Potbelly’s third-quarter results triggered a six-month high for its stock price after exceeding analysts’ expectations. Though revenue fell 4.7% year-over-year and company-operated same-store sales fell by -1.8%, profit margins expanded, and developments accelerated.
The chain has also found the sweet spot amid a heavy value environment, according to chief executive officer Bob Wright. Its $7.99 everyday value combo was expanded in late July, for instance, to include a turkey, ham, or chicken Skinny sandwich with chips and a drink.
“It did exactly what we intended – driving value perception, likelihood to return, and increased frequency,” Wright said during the company’s earnings call Thursday. “What we’re not doing, and that others are doing quite a bit, is deep discounts on core menu items. That’s dangerous because it can damage the brand and it’s expensive from a margin perspective. It’s a bumpy time, but we’re pleased with our balance.”
Potbelly executives don’t think the “bumpiness” of the consumer will change much in the near term, so the company is targeting in-store traffic – through offerings like the $7.99 combo meal – and working to then move those customers into its digital channels.
“One of the main things we’re trying to do with the $7.99 combos is create value appeal for our customers who tend to be less frequent, less digital, and more in-shop customers. Research suggests we’re enjoying the success we tested,” Wright said. “It’s important to understand how that works in conjunction with digital. Those $7.99 customers give us higher scores on value and likelihood to return. We bring them in through our everyday program and then up through our digital frequency channels. (That’s) how we want to keep building the business.”
Potbelly’s menu innovations are also filling gaps identified on the menu, including spicy flavor profiles, sauces, and “heartier proteins.” To address those gaps, the chain is adding two new signature sandwiches next week, as well as two new proprietary sauces. These are aimed at giving customers more reasons to visit and an ability to better customize their experience, Wright said.
Potbelly also recently added non-carbonated Craft Refreshers in partnership with Tractor Beverage, which are driving additional beverage incidence rates.
Notably, Potbelly’s comp sales and traffic numbers improved throughout the third quarter and into the fourth quarter with the help of these menu innovations.
Development acceleration
Additionally, Potbelly opened eight new shops during the quarter, and currently has 695 open or committed between 33 franchise groups. Wright said despite weather-related short-term impact to some development timelines, 2024 is shaping up to be the chain’s best unit growth year since 2017.
“We anticipate growth to further accelerate from here,” he said. “Our new shops are performing well. We believe that’s a sign that our planning and real estate systems are working. We’re just getting started.”
On Friday, Potbelly announced the completion of six new multi-unit agreements representing a total of 32 shops and part of the chain’s long-term goal of reaching 2,000 locations. There are currently more than 425 shops in the United States.
Potbelly Q3 by the numbers
- Average weekly sales decreased 1.3% to $24,870 compared to $25,190 during Q3 2023
- Total revenues decreased by 4.7% to $115.1 million compared to $120.8 million
- Company-operated sandwich shop sales, net decreased $7.6 million or 6.4% driven by the short-term impact of last year’s refranchising, which included the sale of 26 company shops since Q2 2023.
- Franchise royalties, fees and rent income increased $1.9 million or 79.2% driven by a 30% increase in franchised units.
- Company-operated same-store sales in the third quarter decreased 1.8%.
- During the third quarter, the company opened eight shops, bringing the total number of new shops to 15 by the end of the third quarter and two additional locations so far during the fourth quarter of 2024. The company now expects to open 9 to 11 total units in the fourth quarter for a total of 24 to 26 shops for the year as Hurricanes Helene and Milton impacted some of its Florida franchisees’ ability to open units in the short term.
Contact Alicia Kelso at [email protected]
