Industry News | November 6, 2017 | By Danny Klein | QSR Exclusive Brief

Potbelly to Shutter Restaurants, Ramp Up Franchising

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Mike Coyne, the chief financial officer and interim chief executive officer of Potbelly, said the company expected 2017 to be challenging. In addition to a troubling macro environment, the chain’s chairman and CEO Aylwin Lewis stepped down in August. And the brand continues to progress through a strategic review that’s examining every aspect of the restaurant, which has been struggling to gain positive momentum in recent months. In the third quarter, Potbelly reported a loss of $240,000, or a decline of 1 cent on a per-share basis. The company posted revenue of $106.1 million in the period.

Potbelly’s aggressive growth is also slowing down considerably. Its 2018 expansion, Coyne said, is expected to be less than half of 2017’s at the company level. In 2016, Potbelly opened 40 company-operated stores. The chain expects to debut between 30–35 this year and said the growth will continue to moderate moving forward.

Part of that strategy will include an investment in franchised-unit growth. As of September 24, there were 426 company-operated units and just 56 franchised shops.

“One of the pillars of our strategic framework is to be a great franchisor. However, we have historically taken a more measured approach, working with single-unit operators in secondary markets, and more recently, with small multi-unit operators,” Coyne said in a conference call. “As we look out to 2018, we are we recommitting ourselves to the franchise business, and we'll be allocating more resources toward this business.”

Potbelly has engaged with franchise industry players, it said, to build its “institutional knowledge base.” The company is also using a franchise consultant to assess its current portfolio and to develop a gameplan to accelerate growth. Also, Potbelly said it is looking for a franchise executive to spearhead the strategy and “meaningfully increase the franchise mix of our portfolio going forward. We believe there remains a tremendous whitespace opportunity for the Potbelly brand,” Coyne said.

The directive also came with the news that Potbelly would start shuttering underperforming stores as part of a portfolio optimization. Three locations closed in the third quarter and more are coming, with a real estate adviser assisting the brand in its evaluation of potential targets.

As for which locations are in danger of closing, Coyne said it comes down to the basics. “What I would say is the ones that we are focused on are actually losing money, he said. “… Somebody asked whether we look at EBITDA or EBITDAR. And I would say essentially we're looking at both, right? For our shop profit, it's really kind of an EBITDA idea. But certainly we look at it before rent as well. And for the ones that we are most focused on, they are losing money at a shop profit level at an EBITDA level.”

Coyne said Potbelly is making progress on several initiatives it launched in the third quarter. One is a Week of Perks campaign it kicked off National Sandwich Month in August. The campaign encouraged gusts to download the brand’s app and enroll in its Potbelly Perks program. There are more than 460,000 registered Perks members, Coyne said.

The company also invested in menu innovation with a premium Turkey Club Sandwich.  “The Turkey Club was very well received and provided a contribution to mix that exceeded our expectations. In fact, it had done so well that it became our best-performing L TO and therefore has earned a permanent spot on our menu,” Coyne said.

Craft-Your-Own Macaroni & Cheese and the Pumpkin Pie Cookie returned in October.

“Our menu innovation pipeline remains robust. And we continue to look for ways to evolve our menu to drive high-quality premium offerings, address relevant trends and customer expectations and to drive same-store sales,” he added.

Potbelly’s backline is about 15 percent of sales, Coyne said.

“We continue to make investments in catering sales managers, optimized delivery models and catering kitchens. During the third quarter, we opened a catering kitchen in Virginia. And we will continue to be opportunistic with investments in additional catering kitchens over time,” Coyne said.

Potbelly also tested TV advertising for the first time in the third quarter with a commercial in Chicago. It highlighted the chain’s Turkey Club LTO and also asked viewers to download the app.

“We will increase our advertising to our more traditional channels, focusing on our major markets with scale to get the best leverage on this investment,” he said.