Executives at Chicago-based Potbelly Corp. reported during the brand’s third-quarter earnings call that they were pleased with the first period in which Potbelly operated as a publicly traded company and that they were optimistic the brand could deliver on its growth targets over the near term.

“We compete in the fast-casual category and the sandwich category. At the intersection of those two spaces, we think the concept has a lot of room to grow,” chairman and chief executive Aylwin Lewis said.

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For the Sept. 29-ended third quarter, Potbelly’s adjusted net income grew 26.7 percent, excluding the impact of a major dividend payment that was part of its initial public offering in October.

Despite slightly negative traffic, the brand of 307 restaurants reported a 2.5-percent increase in same-store sales at its 288 company-operated stores. During the quarter, Potbelly opened eight corporate restaurants and one franchised unit, and the chain is projecting between 40 and 42 total openings for fiscal 2013.

In the next year, Potbelly projects 35 to 40 company-owned restaurant openings and expects 60 percent of its new units to be built in legacy markets like Chicago and Washington, D.C., and 40 percent in new “hub” cities they entered more recently, like Seattle, Boston, New York City and Phoenix.

Stalled traffic not a roadblock

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Lewis and chief financial officer Charlie Talbot reiterated during the earnings call that all of Potbelly’s long-term targets, like 10-percent annual unit growth and maintaining restaurant-level margins of at least 20 percent, are predicated on same-store sales growth in the low single digits like the most recent 2.5-percent increase.

“Our mind-set is around low-single-digit comps, and there are some years where that will be traffic-driven and some years where that’s check-driven,” Talbot said. “We could make excuses, we could talk about the economic environment, but the reality is we delivered 2.5-percent growth, and that helped us with the model.”

During the third quarter, same-store traffic was slightly negative, though Potbelly did benefit from a lift in average check resulting from positive sales mix to higher-priced items like the Toasty Turkey BLT limited-time offer, as well as a 2-percent price increase taken in the first quarter of this year.

The brand’s current limited-time offer of the Pizza Sandwich is expected to have the same positive effect on average check because it is the same price point as the Toasty Turkey BLT, Lewis said. However, it has a lower cost of goods sold than the previous BLT offering, which featured a more expensive bacon ingredient.

Though Potbelly already drives a significant portion of its sales at lunchtime, the brand will keep focusing on growing that daypart through investments to increase throughput, according to executives. “We’ll use staffing levels, new equipment and technology to help us with throughput,” Lewis said. “Our mission is, No. 1, we win by winning at lunch. We’ll fish where the customers are biting, and we’ll continue to focus on throughput during that period of time. It’s essential for us.”

By the end of next year, Potbelly is on pace to have rolled out faster sandwich ovens to all its stores, Lewis added.

Slowdown via government shutdown

For the fourth quarter, Potbelly is projecting a slight decrease in same-store sales, to a reported range between negative 1.2 percent to negative 0.5 percent. Talbot said much of that has to do with a calendar shift that resulted in a 53rd operating week in 2012, and excluding that impact would yield adjusted same-store sales increases in a range between 1.4 percent and 1.7 percent.

“We also had this little thing called a government shutdown,” Lewis added, noting that it negatively impacted sales in one of Potbelly’s biggest trade areas: the District of Columbia and suburbs in Virginia and Maryland. In all, the government shutdown will drag fourth-quarter same-store sales down 0.3 percent to 0.5 percent, Lewis estimated.

“Obviously, it was unplanned, but literally in those situations there’s nothing you can do,” Lewis said. “We kept the shops open and ran them as tight as possible, but the folks who came in — we wanted to give them good service. Two weeks [of the shutdown] were not onerous; a month would’ve been very tough.”

Potbelly’s 288 company-owned units operate in 18 states and the District of Columbia. Franchisees operate an additional seven domestic units and 12 restaurants in the Middle East.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN