After a second quarter of nearly flat same-store sales, Potbelly’s early Q3 sales suggest customers are still pressured and managing restaurant spending by cutting visits and opting for groceries. Despite this forecast, CEO Bob Wright told investors he’s never been more confident in the brand’s future.

The optimism comes from having a plan in place. In the second quarter, Potbelly tested everyday value combo meal deals to attract infrequent guests. The testing revealed the $7.99 Skinny Combo ( a turkey, ham, or chicken Skinny sandwich with chips and a drink) as the most-liked option. Starting in July, the chain expanded the offer across almost the whole system. Customers have shown their appreciation for Potbelly’s everyday value. The brand saw a 7-point lift in value scores in the second quarter, along with a 5-point lift in return intent among those who ordered the $7.99 combo.

“To get a 7-point bump in value and a 5-point bump in intent to return off of a single price-pointed combo like we’ve gotten is not something I’ve seen very often in my career,” Wright says. “And it didn’t take us cutting the price in half to get there. It just really broke through that starting place where someone says, ‘This is something I’ll come back for on the day or maybe the day before my payday instead of the day after I got paid.'”

READ MORE:

Potbelly Preps for Biggest Development Cycle in Years

Potbelly’s Growth Initiative Attracts Big-Time Operators

The deal is also profitable for franchisees. In fact, Potbelly expanded shop margins year-over-year for the 13th straight quarter. Shop-level margins in Q2 were 15.7 percent, an increase of 130 basis points compared to the year-ago period.

Wright has been with brands that significantly discounted core menu items, and the number of transactions needed to recoup lost profits became difficult to reach. And the more aggressive the discounting offer is, the riskier it becomes to obtain franchisee adoption. If an organization doesn’t have millions of dollars to spend on advertising to drive traffic and transactions, it can hurt the P&L.

Potbelly kept all of this in mind when crafting its promotions. The margins and food costs on the Skinny combo are “quite healthy,” Wright says.

“There’s no difference between a company P&L and a franchise P&L except for royalties,” the CEO explains. “And so if it is profitable for us, it’s profitable for them. And they have respected our approach to promotional activity, our approach to expanding profitability, to pushing margins like we did in the quarter because they get to participate in that. And so frankly, they appreciate the work and they’re happy to add something that can help drive their business. These are their communities, they’re looking across the counter at people that are saying things to them that they’re saying to us in our research, ‘I really appreciate the value. This will make a difference in whether or not I come back more often.'”

Wright isn’t sure how long the promotion will last, but it is designed to be a long-term offering that provides consistent value without becoming a financial burden. Potbelly isn’t in a race to end the deal before it drags on the business, and there isn’t a piece of merchandising standing in the store that the brand is planning to take down.

The $7.99 Skinny Combo is mixing between 5 to 8 percent less digital than other promotional activity, meaning it’s hitting the mark with less-frequent nondigital customers—the ones that can’t be targeted in the app or via email. These are the guests Potbelly is seeking.

Wright makes the point that if someone is a regular, they’re already finding value within the Perks rewards program and with special offers like double points. For guests who don’t have an affinity for any brand, they’re likely looking for a company that’s “putting something on the table that you can count on,” the CEO says.

“If you put something in and turn around and take it away, they may only see it once or twice,” Wright says. “That’s counterintuitive to what the real challenge is and our goal is to benefit them so that our business benefits. And I just think you can never go wrong if you’re doing things with the business where the customer really feels like you’re making every effort to help them out, and that’s what this combo does.”

Potbelly projects same-store sales of 1.5 percent to –0.5 percent for 2024, but that doesn’t take into account boosts from the $7.99 combo or the 20 additional everyday value ideas the chain has worked on.

CFO Steve Cirulis says the company is “undaunted” by what happening in the macroeconomic environment because Potbelly feels it has the right kind of tactics to keep winning. And not just strategies to remain competitive and build positive comps, but also maintain and improve profitability. The chain is confident in its $27 million to $30 million adjusted EBITDA projection for 2024.

“Even with softer sales, you can see we have the ability to kind of manage margins really well, not just at the shop level, but also at the company level as we control some expenses along the way,” Cirulis says. “So look, it’s not going to be an easy back half of the year. But I think we’ve got a strong management team and a great plan to get after it, not just within the environment that we’re in right now, but to continue to build against the long-term growth plans that we’ve set out.”

Potbelly’s comps in Q2 included 4.3 percent pricing, lower traffic, and negative mix shift due in part to the $7.99 combo. However, the chain’s traffic outperformed the fast-casual segment.

The chain’s longer-term goal is to turn in-store customers seeking everyday value into passionate digital customers. In Q2, the digital business mixed 40 percent. That’s an increase of 200 basis points year-over-year, thanks entirely to the growth of Potbelly’s first-party channels. As guests become Perks rewards members, they increase frequency and engagement.

“Our digital channels are an incredibly effective and efficient way to deliver value enhancements to our most loyal customers, not only through the intrinsic value of their accumulated coins but through spot promotions that can activate their engagement and drive sales,” Wright says. “Despite Potbelly digital experience already being a consistent and significant area of growth for us, we are not standing still. When customers utilize our digital platforms, it not only ensures a better experience, but it also allows us to more effectively communicate with and market to them.”

Potbelly ended Q2 with 429 restaurants, 84 franchised and 345 company-owned. So far in 2024, the brand has opened nine stores and expects to reach 30 openings by the end of the year. The fast casual has also inked 54 restaurant commitments year-to-date, including a deal that will bring Potbelly to Georgia for the first time. Since the company revamped franchising efforts three years ago, it has placed roughly 230 committed shops in the pipeline.