Potbelly Corp (PBPB) 2014 Q4 法說會逐字稿

Good afternoon, and welcome to Potbelly Corporation's fourth-quarter earnings FY14 conference call. The call will begin with prepared comments by management, followed by a question-and-answer session. Today's call is being recorded.

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

Good afternoon, everyone, and welcome to our fourth-quarter earnings call.

Before we get started, I'd like to note that certain comments made on this call will contain forward-looking statements regarding future events for the future financial performance of the Company. Any such statements, including our outlook for 2015, 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 we'll be giving today can be found in our most recent annual report on Form 10-K. Under the headings Risk Factors, and MD&A in our subsequent filings with the Securities and Exchange Commission which are available at SEC.gov.

Our presenters today are Aylwin Lewis, our Chairman and Chief Executive Officer; and Charlie Talbot, our Chief Financial Officer. Aylwin will begin with his perspective on the fourth-quarter performance and discuss some recent developments, while providing a discussion of our ongoing strategic initiatives. Charlie will then review our financial results and future outlook in more detail before we open the call up to your questions. Aylwin?

Thanks, Matt. Good afternoon, everyone, and thank you for joining the call.

We're pleased with our results in the fourth quarter. We delivered revenue growth of 13.4%, driven by Company-operated comparable same-store sales growth of 3.7%. For the full year, we achieved revenue growth of 9.1%, with Company-operated and comparable same-store sales growth of 0.1%. I'd like to take the opportunity to thank our shop and support center teams for their continued hard work and commitment. Which enabled us to overcome the challenging first half of 2014 to deliver better results for the second half of the year.

As I already mentioned, our Company-operated same-store sales growth was 3.7% during the fourth quarter. Traffic trends continued their positive momentum from the third quarter, and improved as we moved throughout the fourth quarter. Despite the challenge we faced in the first half of the year, we managed to end 2014 with positive comps, representing a nice comeback in the latter half of the year.

On the development front, during the fourth quarter, we opened 16 new Company-operated shops. Including 3 more shops in Denver, for a total of 5 for the year, we opened 3 franchise shops. For the year, we opened 46 new shops, including 39 new Company-operated shops and 7 franchise shops. We delivered total unit growth of approximately 14% on a net basis. We've surpassed our stated long-term development target of 10%. The 2014 development class are performing well, with sales on track and units achieving steady state in expected timeframes.

Our adjusted net income was $1.7 million or $0.06 diluted share for the quarter, and $6.7 million or $0.22 for the year. Which was ahead of our quarter-three guidance. Charlie will discuss our fourth-quarter and full-year 2014 financial results in greater details on this call. I want to spend the next few minutes just talking about areas of focus as we move forward. The three things at the core of creating value for our business are having a strong GM in every shop, driving sustainable same-store sales growth, and continuing to aggressively open new shops with a high rate of return. Let me briefly expound on each of these three items.

Our operating model is predicated on excellent operations. Consequently, our general managers are the most important leaders in our Company. One big key to the future of a high-growth company is finding and developing the right talent. We recognize the market is very competitive for operational talent. While we believe our culture tracks and keeps our people, we also recognize the need to be proactive on the people front to support our growth plans. We know that high turnover limits the ability to achieve excellent operations, and we work really hard to identify, train, and retain our shop leaders and our hourly employees. Specific turnover rates are not something we have talked about previously.

However, in 2014, our general manager turnover was roughly 29%, and our hourly turnover was just under 80%. We feel as though we operate with some of the lowest hourly turnover in the industry. Given our growth aspirations, we need to continue to improve upon these results. Additionally, we want the vast majority of our new general managers developed from within. So this means we need to be a very good people development machine. We have recently initiated a series of field level incentives to reward those who are developing our talent, to incent our hourly employees to pursue salaried manager positions, and provide meaningful upside to our existing GMs who stay with us over a number of years. This is an incremental investment to support our growth. We're confident that these programs over time will be self funding. We'll reduce turnover, reduce training costs, and better run and more profitable shops.

Now, relative to same-store sales growth, our focus is on three areas. Throughput, back line, and targeted advertising by social, digital, and mobile platforms. Throughput at peak is one of the best opportunities to drive incremental sales, and we will continue to focus on this in 2015. Our line is an awesome production machine that will drive traffic over time. We were not capacity constrained at all during our busy lunch day part. In fact, many of our shops average between 120 to 150 transactions during their peak half hour. The average throughput for our system is well below this level. Which signifies to us a tremendous opportunity to grow our business during the busiest timeframe across our system. We're committed to invest in technology, equipment, and staffing to support higher levels of throughput as we move forward.

Secondly, our back line business, which includes online ordering, catering, and delivery. This business continues to grow. This part of the business was roughly 14% of our shop sales in 2014. Our average weekly volumes of the back line business grew over 6% versus 2013 for the full year. Again, our belief is that we have tremendous capacity growth in this business. We have a goal of doubling this business over the next three to four years.

We've done many things to get to this level, however more is needed in order to achieve the size and scale of this business that we believe we can achieve. For instance, we recently hired a national back line leader to direct our strategy and tactics across the Potbelly Nation. At the local level, our six sales and catering managers are dedicated to building business relationships, and securing larger catering orders. Which has fueled our back line growth in their home markets. In 2015, we'll add additional two new sales and marketing managers.

Lastly, outside the four walls, we have started to work on increasing our digital, social, and mobile presence. We have increased our advertising budget in 2015, and the vast majority of this money will be spent on digital, mobile, and social mediums in order to message the brand outside the four walls. We introduced our mobile app in late Q4 of last year. The goal is to improve the functionality of this app this year as a way to increase our sales through this app.

Lastly, we continue to focus on menu innovation and day part expansion. In Q4, our Turkey Bacon Cheddar Flat promotion was successful for us, and we will continue to innovate around the flat platform. As we discussed on our last call, we rolled out breakfast to 24 additional shops, bringing our total to 95 or 28% of the system. We will continue to roll breakfast out opportunistically based upon the neighborhood traits and specific site attributes. We will test different snack items in 2015 in an effort to improve our sales during the 2:00 PM to 5:00 PM sub day part.

In summary, we have intense focus on same-store sales growth. Through throughput, media investment, digital, social, and mobile, menu innovation, smart day part expansion and back line focus. Finally, I wanted to highlight our development efforts. We're pleased with the 2014 class of 39 Company-owned shops and 7 franchise shops. We had a good balance of opening in established markets, such as Chicago, Washington, DC and Houston, and our newer hub markets. We're off to a good start in Denver in our latest hub market with five shops opened by the end of last year. Our 2015 pipeline is nearly complete, and we're comfortable in achieving another year of over 10% new unit growth.

Now we started this growth phase in 2011. I just wanted to talk about the returns of the two years that we've calculated. Our 2011 returns are over 25%. Our 2012 class, which is our most challenged class, is in the mid-teens. This class is impacted by four shops. When we remove these four shops, our returns approach 20%, and we're working feverishly to improve this class. We also believe that 2013 and 2014 classes should be at or above our long-term return target of 25%. To summarize, we feel good about the business in the fourth quarter. We have plans in place to support the key growth drivers of value in this business. Having a great GM in every shop, driving sustainable same-store sales results, and continuing to build new shops that hit our return metrics.

With that, I'll turn it over to Charlie to give you the details of the quarter.

Thanks, Aylwin. Good afternoon, everyone. I'll walk down the P&L and give you some highlights and color associated with our fourth-quarter results and full-year as well. Additionally, I'll provide some thoughts on our financial plans for 2015.

Starting at the top, as Aylwin mentioned, total revenue increased 13.4% in the quarter to approximately $85 million. Driven by new unit results, and an increase in Company-operated comparable store sales of 3.7%. As a reminder, weathering the government shutdown was a factor in our Q4 2013 results. But comparable store sales growth continued to show strength in each month in the fourth quarter, driven by an improvement in underlying traffic trends, as well as easing comparisons. The traffic trend has extended into Q1 2015 to date, and we continue to be highly focused on sustaining this positive momentum in 2015.

As we begin 2015, we're in a macro environment that's currently favorable to our customers. Unemployment rates are low, consumer confidence is up, and more recently easing gas prices certainly mean more disposable income. With that mind, we expect our 2015 comp to be at least 3%. However, importantly, each of our quarterly results could be above or below this annual target. Due to easier comparisons in the first half of the year versus latter half, given the impact weather had on our results in early 2014.

Our average check growth for the quarter was approximately 3%, driven primarily by the price increases we took last February and then again in July. With the remainder coming from menu mix growth. A big part of the mix increase is the continued success of our Flats program. Flats mix remained relatively consistent with trends during the back half of the year, and it remains a healthy part of our menu. And as a reminder, Flats are priced with a premium to our original sandwich offerings. We are currently promoting a skinny pair in most of our markets, but we'll continue to use a Flat platform for future innovation and messaging.

Before we get too much into detail about certain areas to the P&L, I'd like to remind everyone of our philosophy when it comes to pricing. We believe we have a competitive advantage when it comes to pricing, given our focus on quality and experience combined with our menu pricing in relation to our competitive set. In support, we've seen very little resistance to our recent price increases. In 2015, we're expecting to have inflationary headwinds, primarily on two fronts. COGS, or cost of goods sold, as we have routinely seen in the past at varying levels. And labor costs, which have been less frequent but will be more impactful as we move forward. We expect to see more inflationary impacts related to COGS in the first half of the year, and more inflationary impacts related to minimum wage in the back half of the year. So we've implemented our planned pricing of approximately 3% in January to cover these 2015 headwinds.

Moving down the P& L. Cost of goods sold as a percentage of sales increased in the fourth quarter to 29.2%, up 10 basis points form prior year. As expected, me moved from a deflation in the first half of the year to inflation ramping up at the end of Q3 and continuing into Q4. Mostly due to commodity increases for dairy and certain proteins we would expect to continue into 2015. For the year, COGS was at 28.8%, which is down 50 basis points from 2013 levels. Driven by pricing and menu mix. Looking ahead, our food cost basket is around 60% locked for 2015.

We expect higher levels of inflation than experienced in 2014. Predominately in the first half of the year, and decelerating in the back half of the year. We anticipate COGS in the 29% to 30% range for 2015. And full-year 2015 inflation, gross of rebates, to trend in the 2% to 3% range. Which again, we expect to be more weighted towards the first half of the year. Our supply chain is working really hard to mitigate as much inflation as possible, and we'll keep you up-to-date as we move forward. Labor as a percent of sales increased in the quarter to 29.1%, an increase of 40 basis points from prior year. The increase was driven primarily by the timing of 16 Company-operated shop openings in the fourth quarter. Which were more back half weighted, as well as the incremental training and people investments in advance of these fourth-quarter openings.

For the full year of FY15, we expect labor as a percentage of sales to trend between 28% and 29%. Our guidance assumes increases related to additional training and incentive dollars for certain shop level employees in an effort to enhance our bench and shop turnover results. Regarding minimum wage increases, several major markets in which we operate will implement increases during 2015, including Illinois, Washington DC, and Michigan. Based on the current slate of increases, deflation is expected to be back weighted. However, we believe we remain positioned well given our historical practice of paying our employees above minimum wage levels.

Our general and administrative expenses were approximately 8.1% during the fourth quarter. After adjusting for the one-time costs associated with the store closure and certain costs associated with our corporate office move later this year, our G&A was approximately $7.4 million during the fourth quarter, which was below our previous guidance. This favorability is the result of headcount vacancies as well as timing of certain professional costs. With regards to closure costs, we took advantage of an opportunity to close one underperforming shop. And as a result, we incurred associated lease exit costs.

For 2015, we expect general and administrative costs to increase, and range between $36.5 million and $37.5 million. The increase is primarily related to increased field staff to support our development plans, higher incentive compensation as a result of resetting our bonus plans to target levels, as well as a modest increase related to higher ongoing occupancy costs for our support center. When adjusting for these items, we expect to obtain leverage of roughly 20 to 30 basis points on 2014 G&A, which is in line with our expectations going forward. As Aylwin mentioned, our adjusted net income for the quarter was $1.7 million or $0.06 per diluted share. Which is a decline of roughly $160,000 versus last year. The decline in our adjusted net income was primarily due to additional G&A costs associated with becoming a public company that weren't incurred in FY13.

Now turning to development. We're pleased with the fact that we opened 16 new Company-operated shops and 3 domestic franchise shops, for a total that unit growth of 13.8%. That puts us at 46 total openings for the year, which is at the higher end of our previously provided guidance of 40 to 48 new shop openings. Also, our capital expenditures came in at approximately $29.2 million, which is at the lower end of the $30 million to $35 million range that was previously disclosed. As the result of lower average costs per unit.

In addition, more than half of the new Company-operated shops open today are in legacy markets. In 2015, we expect to open 48 to 55 total new shops, with slightly more than half expected to open in the back half of the year. We have a few planned closures in 2015 that have been factored into our EPS guidance. The legacy to new marketing opening mix will vary year to year as we move forward, but we will target our new unit development to be split evenly between new and legacy markets over time. We expect to spend between $34 million and $38 million on capital expenditures this year, which includes CapEx for our new corporate office.

Regarding our effective tax rate of approximately 38.7% for full-year FY14, the government came through and retroactively renewed the WOTC programs for 2014. As well as continuing to allow accelerated depreciation, which both contributed to lowering our tax rate. However, Congress did not pass the new bills to extend these benefits into 2015. And pending any resolution, our guidance 2015 excludes any benefit from these credit programs. Consequently, our effective tax rate for FY15 is not expected to exceed 40%. We are hopeful the WOTC program will be extended. And in the event that this happens, our tax exempts would be reduced by approximately $100,000 to $150,000 for 2015.

So we cross into a new year, we believe the underlying traffic trends and a more positive macroeconomic environment will be favorable to our business. As a result, we are confident we'll return to our stated growth targets, with 2015 full-year adjusted net income growth of at least 20%. Included in our expectations is the financial pressure associated with the planned closure of certain profitable shops, higher incentive-based compensations reflecting the impact of below target performance of 2014. Our guidance will provide for comparable adjustments to the current year, which includes the add backs of certain one-time or non-cash costs such as impairment closures and one-time costs associated with the move of our Corporate office.

Pursuant to the previously announced share repurchase program, we've repurchased 356,000 shares of Potbelly common stock in the open market for a total of $4.4 million during the fourth quarter. As a result, we have $24.8 million available from our Board authorized program for repurchase, which we'll continue. The buyback activity really had no impact on our diluted EPS for the quarter. For 2015, we expect shares outstanding between 30 million and 31 million shares. This excludes any impact of additional share repurchases.

So to summarize, we remain very committed to our stated long-term growth targets for 2015. Which include -- total new unit shop growth of at least 10%, low single digit comparable store sales growth, shop level profit margin of 20% or better, annual adjusted net income growth of at least 20%, return on capital investments of 25% or more.

So with that, I'm going to turn it back over to Aylwin for a summary of our remarks.

Thanks, Charlie.

We continue to focus on ensuring the business is set up to sustain a long run of growth. Which is predicated upon three important principles -- having a great GM in every shop; to have a consistent comparable same-store sales; and our ability to find, open and run new shops at a high level of return. Under those guiding principles, we will continue to make the necessary investments in the business to ensure our growth is sustainable. 2014 was a challenging year, but we feel good about the rebound in the business in the back half of the year and the positive momentum we have so far in 2015. We're committed to our long-term goals, we're very confident in the long-term fundamentals of the business. Again, thank you for your time today.

I turn it over to the operator, and we'll open it up for questions.

Thank you.

(Operator Instructions)

David Tarantino, Robert W. Baird.

Hello, good afternoon. I have a couple of questions on the same-store sales trends you're seeing. And first, I was going to ask a question about the quarter.

You mentioned that the trends strengthened as the quarter went on. And I was just wondering if you could parse out the impact from perhaps cycling some unfavorable weather or maybe the easier comparison related to that, versus maybe what you're seeing on an underlying basis? Do you think that the underlying trend is also improving?

Hello, David. How are you doing? This is Charlie. A couple things.

One is, as we mentioned last year, the weather in P 12 was roughly 120 basis points for the quarter. The government shut down, and P 10 was roughly 30.

And so we discount those out as we look at trends in the business. And so as we look at Q4, excluding those situations last year, we felt pretty good about where the trends were headed as we got through the quarter.

Great. That's helpful. And then I guess a question related to that. Can you give us any perspective on how you're thinking the first quarter or the first half of the year might play out given how the comparison is so much softer than what you've been cycling?

Is it expected to hold the multi-year trend that you saw in Q4, or how should we think about that? And then I have a follow-up question about the overall guidance for the year.

I think as you think about the year, obviously, the first half of 2015 will have some easier comparisons based on what we talked about all of 2014. So that's to be expected. And then as we get into end of 2014, those trends will be a little bit more difficult to roll.

And then beyond that, we have all the factors related to pricing. So we just rolled pricing in January, so we'll have some benefit on a relative basis in the first half versus the second half.

And so when we talk about our guidance for comps for the year, the at least 3% is really contemplating we'll probably -- our plan suggests we'll have higher comps in the first half relative to the second half. And that's just based on how we plan the business today.

And then last question on this front. The comps outlook for the year, at least 3%. I guess at the bottom end the actual 3% would not include a lot of traffic improvement.

It sounds like you're going to have at least 3% of pricing. So I guess is that just conservatism on your part? Or are you seeing something in the business that suggests you wouldn't be able to grow traffic against what you're facing or what you're cycling versus last year?

I'll start, and Aylwin can finish. Certainly, we expect to grow traffic. Really what we're seeing as a baseline is, is we're throwing out the expected impact related to pricing. Our expectations internally are to exceed 3%, hence the at least part of that comment.

But it's February, and so we've got a lot of year to go. And we'll obviously keep everyone abreast as we move throughout the year, and as results come in. But that's -- our expectation is at least, and pricing will be a big chunk of that baseline.

Great. That's very helpful. Thank you.

Joseph Buckley, Bank of America Merrill Lynch.

Thank you. I have a few questions as well. Just for the fourth quarter, the comp you reported last year was kind of confusing. It was an adjusted comp and unadjusted comp. What do you guys think the 3.7% is up versus in the year-ago quarter?

Well last year we reported 0.7% for Q4. And we had some adjustments in 2012 related to a 53rd week, but that was kind of the adjusted version, if you will. So that's really what we're comparing ourselves to on a year-over-year basis.

Charlie, did you say you took 3% pricing in January? And if so, where does that leave you year over year, here in the first quarter, from a pricing standpoint?

Yes, so let me walk through it. We took some marginal pricing in Q2 of last year -- or I'm sorry, peak two of last year in February, and so we have that. We took some more pricing in July to cover the incremental inflation that we realized in the back half of 2014. And then this year, we took roughly 2% pricing in January.

So when you look at the full year, obviously, we'll have a little bit more pricing in the first half until we roll that July pricing from 2014. But the net pricing impact to 2015 should be roughly 3%, is the way we've got it modeled.

Okay. And then just a question on the labor. Can you talk a little bit about wage rate inflation?

And, I think you referenced the adjusted and compensation plans to try to keep people to groom to be GMs, and then keep the GMs you want. If you roll wage rate, maybe hourly and at the managerial level, that would be up, and if so, how much?

So a couple things, one is on the wage rate. We have gotten all that modeled in terms of the markets that are going to have increases in 2015, and some that have had increases in the back half of 2014.

The pricing that we took in January of this year was predominantly geared towards covering both labor inflation, related to minimum wage increases, as well as cost of goods sold inflation. So from a dollar perspective, we have that covered in our plan. And so those will roll out as we know throughout the year, and some have happened in January this year, and some will happen later this year.

Our pricing philosophy is that we price to cover inflation, and that's what we try to do. And we did it last year with anticipating inflation, primarily around the food, and this year we've taken it in anticipation around the labor.

The incentives I mentioned earlier, are incentives. So they're not in the base, they're only earned if you do something positive for the business. So the new incentive is not part of the base. As people earn through their actions, then they'll get a pay out.

Got it. Okay. Thank you.

Thanks, Joe.

Sharon Zackfia, William Blair.

Hello, good afternoon. A couple of questions, I think first on marketing. You mentioned that you were going to increase that further into 2015.

Could you update us on where marketing was as a percent of sales in 2014? And when you say increase in 2015, is that in dollars or as a percent of sales or both?

It's both. Our marketing spend, as we've talked about in the past, is under 2% of revenues. What we are doing is we are stepping into an increased spend. So from a dollars perspective, we'll gain dollars because we have more revenues to spend against, meaning new store count. And then also, we're slightly increasing the percentage on top of that.

So we'll talk about the impact as we get throughout the year. It's still, in our minds, a fairly low level of spending on the P&L. But we think it's something we want to start stepping into in terms of the platforms we're going into.

And when you're talking about the increase in marketing, is it more what I would call traditional marketing like billboards or bus stops? Or is that more the bounce back offers that you've done sporadically?

No. It's -- the majority of the spend is against digital, social, and mobile. And so we've developed an array of programs to use those mediums. We've partnered with folks outside the Company that have the expertise and the data that help us decide how we do it.

But very little of this will be spent on traditional mediums. We think -- we still believe in the world of mouth, and the shop has experienced the neighborhood piece. But we've said all along if we could find a way to message outside the four walls, it would just really help us. And so big year to test some things, and we think it will work out for us.

Okay. And then lastly on the back line, I think, Aylwin, you said the goal to double that over the next three to four years. I had in my notes that the back line was like 15% of sales, so obviously doubling that would be a really big number over the next three or four years.

First, is that correct? Is it 15% of sales? And then secondarily, what are the real touch points to doing that. Because that seems like a really big steppingstone if you can actually achieve that.

We think it's a really big opportunity to market for off-premise sales. It's growing, it's a market -- we are at 14%, 15% of our sales with the back line. And the first step of that is we've done a lot of things internally.

We've hired an expert on the outside that brings experience. He's going to be our national leader. And he's charged with helping us organize at the national level, at the market level, and the shop level.

We're going to look at technology advances we should do. We're going to look at managing our sales managers a little bit more aggressively.

So it's a lot of things to do. But the reason we didn't say double it in two years, is because you probably wouldn't believe me. But it's a bold goal that we think we can achieve in three to four years, and obviously, if we do that, that's a tremendous boom for the business.

And so, when we think about driving sustainable sales, throughput through peak is a big part, then back line in trying to grow that aggressively, and thinking outside the box, and bringing a new person in to challenge how we do things and improve it is big. And then, we have our sales managers that are out, out there, and we're adding two this year. But we believe we've put programs in place that can really help us sustain the same-store sales that we need to have a great business here.

Great. Thank you.

(Operator Instructions)

Joshua Long, Piper Jaffray.

Great, thank you. As I think we discussed previously, the pricing plans for this year were going to be centered around your core sandwich items. Which, as I remember correctly, was not something that had really seen a lot of pricing taken over time.

So I was just curious on how those plans worked out versus your expectations? And if you learned anything that might either adjust or work its way into future pricing plans around those core items?

We have pricing stores that we understand what our elasticity is. So out in the marketplace, we have a number of shops that we push the limits. So when we put a pricing action in, at least we have a response from the marketplace.

We continue to get asked, do you have pricing in your model, and we believe we have pricing. We like our price value, and we're going to fight hard not to go up against that imaginary number that we think folks should pay for our product at lunch.

But the action we've taken will cover inflation and will allow us to maintain the profitability in the shop. And our pricing philosophy is to price to cover inflation. And that's what we've done.

But we don't -- we take it and we know what's going to happen because we have these test shops. And so we're very confident that when we take pricing it will stick.

And we have some advisory groups that we meet with quarterly that before we do something like this, we run it by them to get customers' opinion about it. So we do try it in an informed way. So when it happens, we think it will be positive impact on the business, and not negatively impact the business.

Thank you for that perspective. And then, Aylwin, switching over to your commentary around the incentives and the investments around driving results at the store level. It sounded as though you might have said there was maybe some initial investment up front that would pay dividends later.

So I just wanted to clarify that was more of a maybe more of a figurative investment. As it sounded like in some of your other commentary that those were maybe sales-based or results-based incentives that were hit.

That you weren't actually increasing necessarily a base, but realigning the targets so that there were some new targets to be achieved. And at which point, there would be a pay out. So I just wanted to make sure I understood that correctly.

It's real dollars, but it's based on actions that you have to get to get the dollars. We didn't add it to the base, so it's real dollars that we have to plan for, but it's not added to the base. And if folks do training well, if they hit certain tenure marks, then they will get the payout.

Understood. And, Charlie, on the 60% locked for this year. Should we consider that fully locked for your model or your basket, or is there an opportunity to maybe lock some of that in and maybe edge up towards 70% or greater early in the part of this year, so we have some more visibility? Or just curious on how you're thinking about managing that line?

By the time we talk next, we'll have much more visibility and we'll continue to play that out. If we could get 100% locked and it was at prices we like, we'd be there today.

I think one of the things that we're mindful of is the evolution of inflation in 2015. And so we want to make sure that we balance the need for price certainty with the opportunistic buying that we do, and being able to spread that out as long as possible. So, yes, that number will continue to grow, but we're pretty comfortable with where we're at right now.

Thank you for that. That 2% to 3% that you mentioned on a gross basis, what are the larger pieces that are moving that target around?

It's beef and pork are the two main drivers of inflation as we look at 2015, at least as we sit here today. And again, I think that we'll continue to watch that closely to see if we can take advantage of some opportunities later in the year to bring that number down.

Thank you so much.

Karen Holthouse, Goldman Sachs.

Hello, good afternoon. This is Greg on for Karen today.

Hey, Greg.

I'm just going to try to get to some of these wage investment and pricing questions in a different way. With new positions and incentives, but also a higher level of price in the model, how should we think about the level of traffic needed to lever labor in the model in 2015?

Well in terms of leveraging labor, we spend a lot of time worried about. So when we take pricing, there's a couple things balancing out. One, we take pricing, obviously we're going to be able to leverage labor off that. The other thing is, as we continue to build bench to support our growth, that's going to be countering that leverage.

In other words, as we increase our shop count and we increase the ramp of our development activities, we have to continue to build a deeper and deeper bench of management talent to support the development. And so you saw that a little bit in Q4 as we opened up 16 new Company shops.

We spent a fair amount of money training and getting folks ready for those shops. So I think those two things slightly offset. If that answers your question?

Yes. Thank you.

David Tarantino.

Hello, I just had a follow-up question on the margin outlook. Charlie, I think the earnings guidance for 20% plus growth implies some margin expansion. And I guess based on the components that you gave us, it's not obvious, at least to me, where that margin expansion is coming from.

So could you parse out what you expect maybe at the restaurant level in terms of year-over-year profitability there? And then maybe comment on some other lines that might see some leverage to offset the G&A investment you're making?

Sure. I think the first comment I'll make is that keep in mind that when we talk about those targets, those are long-term targets in nature. You're going to have years where, as in 2014, where we did not achieve the 20% margin, for example. And we could go through the reasons for that, but a lot of it had to do with leverage around the business.

So again, it depends on, ultimately, our same-store sales and our ability to leverage that. And then the other big piece is our ability to ramp up new-unit profitability in the expected time frames.

So again, 20% is our target. We've spend a lot of time talking about that, and as we go through the year, we'll keep you updated as to how we're progressing against that number. But again, the focus is that's a long-term goal that we have around here that we'll keep our eye on.

Does the guidance for this year assume that you get back towards that level? I guess the guidance for G&A basically calls for some deleverage, so I'm trying to figure out where the offsets are in the P&L to get to overall margin improvement?

Well I think on the overall operating margin improvement, it's going to come down to our ability to drive comps of course. And that's a big part of that offset, if you will.

Great, okay. Thank you very much.

Thanks, David.

(Operator Instructions)

Thank you. We have no other questions in the queue at this time. I would now like to turn the call over to Aylwin for any closing remarks.

I just want to thank everybody for your interest. We feel like we've always believed in the fundamentals of this business. I think the last quarter was a demonstration that the operating model here is the right one, and we will continue to drive performance.

I want to thank our folks in the shops and the folks at support center for their hard work, and we'll continue to work hard, and we'll keep you apprised of our progress. So thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and we thank you all for your participation.