Executive Summary / Key Takeaways

• Potbelly has successfully transitioned from a struggling chain to a growth-focused company, driven by its five-pillar strategy emphasizing franchising, digital engagement, menu innovation, value, and operational excellence.
• The Franchise Growth Acceleration Initiative is gaining significant momentum, with a record number of new commitments and openings expected to drive double-digit unit growth towards the long-term goal of 2,000 U.S. units.
• Digital channels, powered by the enhanced Potbelly Perks loyalty program and ongoing technology investments, represent over 42% of sales and are a key driver of traffic and customer frequency.
• Recent financial performance demonstrates margin expansion and improved profitability, supported by diligent cost management, strategic investments in the business, and a strengthened balance sheet providing ample liquidity.
• Management's reiterated 2025 guidance for positive same-store sales growth, accelerated unit expansion, and increased Adjusted EBITDA signals confidence in the sustainability of the turnaround and future growth prospects despite a challenging consumer backdrop.

The Resurgence of a Neighborhood Favorite

For nearly 50 years, Potbelly Corporation has cultivated a reputation as a beloved neighborhood sandwich shop, known for its warm, toasty sandwiches and welcoming atmosphere. While the company navigated periods of growth and challenge primarily through company-owned operations, a significant strategic pivot less than three years ago set a bold new vision: transforming into a 2,000-unit brand in the U.S., predominantly fueled by franchising. This ambition crystallized with the launch of the Franchise Growth Acceleration Initiative in March 2022, marking a decisive shift towards an asset-light, franchise-focused growth model.

This strategic evolution is underpinned by a five-pillar plan designed to drive traffic-driven profitability: delivering craveable-quality food at a great value, fostering positive customer experiences through its people, leveraging digital channels for awareness and traffic, and accelerating development through franchising. The company's shop model, targeting mid-to-high teens profit margins, is designed to generate strong cash flow and attractive returns on investment, providing a compelling proposition for potential franchisees.

Potbelly operates within the highly competitive fast-casual restaurant sector, particularly vying for market share in the sandwich and broader quick-service space. Key publicly traded competitors include giants like Chipotle Mexican Grill (CMG), Domino's Pizza (DPZ), and Shake Shack (SHAK). While Potbelly differentiates itself as a sandwich-based fast-casual concept in a "sea of sub shops," known for its signature hot food prepared in 500-degree ovens, it faces rivals with significantly larger scale, market share, and financial resources. Chipotle, for instance, commands a much larger market share and demonstrates higher operating efficiency and profitability margins. Domino's, while primarily pizza, leverages a vast franchise network and advanced digital/delivery capabilities. Shake Shack competes in the premium fast-casual space with strong brand loyalty but higher operating costs. Potbelly's strategic challenge is to carve out and expand its niche by leveraging its unique brand identity, improving operational efficiency, and accelerating growth through its focused initiatives to compete effectively against these larger, more established players.

Central to Potbelly's strategic execution and competitive positioning is its investment in technology. The company's digital platforms, including its website, mobile app, and the enhanced Potbelly Perks loyalty program, are critical differentiators. These platforms represented over 42% of total shop sales in the first quarter of 2025, a 200 basis point increase year-over-year, with a notable shift towards Potbelly-owned channels. This digital strength allows for more direct customer engagement and marketing. The enhanced Perks program, relaunched in January 2024, is designed to drive frequency and loyalty through a tiered reward structure where members redeem coins for a variety of menu items. Management reports that this program is performing as expected, with increased frequency and engagement across all customer cohorts.

Further technological investments are underway in 2025, focusing on consumer-facing digital assets and data and analytics. The stated goal is to improve the customer experience, reduce friction in the ordering process, and enhance marketing efficiency through more discrete, automated customer journeys. While specific quantitative targets for these new digital capabilities are not detailed, the strategic intent is clear: to leverage data to better understand and influence customer behavior, driving traffic and increasing the effectiveness of promotional activities.

Operationally, the company is rolling out the PDX system, a combination of a new POS and kitchen management system, to company shops in 2025 and 2026. This technology aims to improve throughput and labor efficiency. Early indications from the Q2 2024 earnings call suggested labor savings of approximately five hours almost instantly upon rollout due to streamlined back-line operations. This focus on operational technology is crucial for supporting the expected increase in digital orders and maintaining service speed as the business scales.

The company is also addressing its physical footprint through a new prototypical shop design targeting approximately 1,800 square feet. This is smaller than the legacy system average of 2,300 square feet and is designed for operating efficiency, better integration of digital order pickup, and reduced occupancy costs, offering a significant advantage for franchisees. Additionally, a remodel initiative is testing four different levels of investment in existing shops to rejuvenate older assets and drive returns.

Accelerating the Growth Engine and Financial Performance

The Franchise Growth Acceleration Initiative is demonstrating tangible results. After opening 23 new shops in 2024, the best unit growth year since 2017, the company expects to open at least 38 new shops in 2025. This includes a mix of franchise and a handful of company-operated units, primarily back-loaded in the year. The pipeline for future growth is robust, with 40 new shop commitments added in Q1 2025 alone, marking the best first quarter ever for commitments and bringing the total open and committed shop count to 766 across 33 franchise groups. Over 70% of existing franchisees are actively developing new shops, and the company has introduced incentive programs to encourage larger multi-unit operators to accelerate their development schedules.

New shops opened in 2024 are reportedly performing well, exceeding sales forecasts and the system average average weekly sales, validating the company's market planning and real estate strategies. The plan to add company-operated shops in underpenetrated, high-performing existing markets (mid to high single digits in 2025, potentially up to 20 annually starting in 2026) is intended to leverage existing infrastructure and accelerate company EBITDA growth, while still maintaining a franchise-focused approach for the vast majority of new unit expansion.

Financially, Potbelly's performance reflects the impact of its strategic execution. For the first quarter ended March 30, 2025, total revenues increased by 2.3% year-over-year to $113.7 million. This was driven by a 1.3% increase in sandwich shop sales to $109.0 million and a significant 30.8% increase in franchise royalties, fees, and rent income to $4.7 million, primarily due to new franchise openings. Company-operated same-store sales grew by 0.9% in Q1 2025, exceeding management's expectations and demonstrating underlying demand strength outside of weather impacts. Average weekly sales were approximately $24,550.

Shop-level profit margin expanded by 20 basis points year-over-year to 13.7% in Q1 2025. This improvement was primarily driven by a decrease in food, beverage, and packaging costs as a percentage of sales (down 110 basis points to 26.1%), benefiting from lower protein costs and commodity deflation, partially offset by increases in labor, occupancy, and other operating expenses. Labor costs as a percentage of sales increased to 30.4%, impacted by lapping a prior year settlement benefit and increased incentive compensation, though partially offset by sales leverage and ongoing operational efficiency efforts.

General and administrative expenses increased in dollar terms to $12.4 million in Q1 2025, driven by increases in payroll, consulting, and technology costs, as well as higher bonus accruals. However, when viewed as a percentage of system-wide sales, G&A decreased, reflecting disciplined corporate expense management. Adjusted EBITDA for Q1 2025 was $5.5 million, a slight decrease year-over-year, primarily due to lapping the prior year settlement benefit. Net loss attributable to Potbelly Corporation improved significantly to $62,000 compared to a $2.8 million loss in the prior year, largely due to the absence of the $2.4 million loss on extinguishment of debt incurred in Q1 2024.

The company's balance sheet is strengthened by improved liquidity. As of March 30, 2025, cash and cash equivalents stood at $14.8 million, with total liquidity (cash less restricted cash plus available Revolving Facility) at $40.3 million. Net cash provided by operating activities increased substantially to $8.6 million in Q1 2025, driven by favorable working capital changes. The debt refinancing in February 2024, replacing a Term Loan with a $30 million Revolving Facility, provides increased financial flexibility.

The release of a $31.3 million tax valuation allowance in Q2 2024 further enhances financial health by allowing the company to utilize deferred tax assets against future cash taxes, freeing up capital for reinvestment. The company also initiated a $20 million share repurchase program in 2024, repurchasing $1.1 million in Q1 2025, signaling confidence in future cash flows and a commitment to shareholder value.

Compared to larger competitors, Potbelly's financial metrics are still developing but show positive trends. While its margins and overall scale remain smaller than industry leaders like CMG or DPZ, the recent trend of margin expansion and Adjusted EBITDA growth demonstrates improving operational execution and financial discipline. The focus on a franchise model is expected to improve capital efficiency and drive higher-margin royalty revenue over time, shifting the financial profile closer to franchise-heavy models like Domino's, albeit at a much smaller scale.

Outlook, Risks, and the Path Forward

Potbelly has reiterated its full year 2025 guidance, projecting same-store sales growth of 1.5% to 2.5%, unit growth of at least 38 openings, and Adjusted EBITDA of approximately $33 million to $34 million. For the second quarter of 2025, the company anticipates same-store sales growth of 1.5% to 2.5%, at least six unit openings, and Adjusted EBITDA between $8.25 million and $9.75 million. This guidance assumes a continuation of the current consumer environment and factors in expected impacts like the Easter holiday shift. Management expresses confidence that the underlying business momentum, driven by strategic initiatives, positions them well for the remainder of the year.

However, risks remain. The challenging consumer environment, marked by cautious spending and a tendency to trim restaurant visits, could pressure sales and traffic. While Potbelly's value offerings and digital engagement aim to mitigate this, sustained economic pressure could impact performance. Commodity price volatility, although currently favorable, and labor inflation (expected in the low 2% range) could affect margins. The competitive landscape is intense, with larger players potentially leveraging their scale and resources to gain market share. Operational execution, particularly in integrating new technologies like PDX and managing the accelerated pace of new unit openings, is critical. The potential impact of tariffs on build costs is also being monitored, though management remains confident in the long-term unit economics. Legal proceedings, such as the recently settled Washington state class action lawsuit, represent potential liabilities, although the $1.8 million settlement is expected to resolve this specific matter.

Management believes that despite these challenges, the strategic plan is working and positioning Potbelly for accelerated growth. The focus on menu innovation, digital investment, operational excellence, and franchise expansion are seen as key levers to drive future performance. The strong pipeline of franchise commitments and the performance of new shops provide a clear line of sight towards achieving double-digit annual unit growth and the long-term 2,000-unit goal.

Conclusion

Potbelly Corporation has successfully navigated a period of strategic transformation, shifting its focus towards becoming a franchise-led growth company. The five-pillar strategy, emphasizing digital engagement, menu innovation, value, operational efficiency, and accelerated unit development, is yielding tangible results, as evidenced by positive same-store sales growth, expanding margins, and a robust pipeline of new shop commitments. The company's investments in digital platforms and operational technology are enhancing the customer experience and improving unit economics, providing crucial support for future expansion.

While operating in a fiercely competitive and challenging consumer environment, Potbelly's focused approach to value and its strengthening digital connection with customers are helping it maintain relevance and capture traffic share. The reiterated 2025 guidance reflects management's confidence in the sustainability of this momentum and the potential for continued growth in units and profitability. For investors, the story of Potbelly is one of a brand leveraging its core strengths and strategic investments to execute a compelling turnaround, with the potential for significant upside as the franchise growth engine accelerates and operational efficiencies continue to drive profitability towards its ambitious long-term vision.