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Shutdown, polar vortex take a bite out of Potbelly

The chain said its same-store sales have slowed so far this year due to the dual January problems.
Photograph courtesy of Potbelly Corp.

Frigid air and a frozen government have chilled Potbelly Sandwich Shop's sales so far this year.

The Chicago-based sandwich chain this week said that its same-store sales have slowed so far this year thanks to the government shutdown in January and a polar vortex that apparently kept people at home.

Same-store sales fell 1.7% in the fourth quarter ended Dec. 31, and executives said that sales have slowed from that level in the first half of this period. “We’re sort of weaker than we’d like,” Potbelly CFO Thomas Fitzgerald said on the company’s fourth quarter earnings call Monday.

Fitzgerald said that about half of the company’s 486 shops were affected by the vortex, a swath of frigid air that sent temperatures well below zero throughout the Midwest. More than a third of the company’s business days during January had weather-related “negative volume,” Fitzgerald said.

By comparison, only 14% of the company’s business days had negative volume in the same period a year ago, he said.

Potbelly also has a lot of locations in the Washington, D.C., area, where restaurant sales suffered during the government shutdown in January.

In addition, the company sped up its planned menu overhaul. Potbelly originally planned for a new menu in the second half of this year, but strong performance in early tests led executives to speed up the timeline.

That led the company to hold off on menu price increases in January, which Fitzgerald said has also impacted sales. “We did accelerate the rollout of our menu optimization from later in 2019 to as soon as physically possible,” he said. “This created a short-term lapse in pricing until the middle of the first quarter.”

The slow start is coming at a crucial time for Potbelly, which is working on a turnaround under CEO Alan Johnson and an overhauled management team that includes CMO Brandon Rhoten and Fitzgerald, who was named CFO in December.

The company slowed its pace of growth late last year so executives could spend time focusing on turnaround efforts. The company actually shrunk by two locations in the quarter.

“I believe there are times where it is essential to have the discipline to slow down in order to speed up,” Johnson said. “We took a bit of a pause in the fourth quarter.”

Executives are still confident that the chain’s plans, particularly its menu rollout, will lead to higher sales this year. Potbelly projects same-store sales to be up as much as 1.5% for the full year—meaning they believe the company will rebound nicely from the slow start.

Investors jumped on board. The company’s stock had risen nearly 5% on Tuesday.

Potbelly has brought in a vice president of culinary innovation, Ryan LaRoche, to lead product innovation and menu design. Johnson said that the company had “robust sales” from limited-time offers.

Johnson said the company’s pipeline of new menu products will be a source of sales growth going forward.

Potbelly also plans to work more on its off-premise business. Those sales, which include catering and delivery, rose 15.3% last year and now represent 17.5% of sales last year. The company tested a number of efforts to increase off-premise sales, which executives expect to expand systemwide this year.

The company also expanded delivery and catering to all of its shops.

“This channel offers a significant opportunity for incremental growth going forward,” Johnson said.

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