Potbelly Corporation Reports Results for Third Fiscal Quarter 2017

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| Source: Potbelly Sandwich Works, LLC

CHICAGO, Nov. 03, 2017 (GLOBE NEWSWIRE) -- Potbelly Corporation (NASDAQ:PBPB) today reported financial results for the third fiscal quarter ended September 24, 2017.

Key highlights for the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016 include:

  • Total revenues increased 2.3% to $106.1 million from $103.8 million.
  • Company-operated comparable store sales decreased 4.8%.
  • Eight new shops opened, including two franchised shops and six company-operated shops.
  • GAAP net loss attributable to Potbelly Corporation was $0.2 million, inclusive of a $1.5 million impairment charge compared to net income of $1.8 million, inclusive of a $1.9 million impairment charge. GAAP diluted loss per share was $0.01 compared to diluted EPS of $0.07.
  • Adjusted net income1 attributable to Potbelly Corporation decreased 37.5% to $1.9 million from adjusted net income of $3.0 million. Adjusted diluted EPS decreased 41.7% to $0.07 from $0.12.
  • EBITDA1 decreased 33.4% to $5.6 million from $8.4 million.
  • Adjusted EBITDA1 decreased 13.5% to $9.6 million from $11.1 million.

Key highlights for the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016 include:

  • Total revenues increased 3.7% to $316.0 million from $304.8 million.
  • Company-operated comparable store sales decreased 4.3%.
  • Thirty-five new shops opened, including thirteen franchised shops and twenty-two company-operated shops.
  • GAAP net income attributable to Potbelly Corporation decreased 95.1% to $0.3 million, inclusive of a $5.8 million impairment charge compared to net income of $6.3 million, inclusive of a $2.9 million impairment charge. GAAP diluted EPS decreased 95.8% to $0.01 from $0.24.
  • Adjusted net income1 attributable to Potbelly Corporation decreased 27.3% to $5.9 million from adjusted net income of $8.1 million. Adjusted diluted EPS decreased 25.8% to $0.23 from $0.31.
  • EBITDA1 decreased 27.6% to $19.6 million from $27.1 million.
  • Adjusted EBITDA1 decreased 5.0% to $30.6 million from $32.2 million.

Mike Coyne, Chief Financial Officer and interim Chief Executive Officer of Potbelly Corporation, commented, "During the third quarter, we generated revenue of $106 million, an increase of 2%, driven by new unit growth, offset by the impact of our comparable store sales, which decreased 4.8%. We continue to operate in a challenging environment, and we remain focused on driving initiatives designed to improve traffic and grow sales in the near term, while managing costs and optimizing our capital spend. We are encouraged by the progress we have made with our near-term initiatives and with our ongoing strategic review. We believe our strategic initiatives will leave the Potbelly brand well-positioned to deliver sustainable shareholder value creation over the long term.”

2017 Outlook

For the full fiscal year of 2017, management currently expects:

  • 45-50 total new shop openings, including 30-35 company-operated shop openings;
  • A mid-single digit decrease in company-operated comparable store sales;
  • An effective tax rate to range from 36% to 38%, excluding the impact of Accounting Standard Update 2016-09 Compensation-Stock Compensation, which could significantly impact our tax rate for 2017;
  • Full year adjusted diluted earnings per share at the lower end of the range of $0.30 to $0.33, excluding the income tax impact of Accounting Standard Update 2016-09 Compensation-Stock Compensation, which could significantly impact our earnings per share;
  • Comparable categories of adjustments to net income as discussed in the “Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures.”

Projected adjusted diluted earnings per share set forth above are measures not recognized under GAAP. Please see “Non-GAAP Financial Measures” below.

Conference Call

A conference call and audio webcast has been scheduled for 8:00 a.m. Eastern Time today to discuss these results. Details of the conference call are as follows:

   
Date: Friday, November 3, 2017                                                                                                                                                                                                 
Time: 8:00 a.m. Eastern Time
Dial-In #: 877-407-0784 U.S. & Canada
  201-689-8560 International
Confirmation code: 13672309

Alternatively, the conference call will be webcast at www.potbelly.com on the “Investor Relations” webpage. For those unable to participate, an audio replay will be available from 11:00 a.m. Eastern Time on Friday, November 3, 2017 through midnight Friday, November 10, 2017. To access the replay, please call 844-512-2921 (U.S. & Canada) or 412-317-6671 (International) and enter confirmation code 13672309. A web-based archive of the conference call will also be available at the above website.

About Potbelly

Potbelly Corporation is a fast-growing neighborhood sandwich concept offering toasty warm sandwiches, signature salads and other fresh menu items served by engaging people in an environment that reflects the Potbelly brand. Our Vision is for our customers to feel that we are their “Neighborhood Sandwich Shop” and to tell others about their great experience. Our Mission is to make people really happy and to improve every day. Our Passion is to be “The Best Place for Lunch.” The Company owns and operates over 400 shops in the United States and our franchisees operate over 50 shops domestically, in the Middle East, the United Kingdom and Canada. For more information, please visit our website at www.potbelly.com.

Definitions

The following definitions apply to these terms as used throughout this press release:

  • Revenues – represents net company-operated sandwich shop sales and our franchise operations. Net company-operated shop sales consist of food and beverage sales, net of promotional allowances and employee meals. Franchise royalties and fees consist of an initial franchise fee, a franchise development agreement fee and royalty income from the franchisee.
  • Company-operated comparable store sales – represents the change in year-over-year sales for the comparable company-operated store base open for 15 months or longer.
  • EBITDA – represents net income before depreciation and amortization expense, interest expense and the provision for income taxes.
  • Adjusted EBITDA – represents net income before depreciation and amortization expense, interest expense and the provision for income taxes, adjusted to eliminate the impact of other items, including certain non-cash as well as other items that we do not consider representative of our ongoing operating performance.
  • Adjusted net income – represents net income, excluding impairment, gain or loss on the disposal of property and equipment and store closure expense, as well as other items that we do not consider representative of our ongoing operating performance.
  • Shop-level profit – represents income from operations less franchise royalties and fees, general and administrative expenses, depreciation expense, pre-opening costs and impairment and loss on the disposal of property and equipment.
  • Shop-level profit margin – represents shop-level profit expressed as a percentage of net company-operated sandwich shop sales.
  • Adjusted diluted earnings per share – represents net income, excluding impairment, gain or loss on the disposal of property and equipment and store closure expense on a fully diluted per share basis as well as other items that we do not consider representative of our ongoing operating performance.

1Non-GAAP Financial Measures

We prepare our financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”). Within this press release, we make reference to EBITDA, adjusted EBITDA, adjusted net income, shop-level profit and shop-level profit margin, which are non-GAAP financial measures. The Company includes these non-GAAP financial measures because management believes they are useful to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision making. Beginning in the first quarter of 2017, the Company modified its definition of adjusted EBITDA to eliminate the adjustments of pre-opening and public company costs from its definition.  The Company believes these refinements improve the usefulness and comparability of adjusted EBITDA. Prior period adjusted EBITDA financial measures have been restated to reflect this change within this press release.  

Management uses adjusted EBITDA and adjusted net income to evaluate the Company’s performance and in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter. Adjusted EBITDA and adjusted net income exclude the impact of certain non-cash charges and other special items that affect the comparability of results in past quarters. Management uses shop-level profit and shop-level profit margin as key metrics to evaluate the profitability of incremental sales at our shops, to evaluate our shop performance across periods and to evaluate our shop financial performance against our competitors.

Accordingly, the Company believes the presentation of these non-GAAP financial measures, when used in conjunction with GAAP financial measures, is a useful financial analysis tool that can assist investors in assessing the Company’s operating performance and underlying prospects. This analysis should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. This analysis, as well as the other information in this press release, should be read in conjunction with the Company’s financial statements and footnotes contained in the documents that the Company files with the U.S. Securities and Exchange Commission. The non-GAAP financial measures used by the Company in this press release may be different from the methods used by other companies. For more information on the non-GAAP financial measures, please refer to the table, “Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures.”

This press release includes certain non-GAAP forward-looking information (including, but not limited to under the heading “2017 Outlook”), namely adjusted net income and adjusted diluted earnings per share. The Company believes that a quantitative reconciliation of such forward-looking information to the most comparable financial measure calculated and presented in accordance with GAAP cannot be made available without unreasonable efforts. A reconciliation of these non-GAAP financial measures would require the Company to predict the timing and likelihood of outcomes that determine future impairments and the tax benefit of any such future impairments. Neither of these measures, nor their probable significance, can be reliably quantified due to the inability to forecast future impairments.

Forward-Looking Statements

Except for the historical information contained in this press release, the matters addressed are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, written, oral or otherwise made, represent the Company’s expectation or belief concerning future events. Without limiting the foregoing, the words “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “strives,” “goal,” “estimates,” “forecasts,” “projects” or “anticipates” and similar expressions are intended to identify forward-looking statements. By nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or implied by the forward-looking statement. Forward-looking statements are based on current expectations and assumptions and currently available data and are neither predictions nor guarantees of future events or performance. You should not place undue reliance on forward-looking statements, which speak only as of the date hereof. See “Risk Factors” and “Cautionary Statement on Forward-Looking Statements” included in our most recent annual report on Form 10-K and other risk factors described from time to time in subsequent quarterly reports on Form 10-Q, all of which are available on our website at www.potbelly.com.


Investor Relations                        
Investors@Potbelly.com
312-428-2950


Potbelly Corporation
Consolidated Statements of Operations and Margin Analysis – Unaudited
(Amounts in thousands, except share and per share data)
  
   
  For the 13 Weeks Ended  For the 39 Weeks Ended  
  September 24,  % of  September 25,  % of  September 24,  % of  September 25,  % of  
  2017  Revenue  2016  Revenue  2017  Revenue  2016  Revenue  
Revenues                                 
Sandwich shop sales, net $105,327   99.2% $103,224   99.5% $313,568   99.2% $303,116   99.5% 
Franchise royalties and fees  800   0.8   558   0.5   2,394   0.8   1,657   0.5  
Total revenues  106,127   100.0   103,782   100.0   315,962   100.0   304,773   100.0  
                                  
Expenses                                 
Sandwich shop operating expenses                                 
Cost of goods sold, excluding depreciation  28,405   26.8   28,478   27.4   83,703   26.5   83,224   27.3  
Labor and related expenses  31,187   29.4   30,163   29.1   93,213   29.5   88,260   29.0  
Occupancy expenses  14,354   13.5   13,111   12.6   42,792   13.5   39,042   12.8  
Other operating expenses  12,464   11.7   11,338   10.9   36,349   11.5   32,570   10.7  
General and administrative expenses  12,104   11.4   9,999   9.6   33,375   10.6   30,827   10.1  
Depreciation expense  6,315   6.0   5,656   5.4   18,960   6.0   16,996   5.6  
Pre-opening costs  336   0.3   340   0.3   955   0.3   731   0.2  
Impairment and loss on disposal of property and equipment  1,536   1.4   1,855   1.8   5,762   1.8   2,880   0.9  
Total expenses  106,701   100.5   100,940   97.3   315,109   99.7   294,530   96.6  
Income (loss) from operations  (574)  (0.5)  2,842   2.7   853   0.3   10,243   3.4  
                                  
Interest expense  32  *   33  *   101  *   102  *  
Income (loss) before income taxes  (606)  (0.6)  2,809   2.7   752   0.2   10,141   3.3  
Income tax expense (benefit)  (487)  (0.5)  960   0.9   252  *   3,732   1.2  
Net income (loss)  (119) *   1,849   1.8   500   0.2   6,409   2.1  
Net income attributable to non-controlling interest  121   0.1   54  *   195  *   153  *  
Net income (loss) attributable to Potbelly Corporation $(240)  (0.2)% $1,795   1.7% $305  *  $6,256   2.1% 
                                  
                                  
Net income (loss) per common share attributable to common shareholders:                                 
Basic $(0.01)     $0.07      $0.01      $0.24      
Diluted $(0.01)     $0.07      $0.01      $0.24      
Weighted average common shares outstanding:                                 
Basic  24,959,023       25,240,374       25,030,951       25,772,846      
Diluted  24,959,023       25,829,970       25,857,083       26,341,913      

_________________
*       Amount is less than 0.1%


Potbelly Corporation
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures – Unaudited
(Amounts in thousands, except share and per share data)
  
   
  For the 13 Weeks Ended  For the 39 Weeks Ended  
  September 24,  September 25,  September 24,  September 25,  
  2017  2016  2017  2016  
Net income (loss) attributable to Potbelly Corporation, as reported $(240) $1,795  $305  $6,256  
Impairment, loss on disposal of property and equipment, and closures(1)  2,016   1,869   6,392   2,897  
CEO transition costs(2)  1,219      2,193     
Tax impact(3)  (1,129)  (677)  (3,007)  (1,066) 
Adjusted net income attributable to Potbelly Corporation $1,866  $2,987  $5,883  $8,087  
                  
Net income (loss) attributable to Potbelly Corporation per share, basic $(0.01) $0.07  $0.01  $0.24  
Net income (loss) attributable to Potbelly Corporation per share, diluted $(0.01) $0.07  $0.01  $0.24  
                  
Adjusted net income attributable to Potbelly Corporation per share, basic $0.07  $0.12  $0.24  $0.31  
Adjusted net income attributable to Potbelly Corporation per share, diluted $0.07  $0.12  $0.23  $0.31  
                  
Shares used in computing adjusted net income attributable to Potbelly Corporation:                 
Basic  24,959,023   25,240,374   25,030,951   25,772,846  
Diluted  25,608,065   25,829,970   25,857,083   26,341,913  


  For the 13 Weeks Ended  For the 39 Weeks Ended  
  September 24,  September 25,  September 24,  September 25,  
  2017  2016  2017  2016  
Net income (loss) attributable to Potbelly Corporation, as reported $(240) $1,795  $305  $6,256  
Depreciation expense  6,315   5,656   18,960   16,996  
Interest expense  32   33   101   102  
Income tax expense (benefit)  (487)  960   252   3,732  
EBITDA $5,620  $8,444  $19,618  $27,086  
Impairment, loss on disposal of property and equipment, and closures(1)  2,016   1,869   6,392   2,897  
Stock-based compensation  759   800   2,435   2,266  
CEO transition costs(2)  1,219      2,193     
Adjusted EBITDA $9,614  $11,113  $30,638  $32,249  


Potbelly Corporation
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures – Unaudited
(Amounts in thousands, except selected operating data)
  
   
   For the 13 Weeks Ended  For the 39 Weeks Ended  
  September 24,  September 25,  September 24,  September 25,  
  2017  2016  2017  2016  
Income (loss) from operations $(574) $2,842  $853  $10,243  
Less: Franchise royalties and fees  800   558   2,394   1,657  
General and administrative expenses  12,104   9,999   33,375   30,827  
Depreciation expense  6,315   5,656   18,960   16,996  
Pre-opening costs  336   340   955   731  
Impairment and loss on disposal of property and equipment  1,536   1,855   5,762   2,880  
Shop-level profit [Y] $18,917  $20,134  $57,511  $60,020  
Total revenues $106,127  $103,782  $315,962  $304,773  
Less: Franchise royalties and fees  800   558   2,394   1,657  
Sandwich shop sales, net [X] $105,327  $103,224  $313,568  $303,116  
Shop-level profit margin [Y÷X]  18.0%  19.5%  18.3%  19.8% 


   For the 13 Weeks Ended  For the 39 Weeks Ended  
  September 24, September 25,  September 24, September 25,  
  2017  2016   2017  2016   
Selected Operating Data             
Shop Activity:             
Company-operated shops, end of period 426  387   426  387   
Franchise shops, end of period 56  41   56  41   
Revenue Data:             
Company-operated comparable store sales (4.8)%  0.6%  (4.3)%  1.9%  

Footnotes to the Press Release, Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
& Selected Operating Data

(1)     This adjustment includes costs related to impairment of long-lived assets, loss on disposal of property and equipment and shop closure expenses. Shop closure expenses are recorded in general and administrative expenses in the consolidated statement of operations.
(2)      As a result of the departure of the former CEO, the Company incurred certain costs related to the transition. Transition costs were included in general and administrative expenses in the condensed consolidated statements of operations and were related to the accelerated vesting of share-based compensation awards, salary related charges in accordance with the former CEO’s employment agreement and various other transition costs.
(3)      For the thirteen weeks ended September 24, 2017 and September 25, 2016, the tax impact associated with impairment and
closures is based on effective tax rates of 34.9% and 36.2%, respectively. For the thirty-nine weeks ended September 24, 2017 and September 25, 2016, the tax impact associated with impairment and closures is based on effective tax rates of 35.0% and
36.8%, respectively.