these things working together. We think it's a part of how we were able to hold the line with the margin pressure that we had during the quarter of only eighty basis points..
29:11 Okay, got it. And then it's been impressive to see your recovery across the various location types that you have, but on the essential business districts, which seems to have been continuing to lag.
I'm just curious what percent of your sales mix right now is central business, district locations, and could you tell us what the gap looks like in terms of comps or traffic in those locations right now versus twenty nineteen?.
29:44 Sure. I can….
29:45 Yeah. Go ahead Steve. Yeah..
29:47 Sure. Certainly, certainly the CBD shops are lagging in their recovery versus the other shop types that we've got. We have seen however, particularly in Q3.
CBDs are among the highest recovering shops through the quarter in terms of their pace versus twenty nineteen, they are down double digit from prior and again, that gap continues to shrink perhaps not as quickly as we would like. I think what's important to note is even though these shops are not performing to their twenty nineteen levels.
30:31 Our overall volume as Bob talked about earlier, is beyond in the twenty nineteen levels. So, we look forward to the day that CBDs are fully recovered because it’s additional momentum for our business.
Prior to the pandemic, CBD, which make up only eighteen percent nineteen percent of our shop count made up about twenty, little north of twenty percent of our revenue base. That's certainly a little bit lower now, but again, we're continuing to recover and looking forward to the continued momentum in that real estate type..
31:16 Okay. That’s the only thing I would add. The only thing I'd add to that is that we are seeing that pace as Steve mentioned start to come back and I think it's important that we certainly see this and we want to continue to remind our investor community the same thing because the business is so different than it was pre-pandemic.
There's – this entire layer of digital business and the massive attrition of restaurants in central business districts.
We don't need full recovery of the traffic and then CBDs in order to get full recovery of our revenue and we're starting to see the signs of that in many of the individual shops in that portfolio, but the portfolio as a whole is really starting to move.
There's no question that we – I think we saw that proven as well as when the delta variant was causing some of that return to office to retreat, but even still, we've held the line with that game and expect it to start coming back as people start moving back in..
32:22 Okay. Got it. And then I guess a longer term or bigger picture question. You've talked about the long term plans to significantly grow AUV. Just curious, does that involve sort of the day part mix moving away from the focus on launch? Or does – or is it really more on leaning further into multichannel or improved site selection.
I was just wondering if you could flush that out for us a little bit?.
32:53 Sure. We see – We're starting with the base that we have now as we mentioned, volumes over twenty thousand dollars a week and that includes we use the word drag or lag with CBD, but I'd also say that's some massive potential for continued top line averaging unit volume growth.
We are focused on the things that you're hearing us talk about already. 33:18 The digital layer of our business, we see as large potential upside for us going forward.
With the new tech stack, we have in place, we're just getting started with our ability to really lead into our Perks program to develop the nurture flows, it allows us to connect with those customers on a much more frequent basis.
We celebrated yesterday, National Sandwich Day yesterday with a digital only offer that we'll certainly talk about next quarter, but let's just say we were very, very pleased with our ability to drive the business through those digital channels and improve it to ourselves and get yesterday with National Sandwich Day.
So, Perks is a big piece, digital is a big piece, zero point nine percent of our revenue invested in this digital marketing. We've been unbelievably disciplined about ensuring there are returns for those investments. And we have that test and control methodology locked in place.
We're going to continue to use that, but it's not hard to see how we compare so unfavorably to the industry in terms of our spend on marketing and that's an investment that can deliver a lot of additional top line for us.
34:28 You add to that, the overall operations focus that we have, and we continue to see our customers happy with how we're delivering the Potbelly promise the menu that's been layered in there, and of course bringing back of some food innovation and exciting additions to that menu that maintain the simplicity of the menu.
It's really a lot about the fundamentals. Your point directly about day parts, lunch and dinner is where we win and it's difficult to see breakfast being in our future anytime in the near future. It's – it can be a big distraction. It can be terribly unprofitable if you don't have the right volumes.
And so, we're going to stay focused where we are and then the last element I would add is that we think catering coming back to levels beyond what it was before again leaning on that digital technology we have is a way that we can unlock a lot of additional sales as well..
35:30 Okay. Understood. I guess just to follow-up on digital, I heard from your prepared remarks that you've retained eighty two percent of digital sales from peak in dollars, I believe.
Could you give us an update on where your digital mix stands right now and how that's trended recently? And then, I guess related how where Perks membership stands right now?.
36:02 Sure. I can take the first part Matt, I’ll let on to talk about Perks. But yes, our digital mix continues to be durable. In that.
We believe, we're seeing kind of a more permanent shift in the way that consumers like to engage with our brand, and I think restaurant brands in general as it relates to the convenience options that exist through delivery or mobile pickup.
We're sitting at thirty five percent of our sales coming from digital and that's just off of thirty seven percent from Q2 and forty one percent in Q1.
So, it hasn't really moved that much and even in a – even in that timeframe of summer where most folks are out and about, and you see dine-in typically strengthen seasonally and we did see some of that, but we also saw persistence in that digital business and I think our new tech stack and the user experience that has been upgraded through that work.
Makes us even more compelling for the consumer to continue to use digital channels to reach us..
37:15 Okay. And then on the Perks membership, any update? Numbers, yes..
37:22 Yes. Actually, we're with David's leadership in marketing, we are re-tuning the KPIs that we see as the primary lead indicators of just how successful that loyalty program can be.
What I can tell you currently is that we made it through the transition from the old provider and the old loyalty engine that we had into the new engine that part of the new tech stack.
37:49 There was no way to avoid it but when you make a transition that large with the sort of the underlying software, we did require that all of our loyalty members, all of our perks members had to go back into their account and reset their password.
Now, that might not seem like a big deal, but we have had a high level of engagement with them to make sure that we're following up every other week, and we've now got our Perks participation at a higher level than it was even before that transition.
38:21 As I mentioned, we put in more than one of those nurture flows that allows us to communicate individually and uniquely with those perks members. And we've also just recently upgraded the acquisition offer from what was a shake to a free sandwich whenever you come on board that just happened in the last few weeks.
So, the number of Perks members is continuing to grow and the active number of Perks members is beyond what it was before we went through that tech stack transition.
We're going to get – we're going to get those KPIs that I mentioned really clear and make sure that we're comfortable with the internal numbers that we would want to share and make sure that we can still maintain that competitive dynamic for the brand without sharing too much and we'll be talking about that in the future..
39:14 Okay understood. And then finally, I guess on development I mean, I know development is on pause right now, obviously but longer term in terms of attracting new franchisees to the system.
Could you give us a progress update on where you stand in the process right now?.
39:34 Yeah, absolutely. We've been doing a lot of work behind the scenes as is necessary for development. It's all about pipeline. And so, we've done the work to understand the potential for the market growth in the United States across all two hundred and ten DMAs. We have targeted the markets that will first receive our efforts in terms of sales.
We've looked at how we subdivide those markets into packages that are most appropriate for franchises to be able to build out their entire development agreement within ten-year period or less, we won't be signing up franchisees to [Indiscernible] accounts that they simply can't get done in less than a decade.
40:22 In terms of the relationship and the actual sales side, we have staffed with – began the staffing of our sales team and we have some of them on staff and those efforts are underway.
We're making no news today, of course, with any franchisee that we're working with if certainly wouldn't name them, but processes are being built as well, which is so important to this function. So, a lot of the work has been done there.
One other relationship that we're happy to have put in place in the last quarter as with an architectural engineering firm that will support us directly, including construction and support management as we begin building again.
So, all of those component parts of a healthy development organization and the pipeline management that goes into it are coming together. And that's why we're confident sharing that as one of the key value drivers for twenty twenty two and beyond. We'll be bringing back some of the core targets early next year..
41:24 Okay Understood. Well, thanks very much for answering my lengthy list of questions this morning, and congratulations again on the new menu..
41:34 Thanks, Matt..
41:35 Thanks, Matt. 41:59 [Operator Instructions] Ladies and gentlemen, at this time, there are no other questions in queue. Now turn the call back over to Mr. Bob Right for closing remarks..
42:08 Thank you all again for your time today. We hopefully as you've heard this morning, we've made solid progress in the first three quarters of twenty twenty one and we'll continue our focus on the objectives that we outlined for you today to stay on track and deliver value for all of our stakeholders in the future.
We continue to believe in our ability to achieve significant growth in the coming years. So, today, thank you for your interest and your support in Potbelly. I hope you all have a great day..
42:37 This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation..