Potbelly Corp (PBPB) 2015 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Potbelly Corporation's first quarter FY15 earnings 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 Mr. Matt Revord, Potbelly's Chief Legal Officer. Thank you, sir. Please go ahead.

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 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 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 and in our subsequent filings with the Security and Exchange Commission, which are available at www.sec.gov.

Our presenters today are Aylwin Lewis, our Chairman and Chief Executive Officer; and Andrew Raabe, our Vice President of Finance. Aylwin will begin with his perspective and the first quarter performance and discuss some recent Potbelly leadership developments while providing a discussion of our ongoing strategic initiatives. Andrew will then review our financial results and future outlook in more detail before we open the call for your questions. Aylwin?

Thanks, Matt, and good afternoon, everyone, and thank you for joining the call. We had strong results in the first quarter. We generated revenue of about $86 million, or roughly an increase of 16%, driven by Company operated comparable sales increase of 5.4% and the opening of seven new Company operated shops. Our adjusted EBITDA was $8.2 million. Our adjusted net income was $800,000, or $0.03 per diluted share.

Same-store sales of 5.4% was driven by traffic and check. We opened seven new Company operated shops during the quarter. This included our first shop in Salt Lake City, which will be a spoke city attached to our Denver hub.

Our 2015 pipeline is essentially complete, with 70% of the leases signed. We're on track to achieve our stated opening goal of 40 to 45 Company shops and 8 to 10 franchise openings.

As previously published, we signed a London franchise deal. We are very excited about bringing Potbelly to London. The first shop should open later this year.

Andrew will discuss our first quarter financial results in greater detail later in the call. But first, I want to take a moment to talk about our culture and our recent leadership changes.

The Potbelly advantage defines our culture. From the CEO and the senior leadership team, we spend a lot of time driving culture deep into the Company. Several times a year we are in our shops reviewing our value -- values to our front-line associates.

Leadership and teamwork is very important. No one person is more important, including the CEO, than the team. This focus on culture should allow us to find strong candidates to replace any leader in the organization.

We have two recent examples. Our CFO and COO positions. The CFO change was unplanned. But within a four-week period, we had a robust [laid] of potential candidates from which Mike Coyne was selected. As a general manager/business runner, we expect Mike to enhance our CFO position, specifically regarding productivity, risk assessment, and analytics. Mike started yesterday and he's in the process of working through an aggressive transition plan.

The second example was planned. After 12 years of growing Potbelly Nation, John Morlock requested a reduced work schedule. His replacement, Julie Younglove-Webb, has been internally groomed to assume the most senior leadership job at Potbelly. She was a senior executive before she came to Potbelly six years ago and she has learned operations from the shop level upward.

John leads a strong ops team from which Julie can build upon. John will run global franchise operations and still contribute as a senior leader. Investors should be confident to know that our culture acts as a stabilizing force that allows this Company to manage through any situation positively.

Again, our first quarter results were very good. So we remain confident in all the growth drivers that we expressed on our last call.

Let me recount them again for you. A strong GM in every shop. During the quarter we implemented new incentives designed to impact development, tenure and turnover. Our Q1 people results are on track relative to our internal goals. This is important work that requires continuous focus.

Second, gross sales. Throughput at peak, backline, digital media -- the bulk of this media started in Q2 with the rollout of avocado. And lastly, menu innovation. Q1, our new soup -- Turkey Sausage Lentil -- sold very well and it met our expectations.

Lastly, grow new units. We're on track relative to our 2015 target. The strong Q1 results were widely distributed across the Company and across the quarter.

Now Andrew Raabe will give you the details of our numbers.

Thanks, Aylwin, and good afternoon, everyone. I will walk down the P&L and give you some of the highlights and color associated with our first quarter results. As Aylwin mentioned, we are pleased with our performance in the first quarter of 2015.

Starting at the top, total revenue increased about 16% to approximately $86 million in the quarter, driven by our new unit growth and our increase in Company operated same-store sales of 5.4%. Breaking down same-store sales, our average [track] grew approximately 4.5%, driven primarily by the price increases we implemented in July 2014 and January 2015 along with the mix increase from menu and add-on growth initiatives.

In addition, we continue to see positive traffic trends in the first quarter that have carried into the second quarter. While we are bullish about our sales trends so far in 2015, we expect our comps cadence to be the highest in the first quarter and then become less positive as our July 2014 price increase rolls off.

On the development front, we added seven new shops and, as planned, we closed two airport locations during the first quarter. For contact, airport locations typically have 7 to 10 year leases, which, after expiration, are rebid depending on the airport's designation.

For the first airport location, we were successful in being awarded the shop again for another 7 year lease. We closed this shop for a full remodel and we expect it to reopen in the second quarter of 2015.

For the second airport location, unfortunately, the space we had occupied was no longer designated as a sandwich deli and, consequently, we were not eligible to bid on the space. It was a successful shop for us and we look forward to having a successful bid sometime in the future.

Moving down the P&L, shop level margin for the quarter increased 60 basis points to 18.1%, driven by increased productivity and slightly lower than expected commodity inflation as well as leverage across our cross categories with the increase in sales. Costs of goods sold as a percentage of net sandwich shop sales decreased in the first quarter to 28.5%, down about 20 basis points from the prior year.

As expected, we incurred inflationary headwinds, primarily from dairy and certain proteins that will likely continue through 2015, which we off set as part of our January price increase. However, inflation was slightly lower than we initially expected during the first quarter. Our food cost basket is roughly 70% locked for 2015 and we anticipate our [cogs] will be on the lower end of the 29% to 30% range for 2015 with total inflation to be on the lower end of the previously communicated 2% to 3% range.

Labor as a percent of net sandwich shop sales was 28.8% for the quarter, which was a decrease of about 40 basis points from the prior year driven by sales leverage, improved labor management and slightly less new shop inefficiency as we [left] nine openings in the first quarter of 2014 with seven in the first quarter of 2015. Last of all, the weather and, subsequently, less volatile sales trends, helped labor management during the quarter.

But in general, we are seeing are shops do a better job of having the right number of staff in the restaurant at the right times. This not only drives better execution but also helps teach future leaders best practice operational practices within our organization.

As a reminder, there are several states, counties, and cities in which we operate that already have, or will be implementing, minimum-wage increases throughout 2015, including but not limited to Chicago, Washington DC, Minnesota, Ohio and New York. Based on this current slate of increases, labor inflation is expected to be back-weighted in 2015.

As we communicated previously, our labor will fluctuate by quarter based on the sales seasonality and timing of new unit openings. Based on these factors, the labor inflation outlook and the pricing currently in place, we expect labor as a percentage to trend between 28% and 29% as previously stated.

Operating expenses as a percent of net sandwich shop sales increased in the quarter to 11.3%, up 20 basis points from the prior year, driven primarily by costs associated with being a high-growth Company. Occupancy expense as a percent of net sandwich shop sales decreased in the quarter to 13.3%, down 30 basis points from the prior year, driven primarily by leverage of the fixed occupancy expenses.

Our general and administrative expenses were approximately $8.8 million during the quarter. After adjusting for one-time costs associated with shop closures and certain costs associated with our corporate office relocation later this year, our G&A was a $8.7 million.

This is approximately $0.9 million higher than the prior year, primarily due to the 2015 bonus reset, investment in field staff to support our development plans and incremental advertising spend. For the full-year, we continue to expect our general and administrative to range between $36.5 million and $37.5 million, as previously communicated.

As Aylwin mentioned, our adjusted EBITDA is $8.2 million, which is roughly a 30% increase above the prior year. Our adjusted net income for the first quarter was $800,000, which is an increase of over $600,000 and adjusted net income per diluted share was $0.03.

Our effective tax rate was slightly below 40% for Q1. Congress has yet to extend any bills regarding the WOTC credit program in 2015, so we reiterate our guidance for 2015, which calls for an effective tax rate not expected to exceed 40% and excludes any benefit from these credit programs. We are hopeful the WOTC program will be extended, and in the event this happens, our tax expense would be reduced by approximately $150,000 to $200,000 for FY15.

Now I'd like to provide a brief update on our share repurchase program. During the first quarter, we repurchased 335,000 shares of Potbelly common stock in the open market for a total of approximately $4.4 million.

As a result, we have $20.4 million available from our Board-authorized program for repurchases, which we will continue as we move forward. The buyback activity had no impact on diluted EPS result for the quarter.

I would like to reiterate our full-year outlook for FY15. We expect adjusted net income growth of at least 20%, at least 3% Company operated comparable sales growth driven by a combination of traffic and check, 48 to 55 total new shops, which we continue to expect to be more weighted toward the back half of the year. We expect that our effective tax rate not to exceed 40% and capital expenditures of $34 million to $38 million.

Finally, we expect shares outstanding of between 29.5 million and 30.5 million shares, slightly down from previous guidance reflecting the Q1 repurchases. This outlook excludes the impact of any additional share repurchases.

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

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

Thank you, Andrew. Q1 results were very positive. The business fundamentals are good. Our culture, our execution and our daily intensity around the details of this business makes Potbelly a strong Company.

We believe we are a multidimensional Company that can create value in the marketplace several ways: Company growth, franchise growth, North America growth, growth outside of North America. Our Company growth is self-funded. We have a strong balance sheet.

To the question of whether we can grow same-store sales, we've had two strong quarters in a row. We believe our same-store sales will continue to grow because of our focus on throughput, our back line, menu innovation and digital media.

Over time, the addition of Mike and Julie should help us get stronger. There's no one better to help us grow our franchise business than John.

Thanks, again, to the men and women of the Potbelly Nation for an excellent Q1. Again, thanks for your time today. I'd like to turn it over to the operator and we'll be open for questions.

(Operator Instructions)

Sharon Zackfia, William Blair.

Hi. Good afternoon. Just wanted to talk through the addition of avocado. Can you kind of walk us through where you're doing marketing. Obviously, I'm in Chicago. So I've been seeing the billboards and so on. I don't know if that's Chicago specific.

Outside of Chicago, is it building through word of mouth? What's the attachment like on the avocado? And then also how should we think about avocado as it goes through cost of sales? Because I think it's probably a lower margin add-on for you.

Well we have -- Sharon, this is Aylwin. Avocado started in Q2. We are very pleased with its initial success. It's in all of our [steady] state shops and markets. We are supporting it -- we are supporting the seven top markets with digital media. So those markets are advertising -- have -- selling avocado has a digital media.

We split the avocado in fourths. Customers get three slices of fresh avocado and we charge $1 for it. And the margins are really strong for us. So it has not [degradated] our margins. And it's been really -- it's been strongly accepted.

Okay, great. Thank you.

David Tarantino, Robert W Baird.

Hi. Good afternoon and congratulations on a good start to the year. Aylwin, could you talk maybe about how Q1 results compared to your internal expectations? I know you don't give quarterly guidance but were you expecting the results to be as strong as they were?

(laughter) That's a great question. I should say yes and just take that to the bank. We thought we'd have a strong quarter. We think we're going to have a strong year.

The growth plans we tested that a lot of that stuff in the middle of last year. And we are very focused on execution. But the men and women of the Company really came through. We had great execution and we're very pleased.

But we expected 2015 to be strong and the quarter definitely helps. And we're looking forward to continue to execute the growth drivers that we talked about.

Great. And maybe I'll try another angle at this. You reiterated a lot of your growth targets but many of them are for at least a certain amount of growth. So I'm wondering how we should think about Q1 results in that context. Are you more confident in delivering those targets than you were maybe when you provided them initially?

It's really early in the year and so it's one excellent quarter. The thing we learned last year is that you've got to do this every day. And so that's what we're working on. Obviously, by the middle of the year, we'll have a better view what the full-year looks like.

First quarter definitely helps. We were in a hole this time last year when we reported. We're not in a hole so we're feeling very good.

But doggone it, we're not taking victory laps and we're very focused on executing those growth drivers. So we feel good. And we reiterated the targets that we've expressed. And we're going to work hard to exceed those the balance half of the year. But I'm not ready to declare that.

Fair enough. One metric that I don't think I heard reiterated was I think last time you talked about on the call comp's at least 3% for the year. Is that still a valid outlook based on where you sit today?

Yes, sir.

Great. Okay. Thank you very much.

Karen Holthouse, Goldman Sachs.

Hi. Thank you. Two questions. First, looking at avocado, which sounds like it was a success, are there other opportunities you think you see to add other ingredients to sandwiches as an add-on that could be a driver of check?

And second question is, if we look at some of your competitive set, there's been noise about companies going through and making pretty branded claims about improving the quality of ingredients or sourcing of a particular ingredients. Do you think that there's opportunities or needs to take -- to do that with any SKUs that are going into your products?

We are always -- we call this thing food loving and best ingredients. We are always looking for -- to have the best ingredients. So I would say one of the things we stated last year is that reduction of sodium is something we're going to tackle. And over the next two years, our commitment and our proteins were to do that.

But we already think we have really great ingredients. We spend a lot of time on it, take a lot of care with our supply chain. So we're going to be opportunistic on that. We think our customers now can eat healthy based on the customizable part that you can do once you come into a Potbelly.

So it's a little long-winded but I would say that sodium is the one we're really trying to kick off. But we work on great ingredients every day. I'm sorry, what was your first question?

Avocado as -- bringing that on to the menu as a potential add-on to sandwiches. Are there other products that you would look at as another opportunity to maybe have things people could add on to sandwiches for a $1 that could become a driver of check.

I think menu innovation is something we work on. And avocado hit a real -- it was a real gap that we had. And I think that's the key to success in this stuff is really finding gaps in your menu with items that customers find appealing and then provide them at a great price. And that's what we will continue to do.

Great. Thank you.

Nicole Miller, Piper Jaffray.

Thank you. Good afternoon and congratulations on the good start to the year. I wanted to check a couple numbers. I think there were seven Company openings in 1Q. Were there any Company closures?

Yes. This is Andy. Yes, we did have two closures this quarter, as we stated. They were both airports. And one closed about mid-quarter, one was toward the end.

Thank you. And looking at the cadence of the franchise openings and having raising to the low end, I think eight the low end, can you talk a little bit about with not one opening in 1Q, will they be equally split for the rest of the three quarters or backend loaded? What's the best way to think about that, please?

I'd say backend loaded.

Okay. And then just the last question, if I may. Great to hear the culture update. How are you going to transfer that overseas? Are you transplanting people? Or will you send opening teams? How will that work?

One, all our franchise partners come into Chicago to be trained. And they go through the culture classes. They are expected to take the Potbelly advantage back to their business. And then we send what we call kind of all-star teams go over and help with the openings.

In the case of London, we'll have someone over there for almost a year -- the first year to help them manage their business. We picked a very high talented person to do that. So they'll stay longer than when the all-stars come home. Again, the culture interjection, whatever we do on the Company side, we expect the franchisees to participate. The culture is a nonnegotiable.

Thank you.

(Operator Instructions)

Joseph Buckley, Bank of America Merrill Lynch.

Thank you. A few more questions on the sales increase. Can you talk about day parts? Was there any further expansion into breakfast? And maybe the use of the back line, what that sales mix looked like versus a year ago -- if that was part of the increase? So maybe just start with that.

Well it was widely distributed across all day parts. We extended breakfast to about 100 shops. We added about 21 shops in the middle of last year. We'll continue to look for that. But it had to make sense for us.

And those shops have grown their breakfast. It seems like that was the right decision. The focus on the back line has continued. So we saw -- when I mentioned the growth we saw was uniformly across all geographics, all type of shops and across the quarter from a timeframe perspective, that was a true statement. So we saw all parts of the business kind of contribute to the growth.

On a regional basis, can I ask about the DC market, which I know is highly competitive and has been an issue from time to time for you guys and for other brands. Was that market as strong as the system in the first quarter?

No, because of the weather. The weather on the East Coast was just as bad in 2015 as it was in 2014. We were fortunate as a Company to get about six weeks into the quarter with good weather. But after that, their February, March, early April was just as bad as last year.

So where they had good days, they had growth. Where they had days where we had to close down shop and had a huge amount of snow, absolutely not. So we didn't talk about the weather, but the weather on the East Coast was definitely an impact and a drag on our overall sales for the quarter.

Okay. And then last question. You mentioned lapping some July pricing. Could you remind us how much price that was last July?

1.5 to 2.

Okay. Thank you.

Nicole Miller, Piper Jaffray.

Thank you very much. I just wanted to kind of piggyback on Joe's question. I think I heard 4.5% of the comp was check in mix. Could you please isolate the check component? The price component -- I guess is what I mean to say. I apologize -- the price component for the quarter?

Yes. So you're right. It was about 4.5% total check. It's predominantly priced.

Okay. And then just can we get the cash at quarter-end while we have you?

$61.7 million.

Thanks, again.

(Operator Instructions)

Thank you, everyone. We have no further questions at this time. I would like to turn the floor back over to Aylwin Lewis for closing remarks.

Thanks for your interest today. Thanks for your questions. It was a good quarter, good start to the year. I, again, want to thank the men and women of Potbelly Nation for their execution and their focus on the things that are very important to us. I look forward to talking to you at the end of next quarter. So thank you.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.