CEO Bob Wright is confident in Potbelly’s newfound identity as a growth brand. Franchisees—ones with heavy experience in the quick-service industry—appear to wholeheartedly agree.
Late in October, the company announced a 40-unit agreement with Royal Restaurant Group, which will involve the franchisee taking over four units and building 36 restaurants. The cofounders collectively have 60-plus years of knowledge and previously served as CEO and COO of Wendy’s largest franchisees. Royal currently operates 24 Burger King units in Florida and has improved sales since acquiring them earlier in 2023.
“They would tell you they just love the idea of having a base of operations. Even four units for them was exciting,” said Wright during Potbelly’s Q3 earnings call. “They have managers to start with. They have places where they can train as they build all these new units. They’ve got a running start in a market that they really love in Central Ohio. So, they didn’t need a large acquisition, but they did really appreciate the chance to have a small acquisition to build from.”
Unit development commitments total 150 shops to date. The brand is reaching toward 2,000 franchise locations, as set forth by its Franchise Growth Acceleration Initiative. The program, which rolled out in March 2022, seeks 85 percent franchised locations in the next 10 years and refranchising 25 percent of company-owned shops.
CFO Steve Cirulis said as the brand’s performance grows stronger, the franchise candidate pool improves. He predicted mid- to high-single-digit unit deals in the future and compounded growth. He noted Potbelly would take advantage of the natural upward trend.
“We’ve also invested heavily in our development team, and that’s very exciting for us,” Cirulis said. “We’re staying true to our development pipeline and pace … I’m pleased with the team and the work they’ve done so far.”
Development deals average about a unit opening per year. Agreements with more than eight locations have an eight-year limit.
The 430-store company’s revenue grew roughly 3 percent to 120.8 million in Q3, powered by same-store sales growth of 8 percent. Average weekly sales were reported as $25,190, partially impacted by recent refranchising transactions. Overall, systemwide sales of $138.2 million showed a 7 percent increase.
Wright believes Potbelly’s momentum proves what the business model is capable of and he’s optimistic about achieving 2024’s growth targets.
“We remain focused on achieving our 10 percent unit growth in 2024 and continue to have a highly active pipeline of qualified Potbelly franchise candidates,” Wright said. “Combined with our unique brand and proven business fundamentals, we believe we have the foundation and the right team in place to drive long-term expansion.”
Food, beverage, and packaging costs were 27.8 percent in Q3 versus 29.9 percent the year prior. This improvement comes on the heels of meat prices retreating year-over-year and de-escalating inflation in the third quarter. Labor expenses reached 28.9 percent— a 200-basis-point improvement from 30.9 percent in 2022.
Shop-level margins were 14.6 percent, a jump from 10.6 percent in 2022. Cirulis said there is not one silver bullet pushing margin increases; contributions from a burgeoning catering business and efficient deployment of digital initiatives continue to leverage higher sales and drive traffic. The brand is focused on achieving a shop-level margin of 16 percent by 2024.
Digital business accounted for 37 percent of total shop sales during Q3, an increase of 150 basis points relative to 2022, backed by the Perks Loyalty Program’s progress, ongoing development of the Potbelly Digital Kitchen, and trends away from third-party channels.
The Perks Loyalty Program serves as an engine for Potbelly, with acquisition rates for Perk members rising 60 percent year-over-year. Wright described the program as the heart of the shift from third parties to Potbelly’s own digital channels. Driving digital business through Potbelly’s own channels instead of third parties can have a deflationary impact on check sizes, but the CEO said the chain engineered the profitability to be an even tradeoff. In fact, he said it may even be a benefit from a margin perspective.
The Potbelly Digital Kitchen, which began testing in 2022, is rolling out as planned systemwide and will eventually become the new standard in every franchise location, according to Wright. By improving digital order processing, speed of service, and streamlining both front and back of house, the kitchen will be particularly helpful with maintaining the flow of occupancy during peak periods, the executive told investors.
Wright added it will not only drive traffic but also enhance the customer experience through accuracy and quality scores. By spotting operational gaps, the brand is hoping to keep deploying the digital kitchen on a broader scale.
“We continue to see the savings we seek out of the labor that goes with efficiency on the back line. We capture most of this in the first two or three weeks after inning PDK,” Wright said. “It will become the normal … We are continuing to expand the rollout of PDK, and we do it by prioritizing the most capacity-constrained shops.”
Q3 saw what Cirulis called “modest” price increases to alleviate rises in input costs, although inflation began to slow down during the quarter. The 4 percent overall price jump includes a carry forward from the year prior, pushing up same-store sales.
For Potbelly, creating value across the menu in the thick of pricing changes means incorporating digital-only prices, category-only prices, and so on. Pricing deliberately varies to ensure balance across all channels. In Q3, the sandwich chain’s data shows that amid price increases, its broad menu and heightened store traffic put the company in a position to keep taking market share week-over-week.
Overall, reported net income came out to $1.5 million for Q3. The adjusted net income was $1.1 million, or an $800,000 increase compared to 2022.
For the full year 2023, Potbelly expects an AUV of $1.29 million, same-store sales growth between 11.5 and 12 percent, and margins between 13.4 and 13.9 percent. Forecasts for Q4 include weekly sales between $24,250 and $24,750, same-store sales growth between 4 and 6 percent, and shop-level margins between 12.5 and 14.5 percent.
“As we look forward to the end of the year and into 2024, we will continue to achieve traffic-driven profitability and unit growth,” Wright said. “This includes crave-able quality food at a great value, customer experiences that drive traffic growth, digitally powered connections, and franchise-focused development.”