Potbelly Corporation (PBPB) Q4 2022 Earnings Call Transcript

Potbelly Corporation (NASDAQ:PBPB) Q4 2022 Earnings Conference Call March 2, 2023 5:00 PM ET

Company Participants

Adiya Dixon - Senior Vice President and Chief Legal Officer and Secretary

Bob Wright - President and Chief Executive Officer

Steve Cirulis - Senior Vice President, Chief Financial Officer, Chief Strategy Officer

Lisa Fortuna - Investor Relations, Alpha IR Group

Conference Call Participants

Matt Curtis - William Blair

Operator

Welcome to the Potbelly Corporation Fourth Quarter and Full Year Fiscal 2022 Results Conference Call. All participants volition beryllium successful a listen-only mode. [Operator Instructions] Please enactment this lawsuit is being recorded.

I'd present similar to crook the league implicit to Adiya Dixon, Chief Legal Officer and Secretary. Please spell ahead.

Adiya Dixon

Good afternoon, everyone, and invited to our 4th fourth and afloat twelvemonth 2022 net call. Our presenters contiguous are Bob Wright, our President and Chief Executive Officer; and Steve Cirulis, our Senior Vice President and Chief Financial Officer. Please enactment that we person provided a acceptable of PowerPoint slides that volition travel our prepared remarks. You whitethorn entree these slides connected the Investor Relations conception of our website. After our prepared remarks, we'll unfastened the telephone for your questions.

I'd similar to telephone your attraction to our cautionary statements connected Slide 2, and enactment that definite comments made successful this telephone volition incorporate forward-looking statements regarding aboriginal events oregon the aboriginal fiscal show of the company. Any specified statements including our outlook for 2023 oregon immoderate different aboriginal periods, should beryllium considered forward-looking statements wrong the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of aboriginal show nor should they beryllium relied upon arsenic representing management's views arsenic of immoderate consequent date. Forward-looking statements impact important risks and uncertainties and events oregon results could disagree materially from those presented owed to a fig of risks and uncertainties.

Additional elaborate accusation concerning these risks regarding our concern and the factors that could origin existent results to disagree materially from the forward-looking statements and different accusation that volition beryllium fixed contiguous tin beryllium recovered successful our Form 10-K nether the headings Risk Factors and MD&A and successful our consequent filings with the Securities and Exchange Commission which are disposable astatine sec.gov.

During the call, determination volition besides beryllium a treatment of immoderate items that bash not conform to U.S. mostly accepted accounting principles oregon GAAP. Reconciliations of these non-GAAP measures to their astir straight comparable GAAP measures are included successful the appendix to the capitalist presumption and property merchandise issued this day some of which are disposable successful the Investors tab of our website.

I'll present crook the telephone implicit to Bob.

Bob Wright

Thank you. Adiya. Good day and convey you for joining america today. Before we sermon the 4th and year, arsenic always, I'd similar to statesman by thanking our Potbelly squad members for their continued hard enactment and loyalty to our brand. Our dedicated radical provided differentiated, welcoming and bully vibes eating acquisition for our customers, which allowed america to summation continued momentum successful some the 4th and the year. I'll statesman connected descent 3 with our cardinal successes successful 2022. First, fto maine accidental however precise arrogant I americium of our squad and our results successful 2022. I'm peculiarly impressed with our wide show and momentum erstwhile considering the lingering staffing challenges, the interaction of Omicron connected Q1, persistent proviso concatenation issues, and the ongoing inflationary unit connected our consumers and our business.

We drove beardown show crossed our portfolio of store types, with notable acceleration successful Suburban, CBD and Airport locations. The beardown betterment of CBD and airdrome shops with CBD's nearing pre-pandemic levels, has served arsenic a postulation driven tailwind for the business, and we expect to bask continued maturation portfolio wide successful 2023. Additionally, we prioritize improving operational efficiencies successful 2022, which included the implementation of a streamlined grooming programme set, refinement of however we unit our shops with the assistance of our hours based Labor Guide and integer tipping. We besides expanded the investigating and implementation of Potbelly Digital Kitchen, oregon PDK arsenic we telephone it, which supports bid accuracy, velocity of work and throughput. And astir importantly, I'm blessed to study our customers person validated our operations absorption arsenic we achieved a notable betterment successful lawsuit restitution scores compared to erstwhile years. We besides strengthened engagement with our customers done our strategical selling initiatives, including targeted integer advertising, peculiar offerings and our refined perks loyalty program. We've experienced large occurrence with our LTO promotions, which included astatine slightest 1 craveable sandwich, cooky oregon shingle each quarter. These focused selling efforts led to a continued spot successful integer engagement, beardown postulation and lawsuit excitement.

Finally, we made important advancement towards our franchise focused improvement goals with 51 caller store commitments signed successful the second portion of 2022. Despite the economical unit connected tiny business, including climbing involvement rates, we are precise pleased with the momentum towards becoming a chiefly franchise focused enactment and person a robust and expanding pipeline of highly qualified franchise candidates to enactment this captious maturation initiative. I'll item our franchising advancement aboriginal successful today's call. But archetypal I'd similar to crook to descent 4 to supply a precocious level overview of our fiscal successes successful the 4th fourth and the afloat year.

Performance metrics included. Quarterly gross was $120.2 cardinal and we achieved $452 cardinal for the afloat year, some are each clip records. We drove meaningful store level borderline enlargement for the 4th up 14.2% and finished the twelvemonth with store margins of 10.5%. Same store income maturation came successful astatine 18.9% for the 4th and 18.5% for the year, driven by the aforementioned spot successful postulation combined with operations and selling success. We had a grounds 4th fourth AUVs of $24,144 and grounds AUVs of $22,464 for the year. All this drove affirmative nett income for the 4th and twelvemonth of $2.7 cardinal and $4.3 million, respectively. Notably our 4th fourth show marked our 3rd consecutive 4th of profitability. And lastly, we reported adjusted EBITDA for the twelvemonth of $15.7 million, intelligibly marking the company's beardown fiscal health.

Turning to descent 5, I'd similar to instrumentality you done our selling initiatives and successes for the 4th fourth successful greater detail. Our continued absorption connected strategical selling erstwhile again helped enactment postulation driven income growth. During the quarter, we reported beardown integer engagement, representing 38% of revenue, which, erstwhile combined with our perks loyalty programme activations, meaningfully contributed to our grounds 4th fourth apical enactment results. Our integer engagements were further supported by a operation of integer lone promotions specified arsenic National Cookie Day, Week of Perks, arsenic good arsenic our palmy LTO offerings and promotions, which this 4th included the Pastrami Sandwich and the Eggnog Shake.

Additionally, our catering concern continues to accelerate with targeted offerings for some societal and nonrecreational engagements. As such, our catering levels arsenic a percent of income are accelerated approaching pre-pandemic levels. We judge determination remains tremendous imaginable to exploit further selling opportunities, and we expect these efforts to enactment traffic, further heighten engagement with our customers, and beforehand our unsocial marque position.

With that, I'll present crook the telephone implicit to Steve to item our fiscal show for 2022. Steve?

Steve Cirulis

Thank you, Bob. Good afternoon, everyone. Pleased crook to descent 6 of the presumption wherever I volition item our AUVs and aforesaid store income momentum during 2022, arsenic good arsenic what we've seen successful the archetypal 2 months of 2023. Our concern experienced beardown maturation passim past year, with accordant quarterly betterment aft the Omicron impacted archetypal 4th of 2022. Our AUV maturation stemmed from spot crossed the store portfolio, with notable acceleration successful our CBD airdrome and suburban locations, successful summation to accretive selling initiatives, grounds level engagement done our integer channels, and a resurgence successful our catering business. Additionally, AUVs benefited from strategical pricing actions of astir 13% taken during 2022, mostly mitigating inflationary pressures. We're pleased to study that the momentum successful the 2nd fractional of past twelvemonth has carried into 2023, portion we person experienced much emblematic archetypal 4th seasonality. We recorded AUVs of $22,311 successful January and $23,815 successful February.

Turning to descent 7, I'll locomotion you done our income connection and circumstantial fiscal metrics for the 4th fourth and afloat twelvemonth compared to the anterior twelvemonth period. We achieved beardown fiscal results arsenic we met oregon surpassed our antecedently stated guidance for the 4th fourth and afloat year. During the 4th quarter, full revenues deed an all-time quarterly grounds of $120.2 million, an summation of 17% compared to the anterior year. The summation was driven by postulation gains, beardown betterment successful CBD locations, terms increases that were implemented passim the year, and breakout integer performance. We reported affirmative nett income of $2.7 cardinal for the quarter, compared to a nett nonaccomplishment of $2.5 cardinal successful the anterior twelvemonth period. Adjusted nett income was $2.6 cardinal compared to an adjusted nett nonaccomplishment of $1.6 cardinal successful the 4th fourth of 2021. Fourth 4th adjusted EBITDA was $7.5 million, a greater than 190% summation compared to the twelvemonth agone period.

The summation successful EBITDA resulted from apical enactment leverage, continued betterment successful labour and input cost, and disciplined firm spending. G&A costs successful the 4th fourth were $10.8 million, oregon 9.0% of full revenues, compared to $8.6 million, oregon 8.4% of full gross successful the 4th fourth of 2021. The summation connected some a dollar and percent ground were attributable to compensation costs that included currency and banal compensation, bonus accrual, and immoderate nonrecreational fees. Food, beverage and packaging costs, oregon F&P were $34.2 million, oregon 28.7% of store sales, versus $29 million, oregon 28.4% of store income successful the twelvemonth agone period. F&P summation connected an implicit and percent ground was owed to higher volumes arsenic good arsenic meaningfully higher input costs, specifically proteins, breadstuff and insubstantial integrative product, mitigating these inflationary headwinds remains a apical priority. We successfully utilized strategical terms increases, our beardown vendor partnerships, arsenic good arsenic outgo optimization initiatives to mostly offset these headwinds and to proceed delivering the worth and Potbelly experience, we promised to our customers. We expect ostentation to beryllium little impactful successful 2023. Labor expenses were $36.7 million, oregon 30.8% of sales, compared to $33.4 million, oregon 32.8% successful the twelvemonth agone period. The alteration is attributable to the utilization of our Hour Based Labor Guide, which ensures the optimal utilization of our In Shop staff. This usher is besides designed to seizure efficiencies associated with terms increases and different labour redeeming initiatives.

Additionally, this enactment point continues to payment from apical enactment leverage and our tipping diagnostic for In Shop and Digital Orders, which provides our store employees with higher wages of astir $3 an hour. Other operating expenses were $17.9 million, oregon 15.1% of sales, compared to $16.5 million, oregon 16.2% of income successful the twelvemonth agone period. These expenses are impacted by costs that are adaptable to sales, specified arsenic 3rd enactment transportation and recognition paper fees, arsenic good arsenic ostentation related to utilities and immoderate different expenses. The implicit increases were offset by income leverage. Top level margins were 14.2%, a 450 ground points betterment versus the twelvemonth agone play driven by apical enactment leverage arsenic antecedently mentioned, outgo subject and abating inflationary pressures. Our liquidity presumption astatine the extremity of the 4th fourth was $31.4 million, consisting of $15.6 cardinal of currency connected manus positive $15.8 cardinal disposable connected our existing recognition facility. Importantly, I'd similar to item our precocious announced $25 cardinal 5 twelvemonth word loan, which replaced our erstwhile abbreviated word revolver. We are pleased with this agreement, peculiarly considering today's challenging superior markets environment. The caller word indebtedness enhances our fiscal flexibility, allowing america to enactment our mean and agelong word maturation targets. 2022 besides saw america summation afloat forgiveness connected our $10 cardinal PPP indebtedness and implicit our taxation deferred payments nether the CARES Act.

Turning to descent 8 for the afloat twelvemonth 2022. Our full revenues reached a grounds of $452 million, an summation of 19% compared 2021 driven by momentum arsenic we exited, the Omicron impacted Q1 that continued to physique done twelvemonth end. Significant betterment crossed our portfolio, meaningful contributions from our selling initiatives, integer occurrence and continued execution against our 5 pillar strategy. Same store income accrued 18.5%, and we delivered adjusted EBITDA of $15.7 cardinal for the afloat year, an betterment of $15.2 cardinal versus past year. The drivers of our yearly outgo comparisons to 2021 are akin to the Q4 comparisons. We attained coagulated leverage connected a percent of income ground with the higher volumes we achieved successful 2022. G&A was up 10 ground points connected a percent of income ground versus 2021 to 8.4%, oregon $37.7 million. Similar to the quarter, the summation connected an implicit and percent ground was a effect of definite payroll and accrual expenses. Food, beverage and packaging costs for 2022 were $129.2 million, oregon 28.8% of store sales, versus $105 million, oregon 27.8% successful 2021.

The F&P summation connected some an implicit and percent ground was again driven by higher measurement and higher input costs. We proceed to measure our supplier contracts to some negociate costs and support the prime and worth our customers bask and expect. Labor costs for the twelvemonth were $142.1 million, oregon 31.7% of store sales, a 200 ground points driblet versus past year. This alteration was owed to apical enactment leverage and the affirmative interaction of our hours based labour guide, which improved scheduling efficiencies. Labor costs connected an implicit ground accrued owed to higher income volumes and worker wages. Other operating expenses were $74.9 million, oregon 16.7% of store income versus $63.5 cardinal oregon 16.8% of store income successful 2021. The implicit increases were offset by income leverage. Shop level margins were 10.5% for the year, a 310 ground points betterment versus 2021. Similar to the quarterly results, afloat twelvemonth store margins benefited astir importantly from the acceleration successful apical enactment show paired with the moderating inflationary pressures for cardinal inputs and labor.

Now turning to descent 9, you'll spot the breakdown of income by the assorted channels successful shop, integer and drive-through. Our integer concern continues to lend meaningfully to the apical line, arsenic it represented astir 38% of income successful the period. We proceed to put to amended this facet of our business, including our perks loyalty program, Potbelly app, potbelly.com website, prime targeted integer promotions, arsenic good arsenic the operations enhancements that marque the past measurement of each integer bid arsenic seamless arsenic imaginable for our customers. While our integer concern remains beardown and is simply a tailwind for the business, in-shop represented 57% of income arsenic our customers proceed to bask the unsocial eating acquisition we offer.

I'll reason connected descent 10, wherever I item our outlook for the archetypal 4th and the afloat twelvemonth 2023.

We experienced momentum arsenic we exited the 4th quarter, which has continued into the aboriginal months of the archetypal quarter, adjacent arsenic much seasonality returns to the business. We are expecting archetypal 4th AUVs to scope betwixt $23,000 and $24,000, aforesaid store income to beryllium betwixt 18.5% and 20.5%, and for store level margins of 10.0% and 11.5%. We are besides introducing guidance for adjusted EBITDA for the archetypal 4th of betwixt $4 cardinal and $5 million. For the afloat twelvemonth 2023, we look to physique connected the momentum we established successful 2022 towards our 2024 and agelong word maturation targets. Our outlook includes grounds level AUVs, aforesaid store income maturation successful the precocious azygous digits and store level margins successful the debased teens.

With that, I'll walk the telephone backmost implicit to Bob.

Bob Wright

Thank you, Steve. Now connected descent 11, I'll supply an update connected our franchise maturation acceleration initiative. As concisely mentioned earlier, we signed aggregate caller Shop Development Area Agreements, oregon SDAAs successful precocious 2022, including 51 caller store commitments. These agreements span aggregate states and regions with important areas for penetration and maturation inactive disposable to imaginable franchisees. Potbelly’s compelling accidental has attracted a highly progressive and fluid pipeline of relationships and engagement with funny franchise candidates. In fact, our wide performance, pb procreation and franchise selling efforts person led to worldly maturation successful leads coming into our campaigner pipeline. The absorption squad and I person continued to foster these relationships done our regularly held find days, which supply the accidental for funny parties to contiguous their maturation imaginativeness and plans and summation an in-depth knowing of Potbelly’s enactment systems successful the areas of operations, technology, selling and development. I stay some excited and encouraged by the accelerated advancement towards our franchising and refranchising maturation initiatives. We look guardant to and volition proceed sharing further deals with you arsenic they are finalized.

I'll reason contiguous connected descent 12, wherever I punctual you of our 2024 maturation targets unveiled astatine the opening of 2021. To start, we person a beardown level successful spot to enactment these targets, including our differentiated brand, renewed absorption connected strategical selling initiatives, and execution of the 5 pillar Strategic Plan. Beginning with AUVs, we are continuing our advancement towards our extremity of $1.3 million. In fact, our Q4 play AUVs execute this people already. Our store level borderline people remained 16% with continued betterment driven by portfolio wide AUV maturation leverage combined with improved operational efficiencies and outgo discipline. Finally, we are moving to execute a franchise portion maturation complaint of astatine slightest 10% done our Shop Development Area Agreements, oregon SDAAs. As we accelerate to our agelong word people of 2,000 shops and our displacement to a chiefly franchise owned system. As I mentioned earlier, I'm encouraged by the advancement we've made frankincense far, adding 51 caller store commitments precocious past year. Our beardown brand, unsocial store acquisition and coagulated underlying concern fundamentals, combined with the efforts of our dedicated team, service arsenic the pillars to enactment these goals. We besides person plans to refranchise astir 25% of our institution owned shops successful conjunction with definite SDAAs successful those refranchised markets.

As I noted earlier, we are excited by our robust campaigner pipeline and woody activity, and we look guardant to announcing caller refranchise deals and caller improvement deals arsenic they are finalized. In summary, 2022 was a twelvemonth of beardown execution and momentum, and we expect 2023 to beryllium a twelvemonth of further acceleration. We judge Q1 2023 volition beryllium our 4th consecutive 4th not materially impacted by COVID-⁠19 oregon its Omicron variant, and we're looking guardant to discussing the trailing 12-month fiscal show with you erstwhile we reappraisal Q1 earnings. We bask and look guardant to sharing our travel with each of you.

With that, I'll present crook the telephone backmost implicit to the relation to code your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]

Our archetypal question volition travel from Matt Curtis of William Blair.

Matt Curtis

Hi. Good afternoon. So, Bob, I'd similar to travel up connected your comments astir recruiting, astir your efforts to enlistee caller franchisees. I mean, you talked astir the find days that you're inactive holding. I was wondering if determination are immoderate different events, franchising events you're readying to be this twelvemonth that we should beryllium alert of oregon different forms of outreach you're pursuing.

And past connected the 51 caller store commitments you added successful 2022. I was conscionable wondering; bash you person a extremity successful caput for however galore you would similar to person successful the pipeline by twelvemonth end? Or are you reasoning astir it differently? In different words, looking for prime implicit quantity?

Bob Wright

Yes. Thanks, Matt. Good to talk to you. So, yes, erstwhile it comes to the efforts to capable that pipeline, immoderate of our prepared remarks we're pointing astatine that successful fact, the magnitude of pb procreation enactment that we've done, franchise selling enactment that we've done done the extremity of past twelvemonth and continues into this portion of the twelvemonth has truly yielded a important worldly displacement successful the fig of leads that we person coming in. It's truly successful the mid-hundreds of leads per 4th wherever the fig was overmuch smaller than that successful the past. We're besides staffing our income squad much robustly. We're adding pb specialists who are coming done those leads, turning them implicit to qualified salespeople, and we're adjacent adding further salespeople to grip the flow.

So erstwhile we accidental we consciousness bully astir the pipeline of candidates, it truly is much, overmuch much than the Discovery Day activities wherever you person elder enactment squad progressive successful that. In summation to that, we've attended aggregate conferences that cater to franchise candidates. In fact, the squad conscionable wrapped up a sojourn with our income booth astatine the airdrome league this week. And we proceed to find that our beingness determination is truly welcomed by whether they're idiosyncratic concern people, entrepreneurs, oregon successful immoderate cases the large operators who are looking to adhd a marque similar ours to their portfolio. So yes, truly pleased with it. In presumption of the numbers, look, we're not trying to beryllium opaque astatine all. The 10% fig that you look astatine successful 2024 is connected its mode to an accelerated tally complaint that would beryllium indispensable for america to execute that 2000 portion extremity successful the agelong term, that 8 to 10 twelvemonth agelong term, it's got to beryllium successful the teams. We cognize that CAGR needs to beryllium successful the teams to get there. So we spot that 10% fig being achieved by filling the pipeline with the due operation of deals that are multiunit deals. Some of the midsized deals similar the 1 we announced successful Orlando, those service that extremity truly good due to the fact that the much of those 6,8,10, 12 portion SDAAs that are signed, they present 1 oregon 1 and 1.5 oregon 2 units a year. And that's however we get to that maturation number. So it's a small little astir the precise circumstantial fig of units that are successful the woody structure, and adjacent the aforesaid way, a small little astir the circumstantial fig of deals. But it's the operation of the 2 and the presumption that we person to the commitments for maturation that are required by the franchisee. Recall, and we've shared this each SDAAs has 2 sets of compliance dates that's lease power and tract power dates, arsenic good arsenic unfastened dates. So we tin spot precise heavy into our pipeline of maturation wherever we expect to person those openings. And of course, our occupation and our income team's occupation are to implicit lick for that.

Matt Curtis

Sounds good. That's helpful. Thanks. Turning to the integer kitchen, I cognize initially astatine least, you were investigating that astatine immoderate of your higher measurement locations. Now that you've expanded a small bit, I'm conscionable funny astir what the operational interaction has been truthful acold that you've seen comparative to the test. And past possibly if you tin conscionable bring america up to velocity connected however galore locations person PDK close present and what your rollout docket looks similar for the remainder of the year.

Bob Wright

Yes, blessed to. We proceed to beryllium precise excited astir this. And it's similar galore of the different exertion investments we made, we're focused connected the debased outgo of investment, the precocious instrumentality that goes with it. And truthful we are expanding it. We person it, I deliberation arsenic of today, I deliberation we person it successful 38 locations. I deliberation that our enlargement plans this twelvemonth would person america apt extremity the twelvemonth determination adjacent 100. So that's not a circumstantial guidance number, but it's our plans for however we would grow it. And here's the crushed why. We're getting very, precise bully returns connected the lawsuit experience. We're measuring those shops against power shops for wide lawsuit experience, for Order Ready connected time, which is truly captious for integer orders. It's arsenic important arsenic accuracy. Order acceptable connected clip has improved. Accuracy has improved. We're really seeing immoderate of our aboriginal measures connected things similar nutrient quality, which makes consciousness connected time. It's ready, it's hot, and the accuracy is there. So we're seeing bully question successful that arena arsenic well. And here's the happening that we're truly enjoying, is it decidedly is helping america with those much capableness constrained shops. So don't construe that to precocious measurement necessarily, but construe to shops wherever we're seeing capableness opportunities to unlock adjacent much capacity.

And that allows america to absorption connected wherever we take which shops travel next. And that's the biggest return. So the different happening that we person already activated and we're pleased with the results due to the fact that of the ratio connected the backmost line. This is simply a overmuch simpler cognition factor. Our managers and teams volition archer us, if you instrumentality this out, I'm going to leave, it's that overmuch amended for them, putting it successful place. And arsenic a result, due to the fact that it's much efficient, we're taking 7 hours of labour retired of those shops, which is large portion of the instrumentality connected concern too. So we got happier customers, much throughput, amended lawsuit acquisition and happier employees arsenic good arsenic labour savings. We similar this happening connected beauteous overmuch each fronts, right.

Matt Curtis

Great. Sounds truly encouraging. Digging a small spot much into the commodity outlook. Can you archer america wherever you're seeing the astir unit and/or alleviation looking into 2023 and past possibly conscionable bring yourself to velocity connected however overmuch you're contracted connected commodities close now?

Steve Cirulis

Yes, sure, Matt. I tin grip that. It's a batch antithetic this twelvemonth than it was done the backmost fractional of past year. I mean, we peaked retired a commodity ostentation of implicit 21%. I deliberation successful Q3, Q4 is already coming down. I deliberation we're astatine 17% and we've seen it proceed to travel down and expect it to proceed to travel down done 2023. Last year, we saw spikes successful a fig of areas. Meat was up for america arsenic good arsenic bread. Two of our large inputs. We saw immoderate higher spikes successful areas that were called a market related avocado spike beauteous precocious for a portion and those kinds of things. As we look into the twelvemonth going forward. Our handbasket is astir 55% locked now. We'll beryllium astir 60 oregon truthful here, not excessively agelong from now, 100% locked done Q2. It's inactive a small spot of a choppy environment, but we're seeing it loosen up a spot arsenic proviso returns. There's a small much contention with suppliers, which is adjuvant for us. And it's conscionable a overmuch much unchangeable environment, which gives us, I think, immoderate much of that assurance successful immoderate of our borderline enlargement plans.

Matt Curtis

Okay, great. And past connected pricing, what benignant of cumulative terms payment are you carrying close now? And bash you person to instrumentality much terms this twelvemonth successful bid to grow edifice level margins that we are looking to?

Steve Cirulis

Yes, sure. The anterior speech we conscionable had astir commodities and ostentation spell manus successful mitt with the mode that we deliberation astir pricing arsenic well. If you retrieve past year, we were beauteous adamant astir making definite that portion we needed to instrumentality terms to assistance offset that inflation, what we wanted to marque definite was we weren't doing immoderate much than that, right. We wanted to marque definite that we continued to supply a unchangeable request basal for our customers. It was adjuvant that nutrient astatine location ostentation continued to propulsion higher than nutrient distant from location inflation. We ended the twelvemonth past year, I deliberation we took astir 13%, good implicit 13% overall. 13%, yes, not that overmuch for the year. And arsenic we're looking into 2023 and the commodity relief, our pricing actions travel mode down. We're expecting astir 3 actions this twelvemonth similar we typically have, and we were going to beryllium benignant of warring ostentation that astir apt puts america benignant of successful the mid to precocious azygous digits, truthful we're not going to person to propulsion terms astir arsenic overmuch arsenic we did past year.

Matt Curtis

Okay, great. I conjecture benignant of related to that full treatment is wage inflation. I mean however has wage ostentation been trending to you guys recently? What bash you expect for the archetypal 4th comparative to the 4th quarter? I would ideate easing somewhat similar everyone else, but conscionable curious. And past possibly much importantly, bash you expect to marque immoderate further investments successful labour this year? Do you cognize what signifier that mightiness take? And I asked that past portion conscionable due to the fact that of the occurrence you've had with integer tipping that you introduced past year.

Steve Cirulis

Sure, I tin grip the ostentation broadside of it. We ticker that closely, obviously. Again, it's a antithetic dynamic than the F&P ostentation and has been for immoderate time, overmuch little summation successful presumption of the complaint we've seen. It truly benignant of flatten arsenic it relates to the increases. Last year, I deliberation we were conscionable northbound of 8% connected the labour ostentation inside. We're expecting this year's ostentation to beryllium benignant of successful the mid-single digits and a astir level illustration close wherever we spot F&P ostentation benignant of ratcheting down passim the year. Our outlook has much of a level illustration too. The labour and yes, each the things that we talked astir with the hours based guide, the tipping, perfectly helps america to the tune of $3 an hour, similar we talked about. And it's besides important to note, with those dynamics successful place, retention is high. We thin to beryllium outperforming our peers arsenic it relates to retention rates, makes it easier to prosecute folks, truthful gives us, we think, an vantage successful the marketplace for endowment due to the fact that Potbelly tends to beryllium a spot that radical privation to work, and that's a spot that they privation to stay.

Bob Wright

Yes, if I could adhd to that, Matt, I deliberation that there's a virtuous rhythm that you spot america proceed to benignant of exemplify successful each of the things erstwhile we speech astir our people. Look, archetypal and foremost, we judge that endowment makes a difference. We judge that radical are uniquely talented successful definite ways, and we look for the precise champion radical that acceptable with this marque and tin perform, and that's astatine the subordinate level, manager level, multiunit level. And we truly look to unit according to that standard. Then there's a batch of improvement and grooming that goes into it. And we've talked astir the grooming advancements that we've made. We proceed to marque much of those. There's a full different furniture of multiunit absorption grooming that's underway that we deliberation is making a large difference. Brings down turnover, absorption turnover successful peculiar is precise costly, and truthful successful much ways than one, and arsenic bully arsenic our turnover is, our main operating officer, Adam Noyes believes we tin bring it down adjacent further with that further concern successful grooming for retention. And past the outgo large part. And we've talked a batch astir it, whether it was tips oregon we've talked astir our inducement programs astatine the store level and, of course, supra the store level, uncovering caller ways to bash that.

We conscionable came disconnected of our 2nd yearly General Managers conference, wherever we celebrated the precise champion of their performances crossed the strategy and with a batch of large reaction. We've added present a balanced scorecard that allows america to benignant of equilibrium the show of those managers crossed the year. They cognize that we've instituted an yearly inducement present that we'll beryllium celebrating adjacent twelvemonth astatine this clip for the precise champion of the champion performers successful that arena. Steve mentioned the tips. It is multimillions of dollars that person been enactment successful the hands of our associates and our managers done those inducement programs. And it's that virtuous cycle. It helps america person the precise champion teams, serves our customers well, and we get the ratio of that stableness and precocious prime team.

Matt Curtis

Great. That makes a batch of sense, I conjecture past 1 for maine is connected the integer engagement you've been seeing with Digital Mix hitting a grounds level, which is impressive. I cognize you mentioned a fig of drivers down that. But is it truly much astir your accrued absorption this twelvemonth connected putting selling dollars to enactment successful the integer channels oregon person you truly been capable to commencement leveraging the cheque information that you've been collecting implicit the past twelvemonth oregon so?

Bob Wright

Yes, the champion mode I could explicate that is if you deliberation astir it arsenic a 3 prong attack. No question that our integer advertizing is 1 of those 3 prongs, and we inactive judge we've got a batch of state successful that tank. Last year, the concern was inactive lone astir up 2%. Little nether that, successful fact, of our sales. Very pleased with the integer efforts, but there's nary video content, there's not produced contented successful determination yet. And we've got the caller branding enactment that was laid down with our ocular recognition standards past year. So that's moving hard for us, for sure. The 2nd of the 3 prongs are truly successful our assets and our ecommerce efforts that's the app and the web and the continued efforts delivering there. So this is wherever you spot things similar our integer lone promotions and the integer lone solutions that we enactment retired wherever we share, we've done things similar Bogo promotions that you tin lone entree done our integer channels, we've done different time lone oregon solemnisation of yearly days that are disposable lone done our integer channels.

And past the 3rd furniture is our perks loyalty program, which is truthful important to us. And yes, we are leveraging that cheque level data. We ingest that present each azygous day. We recognize that narration and however unsocial it is. We person antithetic things that immoderate 1 radical of consumers would not spot due to the fact that it's unsocial to those consumers that are portion of our perks program. The week of perks is simply a large illustration wherever we did a week agelong engagement and celebrated that perks loyalty narration with thing caller each azygous day. And past we could work however those perks loyalty customers reacted to those things. We provender antithetic frequence users, antithetic types of communication, antithetic types of engagement, and those connected the higher extremity of the standard differently.

And each of this is truly inactive conscionable getting started. What's large is that determination is improvement and strategical effort successful each 3 areas to bring that to beingness adjacent further. But that's erstwhile we accidental digital, it's those 3 areas of focus.

Operator

With that, I'd similar to manus the telephone implicit to Lisa Fortuna of Alpha IR for a fewer further questions.

Lisa?

Lisa Fortuna

Thank you, operator. As we person done successful the erstwhile 2 net calls, we person offered our investors the accidental to complement William Blair's precise thoughtful questions. First question, possibly revisiting the franchising initiative. Why is Potbelly compelling from a franchisee perspective?

Bob Wright

Yes. Thanks, Lisa. Actually, I emotion this question due to the fact that it gets astatine the bosom of the powerfulness of the marque and however enticing it is for the franchisees. And there's truly 3 areas that franchisees are ever going to look at. The marque itself. And I volition archer you that we had thing but precocious marks and a batch of enthusiasm for Potbelly arsenic a franchise brand. Growth imaginable is simply a important happening of appetite for franchise candidates. They're not funny successful opening 1 oregon 2 locations for immoderate brand. They similar the accidental to unfastened the territory. They privation to ain the DMA. They privation to person the accidental to physique it retired each astatine erstwhile and truly power the marketplace erstwhile they're done developing. And the 3rd one, of course, are the fiscal components of the deal. That's connected 2 fronts, and we judge we're compelling connected each 3 of those, marque and maturation imaginable and the fiscal components. We're successful a truly fortunate presumption due to the fact that with truthful galore of our shops inactive owned by the company, we tin beryllium precise transparent with what's going connected with the institution and the numbers that we're sharing connected our net calls similar this. Those $1.3 cardinal play mean portion volumes that you saw successful Q4, those are the things franchisees are looking for.

They're looking for margins that are going to springiness them truly steadfast returns connected the concern that they make. And they instrumentality our margins. They judge that they tin bash better, typically. And I emotion that astir franchisees. And past they origin that operating profitability into what they spot arsenic the portion level concern economics. And we bask a merchantability to concern ratio that's 2:1 oregon better. We really person franchisees successful the strategy who person built their much caller shops for little than what our FDD reports. Because our FDD is connected our ain history, they're gladsome to stock that accusation with franchise candidates. And we spot that arsenic different root of enthusiasm. So, look, franchisees are looking to spouse with a marque that brings them immoderate predictability and astatine slightest immoderate assurance successful what they tin bash with their concern successful a conception similar a franchise of Potbelly.

And the fiscal portion is going to halt them each azygous day. They're much and much excited astir our financials conscionable similar we are.

Lisa Fortuna

Can you supply an update connected catering income and immoderate caller initiatives to thrust growth?

Bob Wright

Yes, the comments that we made is our catering income are present approaching pre-pandemic levels and that is inactive with betterment successful what was traditionally the concern catering clientele inactive up of us. We person done immoderate promotional enactment with catering some connected the societal and connected the nonrecreational broadside wherever we've done immoderate promotions astir Dads and Grads and sporting events, Final Four, the Super Bowl. Those are things that we find occurrence with. And I deliberation we're teaching our user basal that we're a large alternate for catering solutions. There's the advertizing broadside of that. That's wherever galore of those promotions are coming in. There's much and much beingness successful our societal channels wherever we tin proceed to amended radical astir what a large offering we person with catering. And this is simply a income function. And truthful we're investing successful immoderate income resources that are much proactive of going backmost retired to the concern channels and concern connections that we person successful each of our commercialized areas and we're uncovering large occurrence with that too.

We bash not acceptable our sights connected what was historically the precocious for catering mix. We deliberation we tin spell overmuch farther than that and marque this a precise meaningful portion of our continued maturation successful the future.

Lisa Fortuna

Can you clarify what you meant by the archetypal 4th of 2023 volition beryllium the 4th consecutive 4th not impacted by COVID? And the treatment astir the trailing 12-month fiscal show erstwhile we reappraisal Q1 net successful a fewer months.

Steve Cirulis

Yes, sure. Let maine instrumentality this one. Yes, I deliberation the champion mode to recognize the wellness of our concern is to truly look backmost astatine the past 3 quarters station Omicron, right. Q1 past twelvemonth was a spot of anomaly, and hopefully erstwhile we get done this quarter, the Q1 net call, we won't speech astir Omicron anymore. But if you're benignant of trying to truly recognize however good is Potbelly doing? Take a look astatine Q2, Q3, Q3, and adhd to that the guidance that we're providing connected this 4th one. And past I deliberation you get a bully consciousness for the momentum that we've been gathering the profitability that we're capable to nonstop and I deliberation the mode that we're capable to proceed to physique what has truly been, I think, a postulation driven maturation story. Certainly, we had terms and we took vantage of price. There's nary question past twelvemonth successful the consciousness that we utilized it to mitigate inflation. But what we besides saw during those Q2, Q3, Q4 and into this 4th is simply a truly beardown instauration of request growth, peculiarly the postulation broadside of things.

And that gives america large assurance heading into this year. And successful fact, erstwhile you look astatine and we bash closely, you look astatine the competition, we thin to usage 3rd enactment accusation to recognize however we're performing connected postulation versus different our accelerated casual competitors oregon sandwich competitors. And what we've seen is accordant separation successful our postulation comps versus our competition's postulation comps. So that means we're taking share. And I deliberation sometimes the income numbers get a small distorted due to the fact that of the pricing, but 1 of the existent measures of however steadfast the concern is that postulation broadside of things. So that's however I would promote folks to look astatine america arsenic we caput into 2023 here.

Lisa Fortuna

How should we deliberation astir adjusted EBITDA for the afloat twelvemonth 2023? Should we beryllium taking the midpoint of what you guided for Q1 and multiply that by four?

Steve Cirulis

No, I deliberation it truly goes backmost to what I conscionable explained. I deliberation if you conscionable multiply by four, you're missing retired connected the trailing twelve, right, consciousness of momentum and the consciousness of our quality to benignant of physique postulation similar I conscionable described. So typically also, Q1 is seasonally a little measurement 4th for us. So it's not a existent advisable mode to look astatine an full twelvemonth by taking Q1 and extrapolating forward.

Lisa Fortuna

That was the past submitted question, truthful I volition present crook the telephone backmost to Bob for his closing comments.

Yes. Thank you, Lisa. And convey you, operator. Matt and each of our investors that submitted questions. I privation to convey you each again for your clip today. I anticipation you perceive it successful Steve and I's comments. We are highly enthused by the absorption and the maturation of the institution this year. And we person the utmost assurance successful our quality to present further maturation and profitability for each of our stakeholders. We look guardant to sharing our advancement with you adjacent clip we talk. Have a large night.

Operator

That does reason today's conference. Thank you for attending today's presentation. And you whitethorn present disconnect.