Earnings call transcript: Potbelly Q2 2025 beats expectations, stock rises

Potbelly Corporation (PBPB) reported its financial results for the second quarter of 2025, surpassing analyst expectations with an earnings per share (EPS) of $0.09, compared to a forecast of $0.08. The company’s revenue also exceeded projections, reaching $123.7 million against an anticipated $122.37 million. Following the earnings release, Potbelly’s stock rose by 3.79%, closing at $11.51. Trading at a P/E ratio of 7.84, the stock has delivered an impressive 73% return over the past year. According to InvestingPro analysis, the stock appears to be trading above its Fair Value, with analysts setting price targets between $14 and $20.

Key Takeaways

• Potbelly’s Q2 EPS of $0.09 exceeded forecasts by 12.5%.
• Revenue increased by 3.4% year-over-year to $123.7 million.
• The company opened 8 new shops, surpassing expectations.
• Digital sales accounted for 41% of total shop sales.
• Stock price increased by 3.79% after earnings announcement.

Company Performance

Potbelly demonstrated robust performance in the second quarter of 2025, with system-wide sales growing by 6.7% year-over-year to $154.2 million. The company’s focus on digital transformation and menu innovation contributed significantly to its performance, with digital sales making up 41% of total shop sales. Potbelly’s strategic initiatives, including new shop openings and product launches, have positioned it well in the competitive fast-casual dining sector.

Financial Highlights

• Revenue: $123.7 million, up 3.4% year-over-year
• Earnings per share: $0.09, compared to $0.08 forecast
• Adjusted EBITDA: $9.6 million, a 13% increase year-over-year
• Same-store sales growth: 3.2%

Earnings vs. Forecast

Potbelly’s actual EPS of $0.09 surpassed the forecasted $0.08, marking a 12.5% positive surprise. This performance is consistent with the company’s recent trend of exceeding earnings expectations, driven by strong sales growth and operational efficiencies.

Market Reaction

Following the earnings release, Potbelly’s stock price rose by 3.79%, closing at $11.51. This increase reflects investor confidence in the company’s ability to sustain growth and exceed market expectations. The stock’s performance is notable, considering its position within its 52-week range, with a high of $13.48 and a low of $6.69. With a beta of 1.55, investors should note that PBPB exhibits higher volatility than the broader market. For detailed volatility analysis and expert insights, consider accessing the full Pro Research Report available on InvestingPro.

Outlook & Guidance

Potbelly has raised its full-year 2025 guidance, now expecting same-store sales growth of 2-3% and at least 38 new shop openings. The company also increased its adjusted EBITDA forecast to $34-35 million. For the third quarter, Potbelly anticipates same-store sales growth of 3.25-4.25% and adjusted EBITDA of $9-10 million.

Executive Commentary

"Our second quarter results continue to showcase the strength of the Potbelly brand as our growth engine further accelerates," said Bob Wright, CEO. He emphasized the company’s investments in digital assets and analytics, stating, "We’re making incremental investments in both consumer-facing digital assets and data and analytics capabilities."

Risks and Challenges

• Supply chain disruptions could impact product availability and costs.
• Market saturation in key regions may limit growth opportunities.
• Economic fluctuations could affect consumer spending in the fast-casual segment.
• Rising labor costs may pressure profit margins.

Q&A

During the earnings call, analysts inquired about Potbelly’s franchise growth pipeline and menu innovation strategy. The company addressed food cost expectations and highlighted its capital allocation strategy, focusing on enhancing digital ordering and expanding its franchise network.

Full transcript - Potbelly Co (PBPB) Q2 2025:

Conference Operator: Good afternoon, everyone, and welcome to Potbelly Corporation’s Second Quarter twenty twenty five Earnings Conference Call. Today’s call is being recorded. At this time, all participants have been placed in a listen only mode and the lines will be opened for your questions following the prepared remarks. On today’s call, we have Bob Wright, President and Chief Executive Officer Steve Surrilas, Senior Vice President and Chief Financial Officer and Adia Dixon, Senior Vice President, Chief Legal Officer and Secretary of Potbelly Corporation. At this time, I’ll turn the call over to Adia Dixon.

Please go ahead.

Adia Dixon, Senior Vice President, Chief Legal Officer and Secretary, Potbelly Corporation: Good afternoon, everyone, and welcome to our second quarter twenty twenty five earnings call. By now, everyone should have access to our earnings release and accompanying investor presentation. If not, they can be found in the Investors section of our website. Before we begin our formal remarks, I need to remind everyone that certain comments made on 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 2025 or any other future periods, should be considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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. 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 under the Risk Factors heading in our filings with the Securities and Exchange Commission, which are available in the Investors tab of our website and at sec.gov. During the call, there will also be a discussion of some items 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 press release and investor presentation issued this afternoon, both of which are available in the Investors tab on our website. And now I’ll turn the call over to Popularies’ President and CEO, Bob Wright.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Thank you, Adia. Good afternoon and thank you for joining our call today. Our second quarter results continue to showcase the strength of the Potbelly brand as our growth engine further accelerates. At a high level, our top line sales momentum continued as we grew same store sales by 3.2%, including positive traffic. And our shop expansion plans remain on track with eight successful shop openings in the quarter ahead of our Q2 expectations.

Our team’s disciplined approach to managing both shop level and corporate costs also led to year over year shop level margin expansion to 16.7% and helped us deliver an adjusted EBITDA of $9,600,000 reaching the high end of our guidance range. These strong results truly reflect the growth engine we’ve been building for the past five years, leveraging our five pillar operating strategy across menu innovation, value, operations, digital and shop growth. However, at the heart of our continued success is our team’s unparalleled dedication and hard work. I would like to thank every member of the Potbelly family from our frontline staff to our support center employees, as well as our franchisees and their teams whose commitment to excellence makes these achievements possible. As we look forward at second half of the year, our focus will remain on actions that continue to support accelerated growth, both now and into the future.

This includes driving comp sales growth through menu innovation and investments in our consumer facing digital assets, as well as data and analytics. Growing and modernizing our shop footprint through accelerated unit openings, franchisee growth, market penetration, and remodels of our company owned units. And lastly, exercising prudent cost controls to achieve balanced growth while also pushing incremental flow through to our corporate earnings. Let me walk through some of these actions starting with innovation. The menu innovation that we’ve introduced over the past year continued to be a driver of our top line performance in the second quarter.

As we previously mentioned, we launched an exciting addition to our iconic core menu in mid April with the all new prime rib steak sandwich, our first ever steak sandwich added to the permanent menu. Importantly, customer reception continues to be tremendously positive. Our consumer insights and customer feedback work we did last year helped us understand where we could focus our core menu efforts, and we learned about the menu enhancements and additions that would be most appealing. Recall the introduction of our prime rib steak sandwich was on the heels of our new slow cooked pulled pork sandwiches introduced at the 2024. In addition, the launch of tractor beverages last year underscored our commitment to innovation across the menu, not just in our legendary sandwiches.

Following the end of the quarter in early July, we continue to elevate the Potbelly menu through the introduction of Potbelly branded hot pepper potato chips as part of our partnership with Zaps. These new chips feature the flavor of Potbelly’s signature hot peppers and are available exclusively in Potbelly shops nationwide. We’ve also upgraded our salad dressings in partnership with Marzetti to enhance quality and flavor on our salad line. As we look ahead, we carry on testing additional areas of menu innovation through our stage gate development process, and we look forward to sharing information about the new menu innovation efforts that are currently in test in future calls. Importantly, our approach to menu innovations remain integral to our three part value delivery.

The intrinsic value of our core menu is all the better with these exciting new menu items, quality upgrades, and flavor enhancements. We also maintain support for everyday value layers with our pick your pair options, $7.99 skinny value combos, and meal deals. And we continue to use our digital channels as our primary method to drive promotional value, especially with our most loyal customers. Again, a balanced use of these three layers of value helps us meet customers’ needs in all the ways they use PopBelly while simultaneously driving profitable traffic growth. Moving to digital.

Our performance during the quarter remains strong and a long term driver of our top line momentum. The seamless integration of our digital advertising, consumer facing digital assets, and Potbelly Perks loyalty program combined with our menu innovations work cohesively to provide Potbelly with multiple sales layers to drive long term sustainable growth. During the quarter, our digital business represented over 41% of our total shop sales, an increase of approximately 140 basis points versus last year. Building on this strong digital platform, I’m excited to share that in late June, we launched our new website and mobile app, rebuilding our digital platform from the ground up to deliver meaningful improvements to the customer experience. These enhancements, which were developed based on extensive user insights and customer feedback represent a key milestone in our ongoing digital transformation strategy.

Through these updates, we made ordering faster and easier than ever. We’ve introduced one click ordering from the home screen, our fans to instantly reorder their favorites, redeem rewards, and explore new menu items with ease. Our refreshed menu layout now showcases more items while incorporating a quick add feature that significantly speeds up the checkout process. We’ve also streamlined navigation with infinite scroll functionality that encourages digital exploration and makes browsing our full menu more intuitive than ever before. We’ve simplified the personalization process with visual cues that guide guests through their choices and a consolidated interface that puts all options on a single page.

The checkout experience has been enhanced with path friendly tools that make it effortless to update, repeat, and remove items. Finally, we’ve made significant changes to allow our Perks loyalty members to effortlessly convert their coins for value added menu items wherever they are in the experience with simple and intuitive visualizations. As we’ve mentioned, we’re making incremental investments in both consumer facing digital assets and data and analytics capabilities that we believe will not only make us more competitive, but also more efficient and effective in our digital marketing efforts. While I’m very pleased with what we’ve accomplished with these recent updates, this represents just another step in our digital journey. We have additional enhancements in our development pipeline that will further personalize and streamline the customer experience, and we look forward to sharing more details on these exciting developments in future calls.

Now, let me give you an update on our Franchise Growth Acceleration initiative. Our team once again made meaningful progress across all phases of our unit growth funnel. Starting with unit openings, we are pleased to have opened eight new shops across our system during the second quarter, above our original expectation of six new shops. As we look ahead, we expect to open at least another eight new shops during the third quarter. More importantly, our future opening plans remain on track and we believe we continue to have a clear line of sight to open at least 38 new shops in 2025 with all the remaining locations currently under development and driving our confidence in our development expectations for the third and fourth quarter.

As a franchise focused company, we continue to expand through franchise partners who share our passion for the brand. And thanks to the great work of our franchise team and converting high quality franchise candidates to franchisees through deal signings, we added 54 new franchise shop commitments during the second quarter, our strongest quarter ever. This brings our total open and committed shop count to eight sixteen shops, surpassing 40% of our long term potential for at least 2,000 shops. The combination of new shop openings, emerging franchisees, and new development agreements, and expanded commitments from existing partners continue to reinforce our confidence in accelerated franchise growth for 2025 and beyond. In addition, our remodel tests remain on track with five remodels completed through Q2 and several more nearly completed to date across all three tiers.

With our various combinations of updated signage, exterior enhancements, interior updates and furniture upgrades, I couldn’t be more pleased with how we’re able to update the overall Potbelly image to our customers benefit while still maintaining that special Potbelly environment that remains a competitive advantage for us. While still too early to share details on traffic lifts and ROI, we are very pleased with the early test results and look forward to sharing more of those details in future quarters. In summary, we’re very proud of what we accomplished thus far and excited for what the future holds for Potbelly. We’ve accomplished so much over the past five years, but we know that Potbelly is just getting started and believe we are well positioned to capitalize on the immense opportunity ahead of us. With that, I’ll now turn the call over to Steve to detail our financial performance for the second quarter.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Thank you, Bob, and good afternoon, everyone. System wide sales for the 2025 increased approximately 6.7% year over year to $154,200,000 with total revenue increasing approximately 3.4 percent year over year to $123,700,000 Second quarter adjusted EBITDA was $9,600,000 or 7.8% of total revenue. This 13% growth year over year was driven by improvement in shop level margin, continued strong performance of our franchise shops, and ongoing disciplined management of G and A. Diving in further, company operated SHOP revenue increased approximately 2.5% year over year to $118,400,000 while franchise revenue improved approximately 27.7% year over year to $5,300,000 in the second quarter. This performance was primarily driven by an increase in franchise units.

Average weekly sales were approximately $27,040 And as Bob mentioned, company operated same store sales were up 3.2% in the quarter, above the high end of our expectations. The same store sales growth was attributable to a 1.1% increase in transactions and a 2.1% increase in average check. The higher average check included an approximate increase of 2.7% in gross price. Turning to expenses, food, beverage and packaging costs were 26.3% of shop sales, an 80 basis point improvement versus the prior year period. This was largely driven by slight commodity deflation of 40 basis points in the quarter.

Labor expenses remained flat year over year at 28% of sales. Occupancy was 10.6% of sales, a 30 basis point improvement versus the prior year period, mostly the result of sales leverage. Other operating expenses held steady year over year at 18.4% of sales. CHOP level margins were 16.7, an increase of 100 basis points versus last year. General and administrative expenses were 8.7% of system wide sales, an increase of 50 basis points year over year, primarily due to payroll costs, including an increased bonus accrual aligned with our year to date performance and non recurring consulting and legal settlement costs.

We reported a net income of $2,500,000 for the quarter. Adjusted net income was $2,900,000 a $400,000 increase versus the prior year period. We believe the strength of our balance sheet provides us flexibility to fund our growth, strategic initiatives, participate in our share repurchase program and align with our broader capital allocation strategy. During the second quarter, we purchased approximately 113,000 shares of our common stock for a total of approximately $1,000,000 We anticipate repurchases throughout our three year program approved in 2024. Finally, let’s turn to guidance.

For the full year 2025, we are increasing our guidance in key areas and anticipate the following. Same store sales growth of 2% to three point zero percent, up from the previous range of 1.5% to 2.5%, unit growth of at least 38 openings, and adjusted EBITDA of approximately $34,000,000 to $35,000,000 an increase from the previous range of $33,000,000 to $34,000,000 Incorporating our quarter to date results for the 2025, we anticipate the following. Same store sales growth of 3.25% to 4.25%, unit growth of at least eight units, and adjusted EBITDA of $9,000,000 to $10,000,000 With that, I’ll turn the call back over to Bob.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Thanks so much, Steve. As we wrap up today’s prepared remarks, I want to end by highlighting an underappreciated driver of our success. It’s our deep commitment to the communities we serve. I’m particularly proud of our Potbelly Summer of Service initiative where our teams across the country have demonstrated extraordinary commitment to making a difference in their neighborhoods. From partnering with major food banks nationwide, helping provide meals to families in need to supporting important causes like Down syndrome awareness through annual fundraising events like GG Fit Acceptance Challenge in Chicago.

Our impact has been both broad and meaningful, touching lives and communities large and small across the country. These efforts reflect our core belief that Popularly is more than just a sandwich shop. We’re a vital part of the neighborhoods we serve. I wanna extend my heartfelt gratitude to our dedicated team members and franchisees who’ve embraced our mission of community service. Your commitment to showing up, giving back, and making a difference has truly brought our values to life.

Together, we’re building not just a successful business, but a company that makes a lasting impact in the communities that we call home. As we look ahead, we remain committed to growing our business while deepening our community connections one neighborhood at a time. With that, we’re happy to answer any questions. Operator, please open the line for questions.

Conference Operator: Thank you. We will now begin the question and answer session. And our first question comes from Todd Brooks from The Benchmark Company. Please go ahead.

Todd Brooks, Analyst, The Benchmark Company: Hey, thanks and congratulations on the continued momentum in the business folks. That’s great.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Thanks, Todd.

Todd Brooks, Analyst, The Benchmark Company: First question I have and just doing the math, looks like about three sixty four signed deals in the pipeline on top of units that you have opened now. I think in the past you’ve talked about an eight year type of realization that franchisees have to open their commitment within, but I know there’s some kind of incentives in place and some of the bigger franchisees are better versed to open more quickly. How long do you think it takes to realize that pipeline? Because we’re starting to get to meaningful numbers here in that 50 unit range just from, the known pipeline right now for franchisee openings going forward.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Yeah. It’s a great question, Todd. It ties to, you know, what we’ve been talking about is our long term algorithm for growth rates in the double digits when it comes to unit count. And you’re right. Your your eight year horizon is what we see as the maximum timeline for shop development area agreement with a franchisee.

So if you think about one of those large area developers, let’s say they’ve signed for 16 shops, they’re gonna deliver two a year. At the same time, if if a franchisee signs any less than eight units to a development agreement, then they get a year per unit. So we don’t necessarily spread all of those shops over eight year period of time because if it’s a smaller development agreement, we’re still gonna get a unit a year and they get a little bit shorter time. So, yeah, as you start to digest all these commitments that have come into the system and especially as those those multi unit developers, find their footing, they work in the real estate market like we’ve talked about many times, and they they get those approvals in place. They they can see multiple openings a year.

Both larger and smaller franchisees have a small incentive on the table if they can open ahead of schedule. And it’s mutually beneficial. We call it our fifty fifty incentive because they can they can get a discount on their royalties during the weeks that they weren’t expected to be open. For them, that’s that’s additional money that’s towards their deal. And for us, we still got half of the royalties that we hadn’t baked into our plan.

So it’s a win win for both of us.

Todd Brooks, Analyst, The Benchmark Company: That’s great, Bob. And just a quick follow-up, and then I’ll jump back in queue. And I’m not sure how exactly to frame up what we just discussed there, but what it sounds like to me is we have visibility into 50 plus franchise openings next year. But you’ve also talked about an element of accelerated corporate openings to try to densify a few of the key company store markets. I think you’ve talked about 10 to 20 a year.

Thoughts on that as we’re looking out to ’26? Is that corporate store pipeline shaping up at all? And do you temper that back at all given the momentum that you’re seeing just from a franchisee signing standpoint? Thanks.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: No, thanks for the chance to clarify that, Todd. I appreciate it. Look, you’re right. While we’re not guiding to our 2026 opening rate, we’ve got really nice visibility into that pipeline. And because we’ve been building the pipeline for this period of time, we, you know, frankly, what we can see more of is is a little more front half loaded than back half.

Because the back half is gonna fill up as we go through the back half of this year. Right? So, that that continues to build with our franchisees. We have said that we would build up to 20 company units a year. We’re not making commitments for the number to be that high, because the we’re looking for the intersection of a few key variables where we would build a company site, densifying a market that we’re already in, markets that have really nice margins for us and lower than nationwide average construction costs, and markets that we don’t already have franchisees growing in.

So, you know, we we think that’s an important, earnings builder for our brand and for our company, while at the same time, you know, it’s it’s true to our unit growth story without getting in the way of what’s really the biggest part of unit growth is those franchise unit developments. So, we’ll we’ll be guiding to those 26 numbers soon enough, but we we’re very pleased with how those two elements are shaping up to make the year look strong.

Todd Brooks, Analyst, The Benchmark Company: That’s great. Thanks, Bob.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Yeah. Thank you.

Conference Operator: And the next question comes from Jeremy Hamblin from Craig Hallum Capital Group. Please go ahead.

Jeremy Hamblin, Analyst, Craig Hallum Capital Group: Thanks for taking the questions and I’ll add my congratulations on the strong results. I wanted to dive into the same store sales in a bit more detail and see if you can share a bit more on, you noted positive traffic, which is fantastic in Q2, but wanted to see from of that 3.2% growth, what was transaction, what was check and then how you’re looking at menu pricing and potential mix here as we are in Q3.

Todd Brooks, Analyst, The Benchmark Company: Sure.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Thanks Jeremy. Let’s Steve

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: and I tag team that he can give you the pricing and the mix piece and then we’ll talk a little bit about why we have the confidence and what happened can continue to happen too.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Sure. So Jeremy, the breakdown of the 3.2 same store sales growth for us on the corporate side was 1.1% growth in traffic, that’s a transaction number, and then 2.1% average check increase. Our gross price was 2.7% and that’ll give you a 0.6% slight drop in mix to break that decomposition for you.

Jeremy Hamblin, Analyst, Craig Hallum Capital Group: Perfect. And just a little bit of color maybe on the cadence throughout the quarter, April, May, June. And obviously it sounds like Bob is excited to share a bit of why you have confidence on a really strong same store sales guidance for Q3.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: You mentioned in his remarks that we accelerated through the quarter in terms of our same store sales. So business continued to strengthen. And that’s in the face of an Easter shift that didn’t fall our way. And that’s also taking into account, you know, fourth of July component that sometimes creeps in at the bottom of the quarter. But we’re and Juneteenth was another element.

So all of those factors still resulted in us continuing to build our same store sales through the quarter.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Yes, Jeremy, I think the thing that we’re excited about is that we’re seeing growth across multiple channels. You know, we talked again about the 41% digital business. And we’re seeing growth across multiple strategic initiatives. You know, it’s all been part of this plan that we’ve been building. So the menu innovation, those three layers of value, the digital efforts that we’ve had in place, the consistent attention to detail with operations and and the staffing that we have and the stability and the turnover levels that we have in our shops.

And I I think as you hear us talk about things like the rollout of the new web and the app in June, and the platform that that allows us to lean even further into into some of these areas that, you know, you heard my comments mentioning that we have we still have additional testing related to the menu. And, you know, sometimes it’s as big as a steak sandwich like it has been. And, of course, the marzetti dressings, we think those are very important moves. They may not be as splashy as a add to the sandwich line, but just really continuing to focus aggressively on the core menu itself. That is the base of that that value structure that we have.

And I I think what you’re hearing is that that the success and the traffic driving capability is the same thing that we’re drawing our confidence in for the future. We obviously wouldn’t raise sales guidance if we thought we could see the continuation of the accelerated momentum that we’ve seen this year.

Jeremy Hamblin, Analyst, Craig Hallum Capital Group: Got it. And can you elaborate a little bit on that menu innovation? I mean, I know you may not talk about specific things, but can you talk a little bit about the timeline? It sounds like there’s potential for either other launches in the back half of the year or testing of items.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Yeah, we have in your right. We don’t wanna over promise here. We always prefer to talk to you all about what we’ve done and and why we’re confident about what we’re working on. But we do have additional menu innovation work in test now. It’s a little too early to talk about exactly where that’s going, but, we have we have that in some of our shops and in some of our markets.

And we certainly have a view to what else is in that stage gate process and that stage gate pipeline and what could come next after that. And it is it’s a blend of products and product products that we put on the menu and the ingredients that make those products. So, we wanna just keep keep elevating our quality game, and giving our customers more reasons to come in. I think for us, we get asked questions sometimes about specific product items. And, yeah, I think you’ve seen the pattern is what you should expect to see in the future.

It’s it’s adjacencies to the current menu. It’s what our customers and our researchers told us they would reward us for if we would invest in those things in the menu. It it is what is accepted by the current the current fast casual and Potbelly consumers. So, you know, we our research was pretty clear for us that we knew steak was gonna hit if we got the right product. And so we spent the time developing that.

There are other things like that that our customers have told us that they would reward us for. And what we’re working on is finding the right solution for that reward.

Jeremy Hamblin, Analyst, Craig Hallum Capital Group: Got it. Last one for me real quick. I wanted to see if you could make some comments around cost of goods. Tariff noise is kind of still out there and creating a bit of confusion, but wanted to see if you could share visibility that you feel like you have here on food costs in the back half of the year.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Sure, sure. It’s perhaps a nice benefit that we’re not a manufacturing company here in the sense because we don’t really have a lot of exposure to those kinds of items that would fall under at least as of today the proposed tariffs. There was some thought earlier that with avocados that we get from Mexico and so forth that we might have some exposure and we probably do if those things fully come to fruition. But as we look at the year, so far we benefited from a really favorable commodity year, deflation, right, in some cases. But as we look to the back half, at least from what we can see, we’ve got food cost inflation here as we’re looking at the third quarter, just shy of 2% is our forecast and then something as we head into the fourth quarter we have a bit of a step up for us anyway in a different distributor relationship and it steps up a little higher than that, but it’s just a little north of two.

So it’s fairly benign. And so we’re locked in on our baskets 99 for this quarter and about 85% for the year. So barring any wild changes from the administration, I think our food costs are in manageable state to say the least.

Jeremy Hamblin, Analyst, Craig Hallum Capital Group: Great. Thanks so much guys for taking the questions.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Thanks, Jeremy.

Conference Operator: Thanks, Jeremy. The next question comes from Mark Smith from Lake Street Capital. Please go ahead.

Mark Smith, Analyst, Lake Street Capital: Hi guys. I wanted to ask first just about the balance sheet a little bit. The debt is now all gone. Just curious your thoughts around capital deployment, if there’s more interest in buybacks or other places where you see putting capital to work?

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Sure. Sure. I think we’ve mentioned in the past that we think about our capital strategy in this way. We want to continue to invest in our assets. Right?

So those are going to be our existing stops. And Bob discussed, I can give a little more color to the remodel program that he mentioned in his opening remarks and those new units that we’re going to continue to build. That’s kind of on the growth side for us. So those things that will drive some additional same store sales we believe and certainly more revenue. And then we want to invest in our technology as well.

And there’s a lot of evidence of that showing up already. The new web and app that recently launched is one manifestation of that, but then rebuilding our tech stack and allowing for even greater marketing capabilities and more sophisticated ways to reach our customers is something that we’ll continue to invest in. Know, over 40% of our business is digital. That’s something that we’re going to continue to spend our capital on because we believe it’s return capital. And we also spent a fair amount of money on maintaining our fleet, right?

There’s always routine maintenance that creeps into our capital spend, but that goes back to kind of reinvesting in our assets. And we have, as you know, a share buyback program in place. I mentioned we were in the market last quarter and we’ll continue to put capital there. But I would say that for us the first best use of capital is are those high return strategic initiatives that push us far beyond our cost of capital and lay the groundwork for continued growth in the future. And what you’re seeing right now is, you know, those multiple layers of growth kind of all hitting at the same time, which are pushing our same store sales and driving some of that traffic.

So that’s a plan and a model and a strategy that’s working for us and we’ll continue to play it out like that. Perfect. And I did want

Mark Smith, Analyst, Lake Street Capital: to ask about the the remodels a little bit as as well as prototypes. You know, what what kind of returns or any you know, how pleased are you, you know, as you look at, you know, results from remodeled restaurants or even kinda new prototypes? Any updates there would be great.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Yeah. Happy to. You know, I’ll hit the prototype first of all because that that really relates to, you know, how how pleased we are with new shop openings. And, you know, suffice it to say, we are very pleased with the performance of our new shop openings, but I’d add to that that we’re never satisfied, you know, with the build costs and the and the sales returns that we get, our franchisees are enjoying when they’re building new shops. The areas that we’ve been working on are, as you can imagine, in restaurant development, are there things that we can do to pull costs out of our our new shop builds?

We do have that prototypical design. We’re very, very happy with that design, but we think that we could we continue to economize some of the construction costs. In fact, we have a recent build where we tested some of those design, adjustments and things that we pulled. We have, we don’t think we have pulled tens of thousands of dollars out of the construction costs. And I think we did a marvelous job preserving the Potbelly experience and the Potbelly feel.

We’re very quick about incorporating any of those proven enhancements that can bring cost down in the very next iteration. Because, you know, as we talked before, the prototype is a design standard. It isn’t a cookie cutter one size fits all box that has to be exactly the same. We’re going into lease spaces. Sometimes they’re rectangular.

Sometimes they’re square. And so because it’s a design standard, we can incorporate these changes whether it’s materials, construction style, there’s some stuff even the intricacies of how some of the wall framing is being done. We pulled costs out. The customer would never see that, and it saves, you know, thousands of dollars. So there’s there’s the the, construction side of things that we think is really important.

Then on the on the revenue side, again, we’re pleased but not satisfied. There are some things we started to learn now that we’ve opened several shops this year and continue to open them that we think we can do even better. So even though we’re we’re happy with the the opening sales growth because we’re partnering with our franchisees. There’s some things we’re learning about how we can kick start catering a little bit faster. Some things we’re learning about how we can train a little more aggressively for those first few days with our dream teams that are in place.

And, you know, these are all things that were not problems. They’re just once you get rolling, find there are more and more better ways to to do this well. And those are the things obviously that franchisees will continue to invest in. We get very high marks with our franchisees because we’re very open about these enhancements. And when they have feedback, we incorporate it and we make the next opening even better.

I think it’s important to note too, Mark, that we’re opening on time. You know, that the the process is getting sharper and better too. You know, this is all this is all infrastructure, team, skills, and and functions that were built. We’ve been building them over the last five years. And so I’m I’m really pleased.

And it’s broad based. I mean, gosh, this quarter, we’ve opened shops in seven different states. You know, it’s not it’s not highly concentrated in that way. Now, what’s neat about the prototype work is it lends itself really well to the remodels you asked about. And I know in my prepared remarks, you know, we talk about these three levels of remodels, we have fun here.

So we named them after our sandwich sizes, skinny, original, and big. And they they that that essentially matches the the price banding that it takes to, you know, to what what are we looking at in in the various scale of remodel. But it is some combination of signage, exterior work, interior work, and, you know, you get into furniture and some fixtures too if you’re into that big size remodel. We have one of our shops that’s it’s been with us so long. It’s got a single digit shop number.

So if you have top top 10 original shops. It’s gonna get a big remodel. We won’t we won’t state exactly where that is, but it it it’s gonna really, I think be boosted by a full blown retouch of the exterior and the interior. And we’ve had some recently, and the five that I mentioned that we’ve already done that were just signage. And in our new logo, our new branding that we that that we rolled out a couple years ago, it really pops.

And and in some cases, see people from the neighborhood that are glad we quote finally opened, just by replacing the signage. So, really pleased with the remodel so far. We got a lot of testing to do. We need our PP NOC, our pre post net of control assessment that Steve holds us, you know, very closely, accountable for before we can start sharing some of the details. But we’re watching you heard me mention it.

We’re watching lift and return on those remodels because we we have experience with other brands. You get this right, and it can drive top line growth that adds profit to the bottom line that we really like. Not to go on and on, I do wanna mention one last thing that kinda crosses both of those, and that’s our PDCX investments. Steve talked about technology and assets. And this is the in shop technology, that new POS with the new kitchen display system, and we’ve even added this handheld ordering system that we think has upside to help drive the busiest day parts and help us handle that big demand during the busiest day parts.

So when we do, when we open every shop, it gets the new PTCX system. And of course, as we’re doing remodels, we’re gonna do that too. But all of our shops will get the new POS by the end of next year.

Mark Smith, Analyst, Lake Street Capital: Perfect. If I could squeeze in one more, kind of twofold. We’d love to hear if you saw any change in consumer behavior, whether it was cutting out chips or drinks or anything as consumers were a little squeezed here in

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: the quarter. And with that, I would love to hear if you

Mark Smith, Analyst, Lake Street Capital: can discuss it at all competitively. If there’s any real differences between a digital customer and yeah, counter order customer on, you know, check size or upselling them, you know, digitally.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Yeah. I mean, I think when it comes to consumer, you’ve heard a lot of other brands talk about low income consumer. We do watch the spending by income bracket among among another number of other variables. And there there definitely seems to be some pressure on the the low income consumer that, you know, 40 and $50,000 and below. That makes up a pretty small percentage of our traffic.

And so we’re able to grow the business in spite of that pressure on the lower end that you’re hearing about from especially from from some other brands. And, you know, at the end of the day, we’re we’re we’re watching that, you know, people are still employed. They’re still they’re still seeing wage inflation that’s outpacing their, their consumer inflation. And when it comes to lunch, fast casual still sits in a great place. I mean, you can come eat a Potbelly for $8, for $9, get a whole meal.

And that’s the threshold that our research tells us that is really important even if someone is watching their dollars in their wallet. And at the same time, you know, if you wanna spend a couple of extra dollars on the premium prime rib steak sandwich and maybe even get it in a big size, you know, we’ve we’ve got that for you too. Clearly, in the digital space, one of the advantages is people spend a little more time perusing the menu, cruising through the menu, maybe adding a cookie, maybe adding an additional drink for their, you know, to put on their shelf or something. And you can see the check growth with that. That can be party size too that influences check growth.

And the other side of that is that we we also have an ever, you know, ever more successful relationship with our Perks loyalty consumer. And they love the fact that they can use those coins that they earn and turn around and and cash those in. So even though they may be adding things to their menu, they can use 300 coins to get a free cookie too.

Mark Smith, Analyst, Lake Street Capital: Excellent. Thank you very much.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Thanks Mark. Thanks Mark.

Conference Operator: And the next question comes from Matt Curtis from William Blair. Please go ahead.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Hi, good afternoon and I’ll add my congratulations on the quarter. On the digital side guys, have you seen any meaningful difference in sales trends between mobile order and pickup versus delivery? And then following the digital enhancements that you rolled out in late June, which I guess mostly designed to make ordering faster and easier. Have you seen any meaningful uptick in digital sales in the month of July?

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Yes. So Matt, first of all, thanks. Thanks for the comments and the question. When you talk about the last question first, we just rolled this out in June. And we’re certainly not going to talk about the components of that continuation of momentum in July.

But we are really pleased with what we’re seeing in the early data with the web and app, particularly with the behaviors that we’d hoped to see reflected in the orders that are related to the enhancements that we particularly designed into it. And we’ll talk more about this in the future, but it’s not just the app and the web, but it’s the tech stack that sits underneath it that gets unlocked because of that code that we think is, you know, very exciting for us into the future. In terms of the movement, within the digital space and, you know, in the traffic movement between inside digital pickup versus digital delivery versus third party digital delivery. We haven’t seen a significant shift in those behaviors here in this last quarter. That’s kind of similar to the behavior that we have been enjoying in the past.

Keep finding ways to make our first party digital the most attractive place for people to go. We like where we sit in terms of the overall mix. We’ve said all along, we’re in those third party channels because that’s where a lot of our customers are. We’re certainly not gonna turn our backs on that business. But, we we’re in finding more and more ways to get people pivoted back to the first party digital channels, whether they’re using it for delivery or pickup.

And in fact, they get smarter and smarter. They often order for pickup, but still come in and grab it off the shelf and sit down and dine.

Steve Surrilas, Senior Vice President and Chief Financial Officer, Potbelly Corporation: Okay, great. Thanks very much.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Thank you.

Conference Operator: Ladies and gentlemen, we have reached the end of today’s question and answer session. I’d like to turn the call back over to Mr. Bob Wright for closing remarks.

Bob Wright, President and Chief Executive Officer, Potbelly Corporation: Thank you, operator. We really appreciate everyone being on the call with us today. We’ve reached the, the end of our call, but I think what you’re hearing from us tonight is that we’re we’re very excited about where Potbelly sits today. The growth story continues, and we certainly look forward to talking to you again soon. Have a great night.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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