Meanwhile central business district locations declined double digits in 2021 versus pre-pandemic comparisons.
“We will certainly build, and our franchisees will certainly build, [central business district] locations in those markets,” Wright said. “But all you really have to do is kind of look at the largest city markets that we're currently in, in Washington and Chicago and New York, three of the most difficult CBD markets to penetrate, and we've done it and done it successfully. So, the rest of our growth is across the rest of the U.S. as we grow to penetrate the other one. I think that's where our franchisees are going to gravitate first.”
Wright acknowledged refranchising will be a “complex financial maneuver.” On one hand, Potbelly will give up EBITDA, but the trade is a $40,000 franchisee fee per store and 6 percent royalties. The CEO expects there to be gains, depending on the restaurant and the market. Potbelly will use those proceeds to take care of debt and accelerate the journey toward 2,000.
“I think it's really important that any franchisees that we're in discussions with understand that these refranchise deals only happen in partnership with a development agreement,” Wright said. “And those development agreements have development area deposits that go with them, as well. So, you spread that kind of evenly over the three years that we've discussed we plan to do this work, there definitely will be cash benefit and earnings benefit that goes with it.”
In addition to 10 percent unit expansion, Potbelly is aiming for shop-level margins greater than 16 percent by 2024, fueled by management of supply chain and food costs and discipline around labor and operating expenses. Shop-level margin was 8.5 percent in 2021 and 11.2 percent in the fourth quarter.
The company also wants to reach $1.3 million in AUV in three years, with sales volume growth across all shop types (urban, suburban, airport, drive-thru, etc). Wright believes this can be achieved through an expanding digital business that currently mixes 36 percent, in-shop technology enhancements that increase throughput, high-return marketing investments that drive customer acquisition, and menu innovation.
Potbelly saw an annualized AUV of $1.03 million in Q4, although that dipped to $892,000 in January because of the Omicron variant. Matters have improved in recent months, with annualized AUV inching past $1 million in February and March.
“We've already seen almost a quarter of our shops hit that level of AUV, even in this kind of challenging environment,” said CFO Steve Cirulis, about the potential of topping $1.3 million AUV. “So, in addition to all the strategic elements that we have kind of lined up to kind of push the entire system, having a large group of shops that are already there, it gives us that kind of further foundation for pushing it along.”
In 2022, Potbelly projects record AUV, double-digit same-store sales growth, and shop-level margins in the low double digits.
The company earned $380.1 million in revenue in 2021, up from $291.3 million in 2020. Food, beverage, and packaging costs were 27.8 percent as a percentage of sales, down from 28.4 percent in 2020. Labor was 33.7 percent as a percentage of sales, compared to 36.4 percent the year before.