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Edited Transcript of PBPB earnings conference call or presentation 7-May-19 9:00pm GMT

Q1 2019 Potbelly Corp Earnings Call

Chicago May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Potbelly Corp earnings conference call or presentation Tuesday, May 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan L Johnson

Potbelly Corporation - President, CEO & Director

* Matthew J. Revord

Potbelly Corporation - Senior VP, Chief Legal Officer, Chief People Officer & Secretary

* Thomas J. Fitzgerald

Potbelly Corporation - Senior VP & CFO

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Conference Call Participants

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* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

* Stephen Anderson

Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone and welcome to Potbelly Corporation's First Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) Today's call is being recorded.

I would now like to turn the call over to Mr. Matt Revord, Potbelly's Chief Legal Officer. Please go ahead.

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Matthew J. Revord, Potbelly Corporation - Senior VP, Chief Legal Officer, Chief People Officer & Secretary [2]

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Good afternoon, everyone and welcome to our first quarter earnings call. Before we get started, I'd like to note that certain comments made in 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 2019 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 in our most recent annual report on Form 10-K under the headings Risk Factors and MD&A and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.

Our presenters today are Alan Johnson, our Chief Executive Officer; and Tom Fitzgerald, our Chief Financial Officer. After our prepared remarks, we'll open the call for your questions. I'll now turn the call over to Alan.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [3]

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Thanks, Matt. Good afternoon, everyone and thank you for joining the call. As we highlighted in our fourth quarter earnings call in mid-February, we expected our performance in the first quarter to be challenged as we faced multiple headwinds to our business during the first half of the quarter, including the shutdown of the Federal government, which lasted 35 days and impacted over 20% of our fleet. In addition, several of our key markets were significantly impacted by the frigid polar vortex.

To give you a sense for the magnitude of our weather-related challenges, I'll point to 3 specific data points. First, the median temperature across all our markets was 15% colder for the entire quarter as compared to the same period last year. And second, Chicago, our largest market, had slightly less inches of snow but more days with snow. And third, Washington, D.C, our second-largest market, experienced 3x more snow in the first quarter than the prior-year period. As you can imagine, advertising and promotion are not effective when outside temperatures are in the single digits. Therefore, we made the strategic decision to push out the incremental marketing spend that was slated for the first quarter to the second quarter and later in the year.

Finally, the rollout of our menu optimization initiative in mid-February created a short-term lapse in pricing. Our typical cadence would be to change our menus at the beginning of the year. However this year, we delayed this by 7 weeks so that we could take full advantage of our new menus, which went up on February 12. We estimated the combined impact of these headwinds was negative 130 basis points, which was reflected in our company-operated same-store sales of negative 4.7% for the first quarter.

The foundation of our turnaround strategy starts with reversing our same-store sales and traffic trends and we continue to work very hard to turn around business. However, as I have consistently stated in prior calls, the business did not get in the shape that it's in with declining traffic trends overnight. Despite our recent efforts, it is clear that we will take some time to get the business back on track.

Tom and I have been part of several turnarounds. And as we compare our experiences, there are some commonalities. Things often don't follow a linear path. There are some things that work and there will be some things that don't. There is typically a series of adjustments and course corrections that are required to ultimately and collectively have the desired impact to change the trajectory of the business. The same is true with this turnaround. In times like this, given our challenges, it is easy to assume that everything is not working. In my opinion, that would be a mistake. Some things are working and working well. But there are some things that are not working and need to be adjusted.

Let me highlight what is working in our business. First, is our menu-optimization initiative. Our efforts to simplify and increase the shop-ability of our menu and the introduction of enhanced variety and bundle options have received positive customer feedback. Through the first 6 weeks, we are very pleased with initial results from Pick-your-Pair and the Meal Deal options that are now available via our newly updated menu boards and online. The results of these 2 additions to our menu have significantly exceeded our expectations and what we saw in our test shops last year. Combined, these 2 options represent about 24% of our entrée mix. This is the highest and the best result we have ever achieved. Additionally, the mix has remained remarkably consistent each and every week, which points to high customer satisfaction. Importantly, from the time we rolled out the new menus through to the end of the first quarter, our average check is up 460 basis points, with the majority of the growth coming from units per transaction.

As we identified this time last year, the OneMore strategy is a powerful growth vehicle when you get it right. We want to build up check growth by encouraging our customers to buy more versus growing the check by raising prices. Through an extensive and disciplined process of testing and learning what works, it became clear that adding these bundles and meal deals to our permanent menu was something that previously we had not tried in over 41 years of our history and would have a meaningful and immediate impact. Virtually every customer looks at the menu, whether in the shop or online. And our enhanced menu is optimally positioned to serve as a silent seller to drive suggestive selling in 100% of occasions.

As we embark on the next phase of menu innovation, we are currently testing a few things that we think will resonate with our customers, such as a premium sandwich category. We recently introduced a new cold brew shake, which features a blend of hand-dipped vanilla ice cream and cold brew coffee, along with a whipped cream topping and a cherry. Chef Ryan remains hard at work on driving our pipeline of menu innovation and LTOs. As we continue to focus on leveraging our menu as a platform for innovation and growth, I look forward to providing you with an update in future calls.

The second area of our business that is working is off-premise, which consists of catering, pickup and delivery. Each of these segments was up in the first quarter and drove our overall off-premise segment to 21.0% of comparable sales, up from 17.5% in the first quarter of last year. Pickup in-shop is the fastest growing segment and we are on the process of rolling out our pickup racks to all of our shops, which should be complete in the third quarter. Delivery growth accelerated through the first quarter as our shops continued to augment our driver delivery window with DoorDash. We continue to make future investments to drive greater productivity and customer convenience. For example, we are investing in technology to better integrate off-premise orders into our normal flow of making entrées as well as enhancing the functionality to track your order. We expect to roll out these technology enhancements across our shops in the third quarter.

The third area of our business that is working is our Potbelly Perks loyalty program. We now have 1.3 million registrants in our program, up from approximately 800,000 at the end of the first quarter last year. More importantly, our members made up 18% of our sales in the first quarter, up from 8% last year. Don't forget, these customers typically spend significantly more. Additionally, many of you have read the same articles that we have, which quote that Starbucks' Loyalty Program has 16 million members. Given our businesses have very different sales level, at least on this basis of comparison, our 1.3 million registrants would indicate that our Perks program is punching above its weight class. Longer-term, we plan to restructure our Perks program to build a stronger retention and brand-building tool. In the meantime, we will roll out a Summer of Smiles overlay program for our Perks members, which will provide a virtual punchcard program designed to drive frequency and retention. This program will roll out in early June and meets the 5 criteria we have established, where the program has to be simple to communicate, have timely and relevant reward, speed to launch to start learning early, requires minimal-to-no system program changes, and be easy and efficient to administer. The ultimate measure of success being higher retention. As we do with all aspects of our business, we quickly learn from this overlay and use the information to inform our go-forward plans for the restructuring of our current loyalty program.

The fourth area of our business that is moving in the right direction is franchising. Specifically, our franchisee pipeline is gathering momentum. I'm very pleased to announce that we have signed 2 new franchisees plus a contract out to a third in the first quarter. Our new franchise partners are all well-capitalized and have significant restaurant operating experience, which represents a significant shift in who we are targeting to drive our future franchise growth. Impressively, the collective new store development plans call for around 40 new shops over the next few years, which is about the same number of domestic franchise units that we have today. I'm also pleased to announce that our very first franchise shop opens in California this week in Irvine. It's important to remember that we spent most of last year cleaning up, restructuring and investing in resources needed to support the franchise organization. And that effort is now starting to bear fruit and is one more example of something that is working and will position Potbelly as a long-term growth story.

The final example of something that is working is our Shop of the Future initiative. We have reached an important milestone in that we have approved the design of a new shop format from the ground up that costs 25% less than the current model and significantly improves the customer experience, while still representing the Potbelly brand story. This is clearly a win for our customers and future investors. We will provide more details on future earning calls but I wanted to share our significant progress.

So that's a brief summary of what is working in our business. We have made solid progress from where we were a year ago but clearly, we still have a lot of work to do. Now let's change gears and talk about what's not working.

You will recall that in Q3 of 2018, when we invested in advertising and increased our promotional intensity, our traffic beat Black Box by 170 basis points, a significant improvement from the negative spread in the first half of 2018. Our plan in 2019 was to pull back on promotions but aggressively increase advertising to drive traffic. The P&L struggles, if you try to do both at the same time.

During the first quarter, our traffic trends, which were leading our weighted Black Box benchmark in the second half of last year, trailed that benchmark by 110 basis points. We believe this is partly attributable to our pullback on spending and promoting in the fourth quarter of last year and the first quarter of this year, compared to the level in Q3 of 2018. So we may have lost some momentum. As I mentioned earlier, given the adverse weather we experienced in the first quarter, we pushed our advertising investment out into the second quarter.

Let me provide a brief update on the initial Q2 results of our strategy to grow our share of the target customers. In April, we launched our first new brand campaign, Love Lunch Again, across 3 core markets. As we have indicated previously, we are committed to making a larger investment in digital marketing, which provides a cost-effective and targeted channel to tell the Potbelly story in a way that really differentiates the brand. We also tested some spot-traditional marketing channels such as billboards, television and radio in our core markets in order to understand the impact of those mediums on our business.

While the initial results for our new campaign improved our traffic performance versus Black Box, the results were not enough relative to the size of the investments we were making. The key to success is finding the right message, media and creative to attract customers and build our brand awareness. What the initial results told us was that at least one of these elements, the message, the media or the creative may have missed the mark. As a result, we are taking a step back to assess our efforts and to gain a better understanding of what brand messages resonate when combined with a call to action and promotional hook. We then plan to take our learnings and apply them with a fresh approach on how to talk to our customers to drive a more productive outcome.

As I've stated before, we don't expect 100% success rate on everything we try. But we continue to test, learn and roll to find the right combination. This business did not get into this position overnight and it will take time to turn around. In the meantime, we will continue to aggressively push those things that are working well for us and drive them to help offset some of the traffic softness.

I will now turn it over to Tom, who will go through the details of the P&L in the first quarter as well as outline our expectations for 2019.

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [4]

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Thanks, Alan and good afternoon, everyone. As Alan mentioned, I will review the P&L and give you some of the highlights associated with our first quarter results. I will also provide a summary of our outlook for 2019.

Starting with the top line, total revenue decreased 4.7% to $98.1 million in the first quarter, driven predominantly by a 4.7% same-store sales decrease for our company-operated shops. Breaking down same-store sales, our average check grew approximately 2.2%, driven by a combination of price and mix. We opened 3 new shops, including 1 company-operated and 2 franchised.

Our shop level margin for the first quarter was 13.1% of company-operated sales as compared to 16.4% in the prior period. Cost of goods sold as a percentage of sales was 26.7% in the first quarter, an increase of 60 basis points to the prior-year period, driven primarily by our traffic-driving investments. For the quarter, labor was 32.9%, which was an increase of about 200 basis points from the prior year, driven by wage inflation and sales deleverage.

Occupancy expense was 14.8% in the first quarter, an increase of 40 basis points as compared to the prior-year period due to sales deleverage and inflation in certain occupancy-related costs, including lease renewals, real estate taxes and common area maintenance. Other operating expenses were 12.5% in the first quarter, an increase of 30 basis points compared to the prior-year period due largely to sales deleverage in items such as repairs, utilities and other expenses that are not variable with sales.

Our general and administrative expenses were approximately $12.7 million in the first quarter or 13.0% of total revenue, which was an increase of 110 basis points as compared to the prior-year period, driven primarily by an increase in store closures and lease exit expenses partially offset by a decrease in stock-based compensation expense and performance-based compensation expense.

Adjusted G&A, which excludes store closure costs, CEO transition costs, restructuring costs and proxy-related costs, and which we believe is the best indication of the core G&A in our business, was $10.1 million for the first quarter or 10.3% of total revenue, a decrease of 10 basis points as compared to the prior-year period. Adjusted G&A was down $0.5 million in absolute dollars relative to the last year.

Our adjusted EBITDA was $3.9 million for the quarter as compared to $7.6 million last year, mostly driven from our decline in same-store sales as well as labor and occupancy inflation. During the first quarter, we had income tax expense of $13.6 million, of which $13.4 million pertained to the deferred tax asset valuation allowance reported in the quarter. Adjusting out the impact of the deferred tax asset valuation allowance and other items, our adjusted net loss for the quarter was $3.0 million or $0.12 per diluted share, as compared to adjusted net income of $660,000 or $0.03 per diluted share in the prior-year period.

Regarding our share repurchase program, in the first quarter, we repurchased approximately 135,000 shares of Potbelly common stock in the open market for a total of approximately $1.1 million. At the end of the first quarter, we had $41.0 million available from our Board-authorized program for repurchases, which will continue as we move forward.

Our capital expenditures came in at approximately $2.6 million in the quarter and our balance sheet remained strong, with a cash balance at the end of the first quarter of $13.8 million and we have 0 debt.

Now I would like to briefly comment on the adoption of the new lease accounting standard, ASC 842, effective December 31, 2018. This standard had a material impact on our consolidated balance sheet, as we have recorded operating lease liabilities of approximately $245 million and corresponding right-of-use assets of approximately $222 million. The $23 million difference between the liabilities and the right-of-use assets is primarily due to the balance -- the balances in our tenant improvement allowance and deferred rent reclassified from liabilities to contra asset accounts. We will not have a P&L impact due to the new lease standard. As we disclosed previously in our 2018 Form 10-K at that time, we were still evaluating the impact of ASC 842 on our financial statements, disclosures and internal controls. The standard has continued to evolve over the course of the first quarter and we now have -- and we have now completed the adoption of ASC 842. As a result of fair market values of right-of-use assets calculated on previously impaired shops, we recorded a smaller opening charge to retained earnings than expected. And accordingly, we will not see a significant impact on the income statement as a result of the adoption of this standard.

On our last call, we communicated that we projected an upside of between $4.5 million and $6.5 million for forgone rent expense for our impaired shops. However, the evolution of the guidance and interpretations over the quarter has resulted in a different approach of how impaired shops are treated within the new standard and therefore, we will not have any P&L impact.

Finally, there was no material impact to our consolidated statements of cash flow. Please note that prior year results have not been restated for the impact of this accounting change and therefore comparative periods remain as reported historically.

Turning now to our outlook for full year fiscal 2019. As Alan discussed earlier in the call, we have several initiatives that are working well for us but some things aren't working well and traffic has weakened. Given this, as we look to the balance of the year, we now expect same-store sales in the range of negative low-single digits to flat and adjusted EBITDA to be in the range of $25 million to $30 million for the full year. We anticipate costs of goods sold in the range of 26.5% to 27.0% for 2019. And our food cost basket is approximately 80% locked. We expect labor as a percentage of sales to trend between 31.5% and 32.3% of sales.

For the year, we expect our adjusted G&A expense to be in the range of $42 million to $43 million, reflecting a pullback on our increased investment in advertising, reducing our performance-based compensation and pulling back on any nonessential spending in other areas. We elected not to cut shop labor to the point where we feel we damage the customer experience. The reduction in our full-year profit outlook required us to take a valuation allowance against our $13.4 million of net deferred tax assets. This reserve can be removed once the company's results provide enough positive evidence that the deferred tax assets can be utilized in future periods. As a result, we will no longer provide guidance on our tax rate since it will effectively be close to 0.

We now expect to open 6 to 8 new company-operated shops in 2019 and 6 to 10 new franchise shops. The new company-operated shops will be back-end weighted. In addition, we remain focused on optimizing our existing company-owned portfolio. As such, we will continue to explore opportunities to exit less-profitable shops. We expect to close between 9 to 12 company-operated shops in 2019, which includes 7 shops already closed in the first quarter and 2 closed thus far in Q2. In terms of capital investments, we expect to spend between $19 million and $22 million in 2019.

I will now turn the call back over to Alan for his summary remarks. Alan?

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [5]

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Thanks, Tom. In closing, our main priorities in 2019 are to generate positive same-store sales and to drive profitability. As I mentioned, we have several initiatives that are working led by our many enhancements, off-premise, the growth of our Perks registrants, franchise growth beginning to come online and significant progress with lowering the investment costs of Shop of the Future by 25%. Once we address the primary drivers of our traffic trends, the things that are working in our business will enhance our ability to deliver sustainable and profitable growth, which will be further enhanced by the new store design. This will significantly boost the cash-on-cash returns from new company shops as well as growing the list of our potential franchisees.

We recognize that there's still much work yet to be done to turn the business around and we appreciate your continued support for our business as we navigate this transition. Thank you for all your time today. We appreciate you being on the call and look forward to providing you with an update on our progress on our next earnings call.

I will now turn it over to the operator and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Nicole Miller [Nicole Miller Regan] with Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [2]

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I'm trying to think about a couple of things. First would be the store closures. What can you share in terms of how negative those stores were, perhaps from a store level margin line? I'm really trying to understand how the drag might be eliminated from both the same-store sales and margin impact going forward.

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [3]

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Nicole, it's Tom. I'd say, as you probably know, we have a list like everybody of the bottom 25 shops. That's the list we've been actively going after to try to close. Unfortunately, they sort of skew newer overall but we absolutely want to exit those shops to the extent that the terms are favorable to us and we take those deals as they come. So they were definitely a drag, we don't tend to quantify it but they were substantial enough that it made sense to cut it to -- to cut checks to get out of the lease to help improve our overall quality of our store base.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [4]

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So when you look out a couple of months, they were dragging down same-store sales and margin, I imagine -- when do you start to see the impact? How soon? And maybe directionally, what is the magnitude of that impact as that weight or that drag goes away?

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [5]

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Yes. On a base of 400-plus shops, it's not significant. But it's more of a -- getting out of shops that we couldn't find a way to make profitable, given where they were, where they've been trending. So it's not so much a same-store sales drag as it is a profit drag overall.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [6]

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Okay. Because they are new stores?

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [7]

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Yes, that's right.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [8]

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And I think, given their volumes (inaudible).

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [9]

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Yes, they are not a significant piece of the pie.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [10]

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That's clicking. Thank you for the clarification there. Is this now a time to refranchise? Like I know you said everybody has their bottom 25 stores but Potbelly has a lot of brand equity regionally. You know, if not nationally, certainly in other areas than your main regional areas. So what does that look like? I know it's something that we've asked about and you look out towards weighting franchise development, and that makes sense, but truly, the opportunity to maybe more in the relative near-term refranchise?

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [11]

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Why don't I address that, Nicole. So I mean, I've sat in on all of the discovery days and are intimately involved in the work that Jeff and his team are doing. And we're getting a nice combination of folks that would like a starter kit of 10 to 15 shops in a particular region. And then some folks actually want to start from scratch. It's an interesting blend. Most of the time, I think folks are really interested in carving out a territory that they believe has a lot of potential and currently, yes, it's a greenfield. So obviously, given the right set of circumstances, and what's right for the shareholder, we would obviously think about refranchising. But I am pleased with the progress that Jeff and his team have shown. It's great to be able to report 3 deals, in the -- 2 signed and 1 out for a total of 40 shops. And isn't it wonderful to finally introduce 40 million Californians to a shop in Irvine? So I'm excited about that. But yes, right now, the big focus is make sure we create the right conditions so that no matter which direction we want to go, it works for us. And I think the news that I've just shared on Shop of the Future, interestingly enough, we've tried to sort of keep that one a little bit quiet because I wanted to make sure that we could do what we set out to do. And I think that's going to create a lot of interest with our franchisees.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [12]

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And congratulations on those new franchisees coming to the system, there certainly will be value as that pipeline grows. Just a last question for me. I completely understand that you will work within the confines of the stores that you have, with the team that you have, and many, many of the in-store opportunities that you do have. That being said, the delivery partnership is an exciting one. What can you share -- share with us about the economics or the customer data, the feedback, do you expect new customers? Loyal customers? Typically, we see some incrementality and higher check with delivery.

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [13]

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Yes. Sure. I'll start, Nicole. As you may know, we've had a test going in South Texas with some of our shops, with the DoorDash marketplace platform. As we not only -- sort of a step 2. Step 1 was to augment our current own delivery folks with DoorDash people during peak and also in the shoulders of peak so that we could fulfill delivery throughout the day and not just during peak. And what's exciting about this test we've been running, we've been running it now for a while, started in roughly late Q3 of last year, is to your point, it does show incrementality. Overall off-premise and overall shop. So we are evaluating rolling that out as we sit here today and we do see it in the results in terms of incrementality and I would say anecdotally, we believe it's an incremental occasion that we want to be a part of. And so in terms of economics, while the margins for delivery are clearly lower, they are still accretive and on a marginal basis. And again, we think it's an occasion that's going to happen and we'd like to get our bite of that apple.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [14]

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I'd just add to that, what the customer is after is ease and convenience and I think that channel opens that door wide open. What is nice about where we are today, vis-à-vis a year ago, there's 3 component parts, delivery, catering, pickup and go. This year, all 3 parts of that are positive. And I think, have plenty of room to improve. And a very good example of that is pickup in our shops. It's available in every shop but the cubbies, which is kind of the main billboard for that segment -- is only in a fraction of our shops. But the good news is come the third quarter, all of our shops will have those cubbies.

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Operator [15]

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Our next question comes from the line of Sharon Zackfia with William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [16]

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A couple of questions, if I could. I guess the line of sight into the flat to low-single digit comps for the year, if you could help us with that. If you're in that range now would be helpful to know. And secondarily, on the average check benefit from the bundles and pick up, it sounded really encouraging. I just want to make sure I understood that correctly. So I think you said 460 basis points from the time you launched it? I just want to make sure that's what I understood and that, that's correct. And then what we should infer for average check for that going forward for the rest of the year.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [17]

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Why don't I take the average check one. You understood it perfectly right. 460 basis points pre the launch versus post the launch.

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [18]

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It's post-launch, year-on-year check (inaudible) It was lower than 460 pre and it's 460 post.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [19]

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Exactly. As far as what's driving that, it's pretty much UPT: units per transaction, which is exactly what it was designed to achieve. The Meal Deal, if you're not buying drinks and cookies and chips, then under the Meal Deal, that obviously drives up the UPT. So higher mix than we thought, which is great, very consistent across the 10 weeks. So there's not big fluctuations, very little fluctuation across the 10 weeks we've had it. Very consistent between the fleet. Yes, there are some areas -- markets that are slightly higher in mix, like Texas, but very little variance. The interesting thing is that the Meal Deal mix is higher than Pick-your-Pair, which again, was fully expected. Interestingly enough, who's buying, about 20% are first-time customers, about 80% existing customers. And what I am particularly pleased with is 62% of our fleet are actually suburban shops and it's actually skewing slightly higher in suburban shops. As to repeat, and this is important because if they are not repeating, then the numbers we provided don't have stickability. And so the good news is the repeat purchase is very high, 39% who buy Pick-your-Pair will order it again on their very next visit. And more than half who buy the Pick-your-Pair, will try it again within 3 weeks. So based on that, I think there's potential for it not only to be sustainable but a frequency driver and a check driver. I hope that's helpful and answered your question.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [20]

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That is helpful. I wanted to get back on the line of sight on the comps. Just a follow-on to that. Do you think then that you can hold like a 4% to 5% ticket lift for the rest of the year? Or would you expect to give some of that back in Perks discounts or other initiatives?

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [21]

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Yes. I think we'll pulse those sort of things. I said in the prepared remarks that we've got a Perk overlay that we are going to launch in 1 month. So we might have to give back some of that but the good news is you have got to have it in the first place to give it back. And what I am very pleased with this time is the check is going up but not because we increased the price, inflation price, but because you're buying more items and that's the way you want to see it.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [22]

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Okay. And then the line of sight on the comp guidance now for the year?

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [23]

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Right. So we revised our guidance, as you know, from where we were to negative low single-digits to flat. And that really implies continued improvement in comps, Sharon, through the year from where we finished Q1. That's kind of the short answer.

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Operator [24]

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Our next question comes from the line of Gregory Francfort with Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [25]

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Maybe just as a follow-up, I think you made a comment about traffic having weakened. Was that a reference to the quarter? Was that a reference within the quarter? Was that a reference since the quarter? The timeframe on what that comment was supposed to be intended for, I'd appreciate that clarity.

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [26]

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Yes. Greg, it's Tom. I think it sort of goes into why we changed the guidance. So let me just kind of tackle both. As you know, we don't provide quarterly guidance but wanted to touch a little bit on the results in April. Because as Alan said, we shifted our marketing investment out of Q1 and sort of through the rest of the year and we've been talking about the marketing investment. And really, the softer traffic trends that we saw in Q1 had continued into the first 4 weeks of Q2 despite the significant investment in advertising. So comps were really quite similar in April as they were in Q1. Now when we look back on Q3 from last year, when we had our best traffic growth both in the absolute and compared to Black Box in quite a while, we knew -- as Alan said -- that the heavier spending in advertising, combined with the increased promotional discounting is not good for the P&L. Really, it's not affordable at those levels. And so as a result, we elected to reduce the promotional discounts in 2019 and significantly increased our advertising spend to raise brand awareness and secondarily, to help retention. So the first 4 weeks of our campaign, while it did improve the traffic from where it had been running, it wasn't enough to sort of justify the increased advertising investment.

Now we have a number of initiatives that we have in place and are testing across our fleet and our expectation, just like last year, we'll read those results and roll out the winners in the balance of the year and we'll also have a better balance in the rest of the year between advertising and promotional activity. Again, we tried to skew it more in April towards advertising and I think our learning is we need to pull back on the level of advertising and sort of mix it more with some discounting, targeted promotions. And as well, we talked about expanding that door -- evaluating the expansion of the DoorDash marketplace. So these are some of the things that we sort of baked in as we think about the comps continuing to improve over the rest of the year to get to the guidance. And while they will help, we just don't see them offsetting the overall trends and that's why we -- potentially not over -- offsetting completely the overall trend. And that's why the guidance ranges to negative low single digits on the low-end. But we've got several months ahead of us and we all fundamentally believe in the longer-term proposition of the brand. And I'd say additionally, we've sort of taken the step -- or taken the decision to take a step back and really do a full assessment of our value proposition against our competitors.

We're going to continue, most importantly, to press the things that are working, things like menu optimization, the changes we made, the off-premise growth that we are seeing consistently across the segments, Perks and all the other things that were mentioned. And a better balancing of that promotional intensity while also always looking for efficiencies across all that we do. So that's kind of the long answer of how we thought about the recent trends and how it moved into how we thought about the rest of the year.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [27]

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That makes sense. And then you talked about the advertising gaining some traction but maybe not as much as you would have expected. Were there certain channels that have been working better and certain channels that maybe didn't resonate as well as you expected?

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [28]

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Look, very much Q2 was trying to -- we have to make clear what it was trying to solve. We identified unaided awareness in our business is very low for Potbelly. So if you just think of the basic marketing fundamentals; no awareness, there certainly can be no consideration. So as much as we want an overnight fix, there isn't an overnight fix. That's what we were trying to address with a very strong branding campaign with moderate to low discounting and promotional activity.

So we saw a change in traffic, which I think Tom did a great job of explaining, but not enough to offset the sort of 4-week trailing Black Box trend leading up to that. And from my experience, impactful marketing requires the right message, the right creative, the right media mix, and the right spend -- and it just takes time to find that sweet spot. What was good is that Brandon and his team came up with some strong branding, very unique creative -- there's no way when you see it that you think to yourself that it's anybody else's other than ours -- that was suitable for testing in a number of different media channels, outdoor, TV, radio, social, digital. For sure, there was a lot of conversation taking place in the digital channel. So that certainly seemed to resonate. So we have just got to keep plugging away to find the right balance and continuing to test and it's really important that we keep looking for that sweet spot.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [29]

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Got it. And maybe the last one is just I think, Tom, in response to my question. The first question I had, you made a comment about value and price value. Have you guys considered maybe offsetting some of the significant mix increases you're seeing with the new menu changes with a price reduction? And how are you thinking about the elasticity of that right now and whether or not that makes sense for the business?

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [30]

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Yes. We are -- I think price is one component of value, Greg. And I know we all know this. But it's also the shop experience. It's the offering. And I would say, when I said we want to take a step back and take a look at the entire value proposition, it is all of that. And some of the ideas that we're putting into test will help us get a read on some of those aspects. And I can tell you from my past, lowering price is a little bit of a tricky game because you've got to get a lot more velocity to afford that. And there's different ways of delivering better value that is noticeable to the customer and that is what we really want to experiment with.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [31]

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I'll just add to that. I like the definition of value being the price you pay for the experience that you get. And you have just seen the game changer in our menu optimization Phase 1.0. They are -- we already have in play, 2.0 and 3.0. Those address other component parts of that value proposition. So without giving you the details regarding what's in there, rest assured that part of the turnaround is to make sure that you leave no rock unturned and take a sharp look at everything to make sure that we're building a platform that can sustain the growth and eventually lead to not only predictable but sustainable comps.

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Operator [32]

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(Operator Instructions) Our next question comes from the line of Stephen Anderson with Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [33]

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I wanted to ask about your store opening guidance and given that there's still a lot in flux right now, what gives you the confidence to decide that you wish to open new stores instead of just putting a moratorium on new store growth?

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Thomas J. Fitzgerald, Potbelly Corporation - Senior VP & CFO [34]

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Stephen, it's Tom. I think what gives us the confidence is -- and I believe we may have talked about this in the last call -- we are opening shops within our strong markets primarily. And -- or now, really, exclusively. So we're not sort of betting bunches on hunches in markets that we're not familiar with. These are very much markets we know. And at the end of the day, 6 to 10 shops, if it provides the cash-on-cash returns that we've seen in our core markets, they're still very attractive to do.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [35]

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Let me add to that. There's a very important reason why opening up shops in the balance of this year makes sense and that's around Shop of the Future. We actually have to, as the company, sponsor that program, open it, make sure that it works so that when we are moving towards franchise asset-light model, that we can demonstrate with absolute clarity, this is how it works. And these are the results that you get. And there's 2 things we're doing on that front. One is taking at least 2 existing shops that we are very clear on what the performance was before converting those to Shop of the Future and be able to get a read on pre and post. And then secondly, ones that are being built from the ground up, where there is no history there. And we can see how they perform versus the same cohorts in the same sort of market. I think that is very, very important to demonstrate.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [36]

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Now in terms of Store of the Future, what kind of timeframe are you looking at for a full system launch?

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [37]

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Well the first phase is open these 2, which will happen this year. And then based on that, we will then decide where to go forward and at what pace. But the main thing is that those 2 will open up shortly. And certainly, this year. Any other questions?

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Operator [38]

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There are no further questions at this time. Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Mr. Alan Johnson for closing remarks.

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Alan L Johnson, Potbelly Corporation - President, CEO & Director [39]

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Thank you very much. I appreciate everybody on the call. Good questions. Appreciate them and Tom and I will make ourselves available for follow-up calls today and tomorrow. So thank you very much and speak to you in the next earnings call. Bye-bye.

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Operator [40]

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This concludes today's conference. You

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