Potbelly Corp (PBPB) 2018 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Potbelly Corporation's Second Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) Today's call is being recorded.

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

Good afternoon, everyone, and welcome to our second quarter 2018 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 2018 or any other future periods, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance nor should they be relied upon as representing management's views as of any subsequent date.

Forward-looking statements involve significant risks and uncertainties, and events or results could differ materially from those presented due to a number of risks and uncertainties. Additional detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information we will be giving today can be found in our most recent report on Form 10-K under the headings Risk Factors and MD&A and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.

Our presenters today are Alan Johnson, our Chief Executive Officer; and Mike Coyne, our Chief Financial Officer. Alan will begin with his perspective on the second 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 the call up for your questions.

I'll now turn the call over to Alan.

Thanks, Matt. Good afternoon, everyone, and thank you for joining the call. We are pleased with our performance in the second quarter, where we delivered revenue of $110 million and adjusted earnings per share of $0.13. More importantly, we are delighted with the improvement in our same-store sales trends, which was nearly flat at a negative 0.2% in the second quarter as compared to a negative 3.6% in the first quarter. And it was our best quarterly result since the fourth quarter of 2016.

Our second quarter comp trends were driven by stronger traffic and higher check, which confirms to me that we have the right strategies in place and we are effectively executing our traffic building initiatives. Our performance through the first half of the year provides us with confidence to reiterate our guidance for the year.

I would note that it is still very early in our turnaround efforts and I want to reiterate that 2018 is expected to be a transition year for Potbelly. That said, we are very encouraged by our early progress and I want to take the opportunity to thank our 7,000-plus Potbelly associates, for without their commitments to change and dedication to daily execution, this turnaround would not be possible.

Mike will review our financial results and outlook for 2018 in greater detail later in the call. But first, I would like to highlight the significant progress we have made to assemble the right team to effect our turnaround strategy. And then I'll provide an update on our strategic initiatives.

We are focused on assembling a leadership team with the skill set and experience required to successfully execute our turnaround plan. Having the right team in place is critical to our success. Over the past few months, we have made great strides in strengthening our leadership team with the addition of talented executives to lead our marketing, real estate, franchising, HR and off-premise business.

First, I would like to introduce Brandon Rhoten, who joined Potbelly in June from Papa John's and previously from Wendy's. I was specifically looking for someone who grew up in the social, digital and mobile space. Someone with impactful experience and a good sense of what works and Brandon certainly fits that bill. Brandon and his team received industrywide recognition for the highly successful digital media campaigns, which helped lead the brand turnaround at Wendy's. He's a great storyteller and is a great addition to our quirky brand.

Debbie White has joined Potbelly to lead our off-premise business. She brings 25-plus years of sales, marketing and leadership roles across PepsiCo, Taco Bell and Domino's, and will be instrumental in helping Potbelly capture the significant growth potential across all day parts in catering, delivery, grab and go, and curbside pick-up.

Finally, our Chief Legal Officer, Matt Revord, has also been appointed our Chief People Officer. Matt has historically been very closely involved with our HR team. So the transition in May taking over HR responsibilities has been very smooth. This is an example of one of the ways we've been able to repurpose G&A by consolidating certain responsibilities where appropriate.

As we had mentioned last quarter, we brought in Jeff Welch to head up our franchise development and strategy. Since then, we have also realigned our company development and strategy under Jeff to take full advantage of the synergies of our growth effort. Another way we've been able to repurpose G&A by consolidating responsibilities where appropriate.

Finally, we previously announced that we had hired Chef Ryan LaRoche to head up our culinary innovation.

Whilst we continue to look for opportunities to bolster our team, it is important to recognize the rest of our leadership team: Julie Younglove-Webb, who's responsible for operations; Maryann Byrdak, who looks after IT; Mike Coyne, our CFO; and Matt Revord, our Chief Legal Officer and CPO. All very seasoned executives with long tenure at Potbelly, spanning 3 to 10 years each. I believe we have made great progress in building the right team, with complementary skills to execute our turnaround strategy.

Now I would like to spend a few minutes to provide an update on our strategic initiatives. Our main priority this year is to establish the foundation to position Potbelly for sustained traffic and same-store sales growth over time. During the last earnings call, I outlined several key strategic initiatives that we are laser focused on executing to substantially improve our operating performance. Let me briefly update you on these.

First, we must become a more sales-focused organization. As I mentioned last quarter, we are intensely focused on suggestive selling. The power of converting the average customer to add one more item, spend one more dollar and to visit one more time all translates directly into positive comps. When I first joined Potbelly, we suggestively sold 6% of the time and we now consistently achieve over 40%. While I am pleased to see the team so quickly embrace this concept of one more, it is imperative that we optimize our efforts to capture the remaining missed opportunities. I am encouraged by our progress but there is much work still to be done.

During the second quarter, we tested over 100 different segmented offers across every one of our stores through our disciplined process to learn what really works and what doesn't. We believe in failing fast. If a certain promotion isn't working this week, we will change it and try something different next week. Eventually, we would run out of things that don't work. So we need to adapt and pivot quickly to find the winning combination and with our dynamic but balanced approach, we are not betting the farm with any single promotion.

This rapid test, learn and roll approach has given us valuable learnings on how we begin to utilize marketing as an engine of growth. We continue to test across our markets and the data we capture will be invaluable as we become more targeted in our offers going forward.

Second, we aim to drive incremental sales through menu engineering and product innovation. During the second quarter, we introduced the Cuban as our featured premium sandwich. We saw solid attachment rates with this delicious sandwich, which exceeded our expectations and contributed to our positive mix for the quarter.

Last week, we introduced 2 unique ways to enjoy Potbelly's Barbecue Pulled Pork sandwich. Both sandwiches start with our premium, slow roasted tender pulled pork and Potbelly's signature sweet and smoky barbecue sauce. The Classic Barbecue Pulled Pork sandwich comes with coleslaw, while the Spicy Barbecue Pulled Pork sandwich comes with a unique twist of cheddar cheese and jalapeno crisps. Definitely worth indulging your taste buds with a little heat. While just launched, we are very encouraged by the early customer feedback on this LTO.

We believe product innovation and menu engineering will continue to be an important driver of incremental sales. The strong performance of our recent LTOs which include the Turkey Club, followed by the Gyro, the Cuban and now Barbecued Pulled Pork sandwiches, provides the opportunity to innovate and further validate that our customers will pay for premium sandwiches if we deliver a compelling product. We are excited by our pipeline of menu innovation and I can't wait to show you what Chef Ryan is whipping up in his kitchen.

Third, we will increase investment and focus in marketing and technology. It is imperative that we connect our customers with this fun and quirky brand through improved storytelling and more targeted customer engagement. We are very focused on providing compelling content that captures the quirky voice of the brand in a way that differentiates it and makes Potbelly a part of the social conversation. As we like to say, we believe that our food should be entertaining and that it is likely going to taste even better if it makes you smile first.

Let me walk through a few recent examples. First, we celebrated National Turkey Month with our Turkey Tender promotion, where we encouraged our customers to swipe right for $1 off any turkey sandwich, which was a fun play off the very popular Tinder dating app. Second, we got in front of a heat wave with the Free Shake Friday offer, that encouraged our customers to beat the heat with a free shake or smoothie with an entree purchase. This timely and very relevant promo drove a record number of shakes and smoothies served and also drove significant traffic.

Finally, in recognition of Friday the 13th, we offered a free I-Scream sandwich for Perk members with purchase via our app. This offer was a huge success as we saw a tremendous uplift, with over 10,000 ice cream sandwiches served that week as compared to only several hundred in a typical week. Our ability to track purchases via our app as well as through third-party analysis of credit card spending trend confirms that we are able to drive both trial from new customers and frequency from existing customers. We positively impact traffic when we reach the right audience with the right message at the right time with interesting creative.

We view our Potbelly Perk customer engagement and loyalty program as a key platform to harness the power of our customers, and we are intensely focused on growing our Perk membership to learn more about our customers, which will then enable us to be able to more effectively talk to them. We continue to see strong customer feedback for and adoption of Perks and we expect to welcome our 1,000,000th Perk registrant during the third quarter.

Fourth, we will continue to invest in growing our off-premise business to leverage the catering and delivery potential of the brand. With a craveable product that travels well and is perfect for most occasions, we are vastly underpenetrated in our off-premise business and we see opportunities for growth across catering, delivery, grab and go, and curbside pickup. During the second quarter, we saw low double-digit growth in our off-premise business. We see this as a win-win, as our customers benefit from the added convenience and we benefit from a margin perspective.

In addition, we recently introduced all-day delivery at select Potbelly shops, where we are utilizing a third-party delivery company to augment our delivery during nonpeak periods. We are encouraged by the early results and the positive traction in traffic and backline spend, but there's much room for improvement.

Fifth, we plan to invest strategically in new shop growth by decelerating company-owned shop growth and increasing the mix of franchise growth. Jeff Welch has hit the ground running in the short time that he has been with Potbelly and is working to develop a path to profitable growth. We expect to provide a more comprehensive update on our development strategy in the coming quarters.

Finally, we continue to look for opportunities to drive savings in our cost structure and productivity in our shops. As I mentioned earlier, we have consolidated several senior responsibilities as we strive to increase productivity with a flatter organization. In addition, we have implemented a number of purchasing and supply chain initiatives, which we expect to drive cost savings.

Finally, we remain focused on refining our labor model and using technology to engineer our costs. As an example, we have taken some of the administrative work that our GMs had formerly done in the shop and now they can do it online.

I will now turn it over to Mike who will go through the details of the P&L for the second quarter, as well as outline our expectations for the remainder of 2018. Mike?

Thanks, Alan, and good afternoon, everyone. As Alan mentioned, I'll review the P&L and give you some of the highlights associated with our second quarter results. I will also provide a summary of our outlook for the remainder of 2018.

Starting with the top line, total revenue increased 2% to $110 million in the second quarter. We opened 5 new shops, including 3 company-operated and 2 franchised. During the second quarter, our company-operated same store sales were nearly flat at negative 0.2%. Breaking down same store sales, our average check grew approximate 3.3% driven by a combination of price and mix. Our shop-level margin for the second quarter was 18.8% of company-operated sales as compared to 19.2% in the prior year period.

Cost of goods sold was 26.2% in the second quarter, an improvement of 50 basis points versus the prior year period. Labor was 29.6%, which was an increase of about 20 basis points from the prior year, primarily driven by wage inflation and partially offset by price increases and improved productivity.

Occupancy expense was 13.7% in the second quarter, an increase of 40 basis points over the prior year, due to sales deleverage and inflation in certain occupancy-related costs, including lease renewals, real estate taxes and common area maintenance. Operating expenses were 11.7% in the second quarter, an increase of 30 basis points compared to the prior year due largely to sales deleverage and operating expense items such as repairs, maintenance, utilities and other expenses not directly variable with sales.

Our general and administrative expenses were approximately $13.4 million in the second quarter or 12.2% of total revenue. I would note that our G&A expense in the second quarter contained several discrete items, including $1.3 million from restructuring costs, $457,000 of store closure costs, $353,000 of CEO transition costs. Excluding discrete items, our G&A expense would have been $11.2 million or 10.2% of total revenue.

Our adjusted EBITDA was $11.5 million in the quarter, which is a decrease of 2.6% from the prior year period. During the second quarter, we had income tax expense of $303,000. Our adjusted net income for the second quarter was $3.3 million or $0.13 per diluted share compared to adjusted net income of $2.7 million or $0.11 per diluted share in the prior year period.

Regarding our share repurchase program, in the second quarter, we repurchased approximately 259,000 shares of Potbelly common stock in the open market for a total of approximately $3.4 million. At the end of the second quarter, we had $61.5 million available from our board authorized program for repurchases, which will continue as we move forward.

Our capital expenditures came in at approximately $6.7 million. Our balance sheet remains very strong with a cash balance at the end of the second quarter of $34.3 million and we have 0 debt.

Turning now to our outlook for the full year 2018. We reiterate our guidance for flat company-operated same store sales growth. We continue to anticipate cost of goods sold in the range of 26% to 26.5% for 2018 and labor as a percent of sales to trend around 30%. For the year, we continue to expect G&A expense to be in the range of $46.5 million to $47.5 million. Our G&A outlook does not include costs related to the restructuring, costs related to proxy expenses or store closure costs, which may occur as we remain focused on opportunistically optimizing our existing company-owned portfolio.

We expect adjusted net income per diluted share in the range of $0.37 to $0.39. We expect an effective tax rate in the range of 24% to 26% for 2018, excluding the impact of Accounting Standards Update 2016-09, which could have a material impact on our effective tax rate. We expect to open 10 to 12 new company-operated shops in 2018 and 12 to 14 new franchise shops, which will be back end weighted. Finally, we expect to spend between $23 million and $25 million in CapEx in 2018.

So with that, I'll turn it back over to Alan for summary remarks. Alan?

Thanks, Mike. In closing, I believe we are making the right strategic investments, both in terms of people and process and executing on the right strategies to position Potbelly for sustainable profitable growth over the long term.

I am very encouraged by the early progress of our brand and traffic-building initiatives, which are reflected in the positive trajectory of our results to date. However, 2018 is a transition year for Potbelly and there's much work still to be done. We must be patient, continue to test and learn and maintain our focus and discipline to effect this turnaround. I am energized by our progress thus far and I truly believe that Potbelly's best days are ahead.

Thank you all for your time today. We appreciate you being on the call and the support of our business. I look forward to providing you with an update on our progress on our next earnings call.

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

(Operator Instructions) Our first question comes from Joshua Long of Piper Jaffray.

Exciting to see a lot of the initiatives gaining some traction here. So, curious with all of the new adds on both the human capital side and just a lot moving around, just how do you think about prioritizing and balancing all of this? Is there -- with so much opportunity in front of you, is there -- do you worry about doing too much at one time? Or is it really a function of just getting the right people in place and then allowing them to execute on the brand knowing that it's got a lot of strength and a lot of room to go going forward?

Joshua, this is Alan. Thanks for the question. Yes, good question. Getting the right team in place, I think, makes executing the 6 strategies that I've laid out actually very possible. The one thing that we did very, very early on is to identify those 6 strategies, which is getting the right team in place, driving sensible sales comps, telling the Potbelly story in a way that differentiates the brand, figuring out our path to profitable shop growth, getting the box right in terms of size and investment, and then driving hard on productivity. That's what we've been focused on. We're not expanding that at this stage. I think good things come from being very disciplined and very focused. So now that I have filled in the various different blanks in terms of the folks that I went through in my prepared remarks, I feel very good about our ability to stay focused and execute flawlessly.

Great. And then thinking about the product innovation, menu engineering that you talked about in the call, that seems like -- the Potbelly user as well, it seems like that's a huge opportunity there with a lot of, maybe not low-hanging fruit, but just a lot of opportunity in terms of new products or just communicating those products in your story more effectively. How do you think about the right number of promotions and LTOs coming out? Is it really -- is it a number opportunity? Or is it just maybe a communication, is it a little bit of both? How do you think about what we might think of the future of how you're going and communicating and getting your -- incentivizing your guests to come into the shops?

Yes. On the menu innovation and optimization initiative, I'm very excited about this one because we kicked it off actually quite a while ago and the initial sort of results are beginning to percolate through. But it's important for us to remember that this is a holistic look at the menu, of which, promotions and LTOs are just sort of 1 element. And if I remind you, the number one goal is to maximize traffic and profitability. And the scope of the project sort of involves stuff that we've not done for quite literally 40 years. So the use-by date is well and truly here.

Number one priority is actually simplification and make it more shoppable. Having 116 products at 66 price points is obviously something that's too complicated. We're looking at the design and the layout, making sure that it's not only easy to read but it's not intimidating, which at the moment, we believe it is. Making sure that there's place for us to feature innovative product like the LTOs that you mentioned and various different promos as they roll in and roll out.

An interesting fact is if you look at the customer that shops at Potbelly, when they don't shop at Potbelly for lunch, they generally -- about 60% of them use a combination of combos or bundles except for when they shop at Potbelly, we don't have any. So the new menu design will accommodate that because I honestly do believe that is not only a traffic driver but it is also a ticket driver and fits very nicely into our one more strategy, where if they can buy one more item or spend one more dollar, I think it's very, very important.

And then the other major element of this is looking at the assortment, where I'm looking for incremental reach and probably, the best example that we're already committed to, and Chef Ryan is almost, as I speak, working on this, is we don't have a prime rib or a steak sandwich and that's a very big missed opportunity for our menu. And then making sure that we look back over our shoulder a little bit and see what have we done in the past and how do we learn from that and not make sort of the same sort of decisions at the wrong time.

So a very good example is there's a decent amount of evidence to suggest that there are better times of the year to take price increases, so we're adjusting and taking that into account. So anyway, it's a series of -- or a nice blend of art and science. And in the meantime, we will continue to test, learn and roll and learn by doing and the first major test of this initiative rolls next month in September, where we are rolling this out in about 60 shops to get a sense of what impact it has.

Very exciting. We'll definitely keep an eye on that. And one last one for me, you mentioned the -- from the -- on the off-premise channel opportunity. It's really a -- there's a margin perspective or a margin opportunity there. I was curious if you could elaborate on that in terms of -- if that's just you're seeing higher checks and there's more of an opportunity there from a kind of higher dollar profit? Or how to think about the margin opportunity for off-premise?

Yes, I think you summed it up well. It's a higher average order. So that's friendly to the margins for sure and also friendly for the labor. If I can sell $200 at a time versus $20 at a time, the economics of that on the shops are quite different.

Our next question comes from Karen Holthouse of Goldman Sachs.

(inaudible) there were about 5 closures in the quarter and guidance didn't change. Could you just give us some color on sort of that part of the closures. Are those stores that weren't really making money so there's no impact to guidance and how we should be thinking about that?

Yes, so Karen, this is Mike. I caught most of that. So you're right on the closures and -- but I didn't know what your specific question was regarding the closures.

So guidance didn't change despite the closures. So is the right way to think about it that those stores weren't really making much money to begin with? Or also, just to help us model maybe a trailing 12 month sales associated with the stores that were closed.

Yes. So I think that's right. I think the net of the closures, some of which we are closing as part of our concerted effort to close shops that are less profitable. There are also shops in there that maybe met their natural end of a 10-year life. They just weren't -- it just wasn't economically viable for us to renew the lease. So I would say that you're right from a bottom line perspective, that it wasn't a significant impact there yet. Clearly, part of the reason why the topline in the actuals is a little bit short of what some expected is because we closed more shops than would have been modeled because we don't guide on these closures. That will probably take some refined modeling as you think about the rest of the year.

Our next question comes from Mary McNellis of Robert W. Baird.

Could you elaborate on the comments in the press release noting the positive trajectory of the comp trends? And I guess, was that meant to signal anything about the recent comp trend that you're seeing in early Q3? If you could just clarify how we should be thinking about that comment.

Yes, I think I'll start and Alan can jump in. That was really pointed out. It was in the same kind of paragraph or sentences about the improvement of this quarter sequentially over the first quarter, which was rather significant, right? From the minus 3.6% in 1Q to the minus 0.2%, or getting close to flat. So it really was meant to comment on that.

Okay, no, that makes sense. And then I guess, then can you elaborate further on what gives you the confidence in the ability to deliver the implied up 2% comp for the back half of the year in light of that comment?

Yes. Thanks, Mary. Okay, I think there's a couple of things. Whilst I'm very impressed with our team going from 6% to 40% on suggestive selling, there's still another 60% opportunity. So that one I think, is something that costs no money other than a commitment to execute flawlessly. The next very important one, which is as Brandon gets his sea legs and his ability to tell the Potbelly story in a way that differentiates the brand, if you have a look at any one of our social platforms, Instagram, you can actually see the progression of how we've started to capture that voice and I'm very excited about the sort of Internet culture and how we apply that to our brand.

The menu optimization project that I just mentioned, absolutely converts into maximizing both traffic and profitability. Very shortly, we will celebrate our 1,000,000th Perk download and our ability to segment that ever increasingly important and growing database where we can send segmented offers to our members as they display various different characteristics. The off-premise initiative of both delivery and catering is very important. We're getting good traction. There's functionality on the app that is coming onboard, which allows us to dynamically suggestive sell rather than waiting for an individual in the shop to recommend an item. So a very big opportunity for us is our beverage attachment rate. We have one of the lowest attachment rates probably in the industry and we plan to change that.

And then lastly, and very importantly, I spoke about our investment in technology, right? And there's functionality coming down the pipe very shortly that will allow us, for the first time as a brand, to actually send out SMS and push notifications. We know from all of our previous experience that those things work. So that's a quick summary of some of the things that are coming up that make me optimistic but at the same time, I've told the team be patient, do the right thing for the business and let's be sort of nicely balanced with our short and long-term thinking. Even if it takes a little bit longer to get the right result, I'd rather get the right result than just go fast and then you have all this nonsense of boom and bust. Consistency and predictability, that's what I'm after.

Our next question comes from Gregory Francfort of Bank of America.

I got a few. Just, did you give the traffic and the check breakdown in the quarter? I may have missed it.

No, we didn't give it yet. I'll break it down for you. So we did say that the check was 3.3% so the math on that would be, the traffic was down 3.5% and the check breakdown is -- of that 3.3%, is 2 points of price and 1.3% of mix.

Good. And then just -- I think, Alan, I think you made a comment on the upsell, that you're doing upsell 40% of the time versus I can't remember what the number was before. How are you measuring that? And is that the number of times your register attendant is bringing it up? Or is that sort of what you're seeing in attach rates? And then is the beverage attach rate starting to move with that upsell? Or is it sides or chips or what are you starting to see in terms of the change in the business?

Yes. So let me repeat what was in the prepared remarks. When I first joined, we were suggestive selling about 6% of the time and now we consistently achieve above 40%. The way we track that interestingly enough, is actually we have an online customer survey where the customer goes home or goes on their phone with their receipt and fills out the survey. And one of the questions there that is asked is, were you recommended bacon and various different questions like that. So it's the consumer's recollection of the experience that they had in the shop.

But as Mike shared with you, we've seen significant growth in our average transaction. And if you look at the component parts of that, a lot of it is the add-ons, the things that are natural upsells like avocado and bacon. And yes, there is good news on the beverage attachment rate, is we are all starting to see some traction there although that is slow progress because we've -- well, actually, it's pretty good progress because we've only just started to sort of make changes in that area and expect it to be an even better attachment as we move to combos and bundles that seem to work everywhere else. And one of the tests, on the many optimization tests that I made reference to happening next month, will actually have bundles in their tests. So we'll see how well they translate.

And maybe how far away through that menu optimization process are you? And I think you said you're rolling it out to 60 shops? And how long do you expect this process to take? I mean, theoretically, it's an ongoing process, but in terms of showing up in the business?

Yes. Well, we'll get an instant read for the 60 shops because we'll actually be taking customers through retina scanning where they'll wear a pair of goggles and look at the -- they will be able to sort of look at the various different designs because at the end of the day, they shouldn't do anything that Alan Johnson says, if the customer finds it more shoppable, if they look in one area but select an item on the menu that they didn't even look at, then that tells us a lot.

I'll give you a very good example just anecdotally, in terms of the change, the sort of full manifestation of this project doesn't come until we've combined both the art and the science. So I think the complete redesign of the menu will happen in 2019. But I'll give you one good reference point. Right now, if you look at the center panel of the Potbelly menu where it has all the sandwiches, believe it or not, if you took the time to count up the number of prices there, there's about 55 price points in that center panel.

And I'm looking at one of the tests in front of me that will be rolled out and we've taken that 55 price points down to 10. Instantly, that makes it so much more shoppable. You get all these sandwiches for 1 price point. So that's a very good example of we'll be able to see how the consumer not only uses that menu but then you'll also see that for the first time on our fixed menu inside the shop, there will be add-ons where you can do sort of things like add chips and a fountain drink for x, add chips and a shake or add various different upgrades and very easily see what you get for the price.

Got it. Okay, that makes sense. And then I just had 2 other quick questions. The first is in terms of the full year comp guide and then what's implied in the back end, like, I think it suggests you guys would do something like 2% in the back half on comps. And is that sort of what you're trying to suggest? Or kind of is the flat that you're giving for the full year sort of more of a directional sort of frame of reference for the guidance for the back half?

Yes, I guess, I'd start by saying at the beginning of the year, we gave guidance on multiple elements and I think that saying flat or flattish has got a little bit of range around it. But we're still sticking with that guidance. I would say that to Mary's earlier question, we talked about the trajectory. We've really been in kind of this flattish world, to be perfectly honest, for a few months now. I could point to incremental improvement as the quarter progress and including where we're at through the third quarter. So far, we've finished up July and really, in that same range.

But it's really given all the things that analysts pointed out. We have many, many things going on in this back half of the year that we're optimistic about. And so we didn't want to move off that guidance at this point because we have that optimism and we'll have the opportunity in 3 months from now to give you guys another update as to, as Alan pointed out, the things that work and don't work and where we were successful at failing fast and we'll update from there. So I would say it's guidance just like any other guidance and we're going to hold to that and we'll see how the next 3 months play out with all of the initiatives that Alan laid out.

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

Yes, so one quick question about your cost -- food cost inflation outlook. Has that changed at all for this year and can you provide any insight where you think costs may be headed going into early 2019?

Yes, we haven't said too much about into '19. But once again, we feel terrific about where our food costs sit right now, where they will be for the rest of this year. We're over 80% locked now, Steve, on our food basket. So we really, kind of knock wood, we feel really good about the cost of goods.

And with regard to your share count, in light of the share buyback program that you announced last quarter, can you provide any insight as to where you think the average count should be for this year for modeling purposes?

We haven't forecasted out or guided in the past on the share count. I think what I would point out, because we're a little bit higher than where we were and a little bit higher where -- than a lot of you all would have modeled. I want to remind folks, we really weren't active with the repurchase plan for most of the first part of this year. We put the new plan in place and started executing in, I believe, it was mid-May. So at best, we had half a quarter's worth. So we'll be much more consistent and intend to be more active than we've been before. But that's all I'd say at this point.

(Operator Instructions) Our next question comes from Gregory Francfort of Bank of America.

I just had 1 follow-up, sort of a theme or topic, just a question for Alan and then a question for Mike. Just, Alan, as you've built out your team over the past few months, are there any holes that you still see in terms of capabilities for the management team? And sort of -- or maybe is there any areas you need to fill?

And then Mike, the other question and it's kind of tied in but also somewhat separate is just as unit growth for the business has slowed, do you see an opportunity to tighten down that G&A as a percent of sales? Or is what you're sort of planning to do with the structure more of an allocation of G&A kind of within your organization? And maybe where does that go if there is an opportunity?

Yes, so why don't I kick it off and answer your first question, Gregory, regarding the senior leadership team. Look, I'm very happy with where we are. I've got now a nice blend of folks that have been here 3 to 10 years each in Mike, Matt, Julie and Maryann. So they'll keep me honest. They've got good institutional memory about what we've done in the past and I've really appreciated the counsel that they've given me and the guidance that they've given me over this transition period.

The rest of the team, you know, are assimilating. Just because we've hired new people doesn't mean -- it doesn't require effort to work together and challenge each other in the right way. And so far, I'm delighted with how everybody is contributing towards the goals that we have set for ourselves and the focus that we have. So the conversation is rich. It's certainly passionate and I think it's safe to say that I held off even though I signaled early in my tenure that we'd be investing in the marketing group and I held off filling positions in that until such time as Brandon came in. And so he's here now, he's formulating his own opinion as to what we need as we roll out and figure out how to tell the Potbelly story. So in due course, he will take care of all of that.

We will probably not publicly make a big song and dance about this, but we haven't had a creative director for, I don't know, well over, I think, a year. And we signed up someone that we're very excited about this week. So God willing, he starts I think on the 20th of this month. So other than that, the field is relatively stable and yes, I think those are the big changes. Now we've just got to figure out how to work together and deliver on the promise of maximizing shareholder value.

Terrific and if I could then jump in. I think that I would just borrow some of Alan's words from both this set of prepared remarks as well as the last call, which is we are going to be very vigilant around finding opportunities to save or to become more productive in many ways. And Alan mentioned a couple of things specifically on this call, it's everything from making Jeff do 2 jobs, right, which makes perfect sense to us in terms of development, not just the franchise side but the on-site, to take Mr. Revord and have him do 2 jobs.

And that's really just the start of what we've been doing to try to find savings on the G&A line but we've also been very clear for Alan's entire tenure here that mostly, what we're looking to do is to reallocate that spend into what Alan just talked about, right, to fund those areas that will drive -- that are most closely linked to driving traffic and driving sales. So I would say, I wouldn't anticipate significant improvement in that G&A line in the near term because of exactly that.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Alan Johnson for closing remarks.

Okay, thank you very much. I'd like to thank everybody on the call for showing the interest in our turnaround, and I look forward to giving an update at the next earnings call. Take care, everybody. Thank you. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.