Potbelly Corp (PBPB) 2016 Q4 法說會逐字稿

Greetings and welcome to the Potbelly Corporation's fourth quarter and full year 2016 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions) I would like to turn the call over to your host, Mr. Matt Revord, Potbelly's Chief Legal Officer. Thank you, sir. Please begin.

Good afternoon, everyone. Welcome to our fourth-quarter earnings call. Before we get started I would like to note that certain comments made on this call will contain forward-looking statements regarding future events or the future financial performance of the Company. Any such statements including our outlook for 2017 or other future periods should be considered forward-looking statements within the meaning of the Private Securities and 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 will 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 Securities and Exchange Commission which are available at SEC.gov.

Our presenters today are Aylwin Lewis, our Chairman and Chief Executive Officer, and Mike Coyne, our Chief Financial Officer. Aylwin will begin with his perspective on the fourth-quarter performance and provide a discussion of our ongoing strategic initiatives. Mike will then review our financial results and future outlook in more detail, before we open up the call for your questions. Aylwin?

Thank you, Matt. Good afternoon, everyone. Thanks for joining the call. During the fourth quarter we generated revenue of $102 million. An increase of approximately 8% driven primarily by new unit growth. We opened 28 new shops including 25 Company-operated shops and three franchise shops.

We delivered adjusted EBITDA growth of 24% to $13.4 million. Adjusted net income growth of 65%, to $3.8 million. And adjusted EPS growth of 88%, to $0.15 per diluted share. For the full year we achieved revenue growth of 9% to $407 million with Company same store sales growth of 1.4%. We delivered adjust EBITDA growth of 15% to $48 million. Adjusted net income growth of 44% to $11.9 million. And adjusted EPS growth of 55% to $0.45 per diluted share. We opened 50 new shops including 40 Company-owned shops and 10 franchise shops for total net unit growth of 11.3%.

Q4 was just as challenging as we expected relative to sales. Our same sales growth up (inaudible) during the quarter was due to continued industry head winds and several Company specific factors. Internally this year's menu innovation did not match last year's robust menu innovation calendar. Although we tried several ideas none of them drove the mix that we experienced in 2015.

Externally the cost of meals eaten at home versus eaten away from home is still pointing in the wrong direction for us and the industry in general. And lastly, we had adverse weather during the quarter that impacted our sales negatively. For the year our same-store sales were 1.4%. This was in the middle of the range of 1% to 2% that we announced during Q2 of last year.

As we look at our performance in the first quarter of 2017 to date it is clear that the industry head winds continue unabated. Traffic in particular remains in line with levels we saw at the end of the fourth quarter.

While we expect comparisons to ease in the second half of this year, as we (inaudible) last year's industry head wind, our outlook is for flat comp sales growth in 2017. As we continue to manage the Company through the industry challenges, it's critical we lean on our strong culture, our tradition of operational excellence and our daily intensity around the details of the business to drive sales growth and profitability.

We know we need to continue to score opportunities to grow our business while managing costs and optimizing our capital spend to align with the market conditions. Let me spend a few minutes to update you on our three value drivers which are (inaudible) shop, growing sales and opening new shops.

Strong (inaudible) shop. We have implemented a new field organizational structure beginning of this year. The structure should allow us to drive additional operational focus, excellence and results. We have gone away from a 1-zone structure to a 2-zone structure. This will allow Julie Younglove-Webb, our Ops Leader, to manage her resources in a more targeted fashion and we believe it should drive our results overall. Investment in the labor model is complete. This will help us schedule and control labor better.

Our GMs are spending less time scheduling. Almost cut in half. This is going to allow us to replace the mandatory GM work-week from 50 hours to 45 hours which shall enhance their energy level and their results. We're also implementing a new hourly selection tool. This online tool will greatly enhance our selection process and hopefully decrease our associate turnover.

Growing sales. Our backline sales grew low double digits during the fourth quarter and was 16% of our overall sales.

For all of 2016 our back-line grew high single digits and was about 15% of the sales. We shall add several additional catering kitchens this year. As well as an increase in the number of catering sales managers from eight to two to three more during 2017. The mobile app and redesigned website will be launched during the first quarter of 2017. This is tremendously good news for us.

The app will have order ahead, one click ordering ease, and mobile pay. We will also be able to GEO target customers with (inaudible) messages. In conjunction with the launch of these two items we will introduce Potbelly Perks. A customer engagement program designed to delight, inform and reward our customers. We believe the app will help us drive sales.

Our intent is to have a better menu innovation calendar in 2017 versus 2016. We will also continue to invest in digital marketing with improved (inaudible) during this year.

Turning now to our new unit development. We believe our proactive efforts to reduce our unit growth and CapEX spend in 2016 from our original guidance was prudent in the light of the challenging macro environment and demonstrates our commitment to drive shareholder value.

We are extremely focused on selecting the right sights with the appropriate lease rates to leave us well positioned to achieve our return threshold. We have recently made investments in a new analytical tool to further enhance our real estate site selection, market planning and customer segmentation capabilities. We remain confident in our ability to find, open and operate new shops.

In light of the current industry back-drop, our development plan for 2017 assumes an increase in the mix of franchise shop. Coupled with moderate growth in Company-operated shops. Our current plan is to open between 30 to 40 new Company-operated shops and 15 to 20 new franchise shops for total growth of 45 to 60 shops. The bottom line is that we need to adapt to innovate to drive in the current market environment.

As I've just discussed I believe we have identified and are investing in the appropriate sales and operational tactics to drive near term growth with a keen focus on cost management and capital optimization. Just as importantly, I believe as an organization we must improve our story telling of our special Company and its long history. Potbelly is a special place. It's a neighborhood sandwich shop and the best place for lunch. Our food and our people are exceptional. Potbelly is turning 40 years old in 2017 and we will be celebrating this birthday later in the year.

We have some exciting activities in place that will help energize our employees, excite our customers and elevate the brand. We look forward to updating you on these initiatives later in the year.

Before I turn the call over to Mike to review the details of the P&L for the fourth quarter and the full year I would like to take the opportunity to thank our shop and support center teams for the combined hard work and commitment. Despite the industry head winds that contributed to lower sales growth than expected, we exceeded expectations from a profit growth perspective and a margin growth perspective. I'm proud of the dedicated team and we will continue to push forward in 2017.

Now, Mike, I'll turn it over to you.

Great, thanks, Aylwin, and good afternoon, everyone. As Aylwin mentioned, I will review the P&L and give you some of the highlights associated with our fourth quarter and full year results. I will also provide a summary of our outlook for 2017. Starting with the top line, total revenue increased 8% to $102 million in the fourth quarter driven predominately by our new unit growth. During the fourth quarter our Company-operated same store sales were relatively flat at plus 0.1%.

Breaking down same store sales, our average check grew approximately 4.3%, driven predominately by price. For the full year total revenue increased by 9% to $407 million driven by our new unit growth and increase in Company-operated same store sales of 1.4%.

Moving down to shop P&L, shop level margin for the quarter was 19.5% of Company-operated sales, shop level margin for the year was 19.7%, an improvement of 30 basis points from the prior year period. Our cost of goods sold as a percentage of Company-operated sales was 27.3% in the fourth quarter, an improvement of 100 basis points versus the prior year. Driven by the combined impact of pricing and commodities that move favorably throughout the year.

For the year cost of goods sold was 27.4%, an improvement of 110 basis points as compared to last year and favorable to our prior guide. For the quarter labor was 29.1% which was an increase of about 30 basis points from the prior year. For the full year labor was also 29.1% which is an increase of 40 basis points compared to last year and at the low end of prior guidance.

Increases were primarily driven by wage inflation, partially offset by price increases and improved productivity. Occupancy expense was 13.2% in the fourth quarter. An increase of 50 basis points as compared to the prior year period, due to lease renewals, higher real estate taxes and higher common area maintenance. For the year occupancy expense was 13% of sales, which was an increase of 40 basis points compared to the prior year. Operating expenses were 11% in the fourth quarter, an increase of 70 basis points.

Operating expenses were 11% in the fourth quarter, an increase of 70 basis points compared to the prior year period. The increase was driven by a tough comparison against a very favorable environment in the fourth quarter of 2015. For the year operating expenses as a percent of sales was 10.8%, an increase of 10 basis points compared to the prior year. Our operating expenses include items like repairs and maintenance, credit card fees, insurance, utilities, supplies and therefore, had variability from quarter to quarter.

We remain focused on finding opportunities to drive productivity across our shop level other expenses to offset cost pressures. Our general and administrative expenses were approximately $9.6 million in the fourth quarter, or 9.4% of total revenue. Which is an improvement of 70 basis points as compared to the prior year period. For the full year, our G&A expenses were approximately $40.4 million, or 9.9% of total revenue, an improvement of 10 basis points compared to the prior year. Our quarter and full year G&A includes the impact of a reversal of a portion of our incentive compensation accrual of approximately $1.6 million in accordance with our pay for performance philosophy. This was partially offset by a legal expense accrual of $1.3 million related to the settlement of an employee litigation matter that was disclosed earlier this year.

Excluding the impact of this litigation matter and incentive compensation accrual adjustment, G&A for the year would have been at the low end of our prior guidance at $40.7 million, or 10% of total revenue, which is flat to prior year. Our adjusted EBITDA was $13.4 million in the quarter which is an increase of 24% from the prior year period. For the year, adjusted EBITDA was $48 million, which is an increase of 15% from the prior year. Our adjusted net income for the fourth quarter was $3.8 million, an increase of 65% from $2.3 million in the prior year and our adjusted net income per diluted share was $0.15, an increase of approximately 80% from the prior year period.

For the year we delivered adjusted net income of $11.9 million, an increase of 44% from the prior year period. Adjusted net income per diluted share was $0.45, an increase of 55% from the prior year period. Please note that the $0.45 includes the impact of our incentive compensation accrual reduction, which is approximately a $0.04 impact. Also note that our effective tax rate was 34.5% for the full year which was well below our guidance driven by the recognition of certain federal tax credits during the fourth quarter. The impact of these two items was about $0.05. And therefore, we delivered about $0.40 when these benefits are excluded which is above our full year guidance of $0.36 to $0.38 per adjusted share.

Regarding our share repurchase program, in the fourth quarter, we repurchased approximately 145,000 shares of Potbelly common stock in the open market for a total of $1.9 million. During the fiscal year of 2016 we repurchased 1.7 million shares for approximately $22.3 million. At the end of the fourth quarter we had $27.7 million available from our Board authorized program for repurchases which will continue as we move forward. Our capital expenditures came in at approximately $37.8 million, which was within our lowered guidance for the year. And our balance sheet remains very strong with a cash balance at the end of the year of $23.4 million and we have $0.00 debt.

Turning now to our outlook for the full year, fiscal 2017. Similar to last year, we are expecting inflationary head winds in 2017, primarily as it relates to our labor costs. Consequently we have taken pricing of approximately 2.5% in January to offset these expected head winds which will bring our total price impact to about 3% for the full year.

These increases were strategically implemented across the menu and across our footprint which also brought certain menu items more in line regionally. As Aylwin mentioned earlier, we have seen a continuation of the negative traffic trends from the end of fourth quarter of 2016 into the first quarter of 2017. As we look out to the balance of 2017 we do not contemplate an improvement in the challenge macro environment in our plan, so we expect to deliver flat Company-operated same store sales growth in 2017.

We expect relatively modest levels of goods inflation, accelerating slightly as we progress through the year given expectations around our timing of inflation and our pricing. We anticipate cost of goods sold in the range of 26.5% to 27.5% for 2017 and our food cost basket is over 60% locked. We expect labor, as a percentage of sales, to trend around 30%.

Our guidance assumes continued wage pressure for minimum wage increases implemented last year as well as expected minimum wage increases in 2017 in major markets. In part, offset by the price we have taken. We will continue to manage our labor expense through continued efforts and investments to improve our labor productivity.

We expect our GA expense to be in the range of $44.5 million to $45.5 million. And for the year we expect adjusted net income growth of flat to plus 5% given our expectations for flat Company-operated same store sales and expected labor inflation offset by our pricing, productivity and sales growth initiatives.

We expect adjusted net income per diluted share in the range of $0.45 to $0.47. And we expect an effective tax rate in the range of 36% to 38%. As I discussed earlier, our adjusted earnings in 2016 included about $0.05 benefit from the reversal of our incentive compensation accrual and from the lower than expected tax rate.

When you judge for these 2 factors in line with our normal run rate, the implied adjusted net income growth is low to high teens for 2017. As a reminder, our full year fiscal 2017 is a 53-week year and our guidance includes an extra week in our fourth quarter. For context, the impact of the 53rd week is estimated to contribute approximately $7 million of revenue and $700,000 of adjusted EBITDA. We do not expect a meaningful impact to our bottom line.

On shop development we expect to open 30 to 40 Company-operated shops and 15 to 20 franchise shops, for a total of 45 to 60 total new shops which we expect to be back end weighted, but to a lesser degree as compared to 2016. We expect to spend between $37 million and $39 million on capital expenditures in 2017.

Although we do not provide quarterly guidance I want to provide you with some color on certain puts and takes as you think about the cadence of our quarterly performance. The first quarter is lapping the strongest same store sales quarter of 2016 and we're seeing traffic trends that have continued from the end of last year. We expect comparisons to ease as we progress through the year.

In addition, we expect inflation impacts to increase during the year while noting that our pricing from August of 2016 rolls off. We expect G&A expense to be higher in the fourth quarter driven by the reversal of the incentive compensation pool in the fourth quarter of 2016. On the unit development front, again, I want to reiterate that we expect our shop development in 2017 to be back end weighted, albeit to a lesser extent than our heavily back end weighted cadence in 2016.

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

In closing, 2016 to me was a positive year relative to the overall results of the Company. We were disappointed in the same store sales growth. Those can be explained partially by the head winds that faced the whole industry. That said, we had double digit new shop growth, strong margin growth and excellent profit growth. We beat our [ESBPS] expectations and we have a strong balance sheet and strong cash flow. We are forecasting 2017 in a conservative fashion which is prudent.

We are excited about the launch of the app and the customer engagement program. We believe the long-term, short-term of this business and the fundamentals are bright. One last note, as we noted in our press release, we're in the process of trying to retain our iconic Midway Airport location.

This is a very important location for us. And while we're currently advocating to (inaudible) officials to retain this shop we can give no assurances that we can succeed. Our 2017 outlook provided by Mike does not give any effect to any adverse impact on our financial results caused by the loss of the Midway shop which is about 2% of our business.

With that, I'll open it up to questions.

(Operator Instructions) Our first question comes from the line of Sharon Zackfia, of William Blair. Please, proceed with your question.

You guys sounded excited there might not be any questions so now I feel disappointing. So, I guess a couple of questions. First, I wasn't clear on what your price benefit is in the first quarter. I know you took 2.5 but I think you had some roll over? And then, Aylwin, if you could talk about the menu innovation. Kind of how you reset going into 2017. Is it a matter of frequency? Is it a matter of being more on point? Just help us understand that.

Okay. Sharon, I'll start. It's Mike, how are you?

Good.

Good. The pricing, so, yes, the 2.5 at the beginning of January, we have about a point or so rolling from the pricing that we took in August. So for the first kind of, you know, seven plus months of the year you'd expect to be in the 3.5 range in total. And if there's nothing that replaces that, it would be about three or so on a full-year basis.

Great. And then on the menu innovation?

Yes. So last year we made attempts to do line extensions and combinations of things that we have done in the past. And, you know, it's diminishing returns when you come to some of that stuff the second and third time. So we were disappointed with the calendar. So the learning is that if we're going to continue down the menu innovation path it needs to be bold.

It needs to be, you know, customers that want adventure. It needs to be right in the middle of our fly wheel in terms of the type of proteins we're offering. And innovation around the brightest appeal products. And we do believe we have something like that this year. And, you know, the latest one will start in March and we're looking forward to it. So that's it. Broader, more innovation, real points of difference between what we're currently serving. But proteins that have the widest appeal.

Okay. Thank you.

Our next question comes from David Tarantino, of Baird. Please, proceed with your question.

Hi, good afternoon. I have a clarification question on the recent same stores traffic trends, or same store sales trends. You mentioned trends slowed towards the end of the quarter. Could you give us a sense of how big the slow down was in traffic in December and what that implies for what you're running in the first quarter?

Sure. The traffic number for the quarter was about a negative four. Okay? And with that the December was the worst of the three. In fact, October and November were about in the same territory, but December was worse than that. And it's the December month that really has continued on into January. So a little bit worse than the minus four for the fourth quarter.

And do you think, as you enter this year, it seems like the weather comparisons were very challenging in December. But, maybe that hasn't continued so far this year. So, is there something else going on underneath the surface that might be weighing on the trends in your area?

(inaudible) comparison is to last year. So last year's first quarter was the best same store sales we had. As we mentioned, we think that changes four. And it's been very uneven. We've had some weather the last few weeks, but generally in Chicago it's been great. Been pretty mild. Had some weather down in Texas. West Coast has been, you know, really good for us. So, you know, I think we'll know more at the end of the quarter than we do now. You know, these Monday holidays really kill you.

One thing that happened, you know, we benefited from having Christmas the last week of the year. But then the quarter was hurt by having New Year's the first week of the year. So it's been very disjointed, been very un-fluid. But we're searching for answers. For right now we're just riding the trend and we think it will turn for us later in the year.

Understood.

We're being prudent with the guidance because that's what we should be. (inaudible), obviously be better.

Got it. Yes. Makes sense. And then, on the mix component I think, Aylwin, you mentioned that might have either stopped being a tail wind or perhaps turned into a head wind in the most recent quarter. How do you think that plays out as you look at menu innovation pipeline for this year? Is that going to be --

It's going to be better, quite frankly. Last year in the quarter was 0.7. This year is 0.3. So that difference meant that this year's was not as robust for the full year. So the calendar needs to be better. So we're putting a lot of pressure on the team. A lot of pressure on our digital marketing, our merchandising. We drive -- we at least drive mix with the calendar. If not then it's just a very expensive exercise that you're not driving mix. At least mix and hopefully then traffic.

Got it. And then one more for me. Would you talk about how the Potbelly Perks program will be structured? What types of benefits will consumers get with that and how do you plan to leverage that?

We have been convinced by our customers and by certain people like yourself that it's something that we needed. So we're going full bore. We're running the cost, quite frankly, through the P&L. It's fairly expensive to do. The goal is to have an algorithm that doesn't just reward your most loyal customers.

But it's meant to provide information, it's meant to provide free product based on the usage. You can earn points based on the usage. We're going to offer a free sandwich to get people to download the app and use it for the first time. And then there's like three levels of rewards. And at the very highest level you get a lot of special treatment. And so it's a big part of the app. It's kind of best in class of what the folks in the industry have.

And we think, you know, the app itself, the ease of using it, the benefits that we have for the app, that quite frankly was best in class that we looked at. And then having a Perks program. I don't allow them to call it a rewards program. That's what most people call it. We think those two things combined should drive business this year. It's taken a year to develop. It gets implemented this quarter. So we're very excited about it.

Thank you very much.

Our next question comes from Joshua Long, with Piper Jaffrey. Please, proceed with your question.

Great, thank you for taking my question. I wanted to see if we might be able to talk about the moderation in unit development in terms of maybe just conservatism and to protect your own business and focus on running great shops. And then also just maybe what the environment for quality sites is looking like and how you think about that evolving over the course of the year and if that maybe, at what point in the year that informs your decision to maybe potentially slow down 2018 growth as well?

All along we're all about creating value and managing risk. Given a lot of the disruption in the marketplace. You have a number of folks announcing closures.

We just thought it was prudent to plan this year with a CapEX that was very similar to last year. We have a wide range of company units, 30 to 40. And what we have told ourselves, what we have told our Board is that the first half of the year is pretty well locked.

We'll take a look at where we are in the middle of the year and either we'll stay on the same path, which means 40, or we'll decelerate because the market conditions dictate it. Coupled with that is that will add more franchise units this year.

Which is helpful and it's, you know, toward our goal of trying to get to 25%. So I think that's the beauty of what you have.

You got a management team that's looking to add value, manage risks, keeping this optionality open to the widest. The market gets worse, we're at 30. If the market stays the same, we're accelerating and we can go to 40. That's the combination of 45 to 60. And obviously, you know, our franchisee's feel good about the brand. And the majority, I would say half of the one's that were scheduled to open this year will be pretty close to the first half of the year with the franchisee's. So, that's the deal.

That's helpful. I appreciate the extra color. In thinking about Potbelly Perks, how should we think about kind of the incentive component being built into the guidance and how that flows through? You mentioned that it was maybe a little expensive, there's some investment alongside of that. Just trying to think about how that impacts of informs the guidance you offered on the COGS line, or maybe if some of those incentives might flow through that other operating expense line.

It's in the guidance. We have covered it in our plan. We have covered it in the guidance. Some is COGS, some is G&A. But it's within what we have talked about.

All right. Thank you. In terms of maybe shifting away from the menu line extension, or revisiting the menu innovations side of it, do you anticipate also adjusting either marketing spend or kind of a material change in the approach to marketing this year to balance that innovation side off versus 2016?

We're still going to do innovation this year. And we think we have some really good products in the pipeline. I'm just saying we're very excited about 2015, we're very disappointed, I say very, but we were disappointed in 2016.

And if you have to have a menu innovation strategy, it has to drive the business or it's very expensive. If it doesn't work for us this year we would look at taking a different approach and making the corresponding cost adjustment. We're still very committed to digital marketing. Quite frankly, you know, I think we have to become better story tellers.

So we're going to embark to do that. One of the great things we have for us this year is the 40th birthday. And we plan to use that as a way to reintroduce the brand to the world and have a multi-month celebration that we'll talk about in the future. But, we're very excited about talking about the brand, celebrating the birthday and making a big deal about that around story telling and obviously using digital marketing to help drive a lot of the messaging.

Understood. Thank you for the time.

Our next question comes from Steve Anderson of Maxim. Please, proceed with your question.

Yes, good afternoon. I wanted to ask a follow-up question regarding the Potbelly Perks program. Typically what we have seen from the competitors, the food expenses tend to increase by a certain amount, you know, relative to the prior year. Is that built into your guidance?

Yes. Yes. Absolutely.

All right, thanks.

(Operator Instructions). Our next question comes from Greg Frankfurt, of Bank of America. Please, proceed with your question.

Hey, guys. A few from me. First, you talked about adding a few catering kitchens this year. Can you maybe update us, how many do you have now, and are those sort of concentrated in the urban markets? Just, maybe where your presence is right now?

So we have 4 that you would count catering kitchens, pure catering kitchens. And the goal over time is to almost have nearly one in every market we do business in. So this year we said we would do several and open those. It's a way to help us continue to grow that catering business, which is a large segment of the population. Allows you to get the large orders that, you know, restaurant-based catering can't quite touch.

We have had very good experience with the catering kitchens we have and we want to extend that across the US. These will be kind of industrial areas. No retail. No front line retail and it's essentially production and delivery.

Got it. And then just on the mobile app and website. Are you using an external vendor for that? And, if you're making investments on the technology side, are those, have they happened or should we expect them to happen? Just any sort of CapEX or G&A spend associated with that? What would the timing be?

Yes. We're working hard to become a digital company. We announced this 2 years ago. So within the confines of our CapEX is the necessary investments we're making in technology. Some of that is the additional tools for the shops. So the labor model last year. This year the selection tool. We're upgrading the online environment, switches and things like that in the shops.

Because, if you're going digital your wireless has to work without, you know -- So the app is part of the customer-facing part of that. And it is within the CapEx that we've announced. All of the development was using external vendors that have done this before. It's quite a chore because all things have to go through your POS vendor. And that's MCR. And so that network lasted a year. And quite frankly, it was a bit longer than we anticipated. But, you know, within a couple weeks we'll be launching the app and the new mobile site.

Got it. Can then just in terms of -- there's the Trump question that everyone asks, but maybe a different question. You guys have a lot of exposure to the D.C. market. And we look at sort of (inaudible) data early in 2017 and there was a bit of a pickup in D.C. around the inauguration, the women's marches. Did you guys experience that, and maybe if not, why not? And any sense sort of regionally maybe what's happened so far?

You know, the bell water of inaugurations was the first Obama. That was tremendous for businesses in D.C. including ours. Everything else pales to that. So the inauguration of Trump was very disappointing. But to your point, what helped out that week-end across America was all the women's marches. So, not only in wherever they occurred if we had shops, it was a great weekend. So that helped.

Long-term we feel good. We have put a ton of time and we have put a ton of pressure to improve our operations and results in D.C. The senior team, for example, has been there three times in the last 18 months on the ground working with the local teams. And we're happy with the progress. And it's an important market to us. We continue to grow there. And, you know, we think we run our business well, it will grow in sales and profits.

Got it. Maybe just 1 last 1 for me. Just, Mike, I know you talked about the tax rate. What were the tax credits this year and why don't they continue into 2017? Maybe what was specific to 2016?

Actually the credits that we received in 2016 we've received in the past as well. And those are the worker opportunity tax credits or WOTC credits. They will continue in 2017. It's just that we had a particularly strong year in 2016 that we didn't want to plan on reoccurring in 2017.

Got it. Thank you. Appreciate it.

Our next question comes from Karen Holthouse, of Goldman Sachs. Please, proceed with your question.

Most of my questions have been asked and answered. So just a quick modeling one. Fourth quarter COGS ran a little bit north of 27. It sounded like on your commentary, if anything, sort that ramps into the end of the year versus at the beginning of the year. Maybe some incremental costs associated with the value programs.

I'm just kind of wondering how you get to the 27 for the midpoint of the range. I would have thought you would have started with 27.3 from the fourth quarter and if anything modeled that coming up through the coming year. Thanks.

No, thanks. And great question. So the combination of the pricing impact as well as what we see in the first half of the year in terms of some deflationary items and some of their more significant items, for example, proteins, lead us to the range that you just described. So we feel pretty good about that in the way in which we'll start the year.

So sort of think of it as a percent of sales basis so that it maybe comes down a little bit from the fourth quarter and ramps up from there through the year?

Yes, yes. That's exactly right. Ramp up, I might say, slightly accelerate. Just use those words. Because I think that while we have our better benefit hopefully in the first half of the year, coupling with our pricing movements throughout the year it will increase throughout the year but not in a dramatic fashion.

Okay, great. Thank you very much.

Our next question is a follow-up from Sharon Zackfia, with William Blair. Please, proceed with your question.

Just a quick follow-up on the franchise side. When you look at that acceleration this year, can you talk about whether you think that continues into 2018? And then kind of the mix you have of new versus existing franchisee's and if we'll see new markets as well open on a franchise base on 2017?

Yes, yes, yes. I'm sorry, Karen, Sharon, I'm sorry. We've got a good base that continue to grow because they have multi-shop agreements. We have signed multiple new shop agreements (inaudible) those have come on stream. The combination of those helped. And obviously the big kahuna's, California, that we're working on. We expect over time the franchise growth and that franchise revenue to continue to grow.

I guess one follow-up. Have you considered selling any of the Company-owned locations or re-franchising those?

We talk about that stuff all the time. It's got to fit within our overall strategy and it's got to be with the right partners on a grander plan. So we'll do the right thing to enhance the growth of the business.

Okay. Thank you.

(Operator Instructions) Our next question is a follow-up from Steve Anderson, of Maxim Group. Please, proceed with your question.

To your area franchise development, how much of that is going to be international and can you (inaudible) your store that you opened up in Canada this past year?

What was the second part of the question, Steve?

It's a follow-up with the international development. I know you had opened up your first store in Canada. I wanted to ask about your plans there in particular.

Right. So actually, interesting today we just opened up our second shop in Toronto. We now have two in Canada and there's a few more to go as part of that agreement. London right now is still just the one shop. That was a multi-shop deal. Still looking for that second shop. And where we have the base of the international shops is in the Middle East and that you shouldn't expect to grow at all.

We're still looking for a big Asia deal that hopefully we'll be able to announce sometime this year.

Thank you.

If there are no further questions at this time I would like to turn the call back over to Mr. Aylwin Lewis for closing remarks.

Thank you for your interest and thanks for the great questions. Listen, I think 2016 was a positive year. Disappointed in sales growth, like I said, the head winds impacted us. Our job is to do everything possible to supersede that.

I think the talent of the Company of managing flow through, driving margins and beating our profit targets is something we're very committed to because we really work hard on it. We have a prudent forecast for 2017. We will work like the devil to beat that. But it's the right thing to do given where we stand today. We're very optimistic about some of the investments we're making. The app, the rewards program. If ours is just as good as some of the competition, it should help drive the business.

We continue to make investments in improving the effectiveness and efficiency of the shops so our GMs can spend more time serving customers. And one of the big one's internally is just going from the mandatory 50-hour work week to 45. We think that's really beneficial. The only way you can make that happen is we're taking actual work out of the shops. And so, again, that should help with the positive energy of our number one leader as well as then allow them to focus on their neighborhood, their customers, and their employees.

So thank you very much. Appreciate your time. And get out and buy some sandwiches.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.