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Declining traffic hits Potbelly hard in 4Q

But investors cheer higher profits and the stock surges

Potbelly Corp. said this week that traffic fell in December, and continued falling into January, amid “industry headwinds” and menu innovation that didn’t quite match up to past years’ standards. 

Yet the company also reported higher-than-expected profits in the quarter ended Dec. 25, and the company’s stock surged more than 8 percent on Wednesday. Adjusted net income increased nearly 65 percent to $3.8 million, or 8 cents per share, from $2.3 million or 5 cents. 

“The bottom line is, we need to adapt to thrive in the current market,” Potbelly CEO Aylwin Lewis said on the earnings call on Tuesday. “We must improve the storytelling of our special company and its long history. Yet we exceeded expectations from a profit growth and a margin growth perspective.”

Same-store sales at company locations increased 0.1 percent. But traffic in the period fell 4 percent, and was worse in December. Company executives suggested those weak December results continued into January. 

They also suggested there are few indications the market conditions will improve much this year — though they expect comparisons to ease, which should help same-store sales. Potbelly is projecting flat same-store sales for the full year.

“We know we need to score opportunities to grow our business while managing costs,” Lewis said.

Same-store sales have been weak industrywide for much of the past year, but it’s been particularly troublesome the past two months amid tough comparisons and weather issues. Same-store traffic fell 4 percent in December, according to MillerPulse, and 2.9 percent in January. 

Executives said the industry challenges weren’t the only problem. Lewis said that the company’s menu innovation “did not match last year’s robust calendar.” 

“Although we tried several ideas, none of them drove the mix that we experienced in 2015,” Lewis said. 

He said on the call that the company tried line extensions and combinations of promotions Potbelly had done in the past. “You get diminishing returns when you come to some of that stuff the second or third time,” Lewis said.

The company slowed down unit development in 2016. The company opened 40 locations, while franchisees opened 10. 

Potbelly expects to further slow development of company-operated locations in 2017, but franchisees will replace much of that slowdown. The company said it expects to open between 30 and 40 company restaurants, focusing on selecting sites “with appropriate lease rates.” Franchisees are expected to open 15 to 20.

And Lewis described several efforts designed to improve sales and cut costs. The company has a new labor scheduling system enabling it to cut general managers’ workweek from 50 hours to 45.

It is also investing more in catering, which grew in the low double digits last year and now represents 16 percent of overall sales. The company plans to increase the number of catering sales managers this year to further that growth.

And Potbelly is nearing the release of its mobile app and a redesigned website, expected some time this year. “This is tremendously good news for the company,” Lewis said.

The app will enable customers to order ahead, and will have one-click ordering with mobile pay. It will also enable the company to geotarget customers with daypart specific offers.

As part of this effort, Potbelly will introduce a loyalty program called Potbelly Perks.

“We believe the app will help us drive sales,” Lewis said.

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

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