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Potbelly closes 8 locations as same-store sales fall nearly 5%

The chain plans to launch a new format store this year

Potbelly Corp.’s 2019 turnaround plan was derailed in the first quarter by bad weather and the government shutdown, the company said Tuesday.

Earlier this year, the Chicago-based sandwich chain launched its recovery plan, which included a revamped menu, augmenting in-house delivery with DoorDash and product innovation. But those initiatives were overshadowed by unseasonably cold temperatures across the brand’s two key markets — Chicago and Washington, D.C. — CEO Alan Johnson told investors during a Tuesday conference call.

Same-store sales in the first quarter declined 4.7% at company stores. To reverse the downturn, the company increased ad buys in the current quarter. While traffic improved slightly at Potbelly Sandwich Shops, it wasn’t enough to justify the ad spend, company leaders said.

“As a result, we are taking a step back to assess our marketing effort, and we expect to take our learnings and apply them with a fresh approach to drive a more productive outcome,” Johnson said in a statement.

During the quarter, the company also closed eight underperforming restaurants, including seven company stores. Chief financial officer Tom Fitzgerald said in some cases the company had to “cut checks” to get out of leases on stores that “we couldn’t find a way to make profitable.”

“They were definitely a drag,” he said.

For the year, the chain plans to close 15 to 22 restaurants, including 9 to 12 company stores.

Despite the first quarter setbacks, Johnson said several initiatives are working including the mid-February rollout of a $7.99 “pick-your-pair” bundled meal. The combo meal includes choices of half a sandwich, mac and cheese, chili, a cup of soup and a half-sized salad. The pairing option also allows diners to add on other items at a discount such as chips and fountain drinks.

Johnson said check averages are going up because customers are buying more items.

“That’s the way you want to see it,” he said.

Off-premise sales grew in the first quarter with pick up being the fastest segment. Stores are in the process of installing pick-up racks for guests.

The company’s loyalty program is also performing well, with 1.3 million registered users, up from 800,000 last year, same quarter.

Johnson said loyalty members accounted for 18% of sales in the first quarter, up from 8% last year, same quarter. The company plans to upgrade the loyalty program with a “virtual punch card” system designed to drive frequency and retention, Johnson said. That will roll out in June.

Johnson said the company will “keep plugging away to find the right balance” of initiatives that will support positive results for the brand.

“It’s important we keep looking for that sweet spot,” he said.

Johnson said later this year the company plans to roll out a new store design called the Shop of the Future. He said the new format cost 25% less than the current model to build. It significantly improves customer experience without losing the brand’s identity, he said.

The company closed the quarter with 481 restaurants. Of those, 431 are company stores. In 2019, the company plans to open 12 to 18 new restaurants, including six to eight company stores.

On Monday, May 6, the first Potbelly Sandwich Shop in California opened, in Irvine. The Southern California restaurant is operated by franchisee Sameer Bhatia, who plans to open three more Potbelly shops in the area.

Total revenue for the quarter ended March 31 decreased 4.7% to $98.1 million, compared to $102.9 million in the same quarter of 2018.

Net loss of $18.4 million, or 76 cents per share, compared to a $2.2 million loss, or 9 cents a share, for the same quarter last year. The loss was primarily driven by a one-time tax charge of $13.6 million.

Contact Nancy Luna at [email protected]

Follow her on Twitter: @FastFoodMaven

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