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Executives

Matthew Revord – Senior Vice President, General Counsel and Secretary

Aylwin Lewis – Chief Executive Officer and President

Charles Talbot – Senior Vice President and Chief Financial Officer

Analysts

David E. Tarantino – Robert W. Baird & Co.

Michael Kelter – Goldman Sachs & Co.

Sharon Zackfia – William Blair & Co. LLC

Nicole Miller Regan – Piper Jaffray

Joseph T. Buckley – Bank of America Merrill Lynch

Potbelly Corporation (PBPB) Q4 2013 Earnings Conference Call February 18, 2014 5:00 PM ET

Operator

Good afternoon. Welcome to Potbelly Corporation's Fourth Quarter and Full Year Fiscal 2013 Earnings Conference Call. The call will begin with prepared comments by management, followed by a question-and-answer session. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Mr. Matt Revord, Potbelly's Chief Legal Officer. Please go ahead.

Matthew Revord

Good afternoon everyone and welcome to our fourth quarter and full year 2013 earnings call. Before we get started I’d like to note that certain comments made in this call will contain forward-looking statements regarding future events or the future financial performance of the Company. Any such items including targeted results for 2014 in details related to our future performance should be considered forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties. I refer you to the documents the Company filed with Securities and Exchange Commission, specifically the Company’s final prospectus for its Initial Public Offering, which was filed on October 4, 2013. This document continued and identified important factors that could cause the actual results that differ materially from those contained in our projections and forward-looking statements.

Charlie Talbot, Potbelly’s Chief Financial Officer will now provide a brief call preface, before handing off the call to Aylwin Lewis, Potbelly’s Chairman and Chief Executive officer. Charlie?

Charles Talbot

Thank you. Before we get started as a reminder our results for both the fourth quarter and fiscal year ended December 30, 2012 included one additional operating week versus 2013. As a result our calendar weeks were not comparative on a year-over-year basis. As we discuss year-over-year results today, they are on a comparable 13 week versus 13 week and 52 week verus 52 week basis, which exclude the additional operating week.

We estimate the additional operating week to be approximately $300,000 of adjusted net income in 2012 both years include the Christmas holiday week, which more accurately reflects our year-over-year business results.

With that said, I’d like to turn it over to Aylwin Lewis.

Aylwin Lewis

Thanks Charlie. Welcome everyone. Before we get started, I wanted to thank our shop and support center teams for their continued hard work and commitment in making Potbelly a high growth company. Our fourth quarter results were good, considering our adjusted net income grows roughly 35% to $1.9 million or $0.06 per diluted share after neutralizing the effective tax rate difference in 2013 versus 2012.

Company operated comparable same-store sales were up 0.7%. Adjusted EBITDA increased about 17%. In addition, we opened 13 new shops during the quarter, which is at the high end of the guidance that we provided on our third quarter call. Fourth quarter was a very challenging external environment highlighted by the October government shutdown in Washington D.C. and the disruptive winter weather conditions that affected majority of our markets in December.

In spite these headwinds we delivered solid Q4 results at the high end of our EPS guidance as communicated on the Q3 call. Our comps for the quarter were below our internal expectations, however it is important to understand our comps trended inline with expectations in October and November. Charlie will speak to this later in the call.

Now, we want to be a well managed company and members of the Potbelly team and the shops and support center maintained a disciplined approach to the business and they work tirelessly to help drive our results. For the year the company operated comparable same-store sales were up 1.5%, adjusted EBITDA increased by 15%, adjusted net income when neutralizing the effective tax rate difference in 2013 versus 2012 rose roughly 50% to $0.34 per diluted share.

Charlie will talk you through the details later. I want to spend a few minutes discussing our new unit growth strategy, which we introduced in a road show remained on track. During the quarter we opened nine new company operated shops, four franchise shops bringing our total to 34 company shops and eight franchise shops for the year. This equates roughly to a 14% shop growth over the last 12 months. Our 2014 plan remains 35 to 40 company operating shops and at least five franchise openings, which will result in the net new unit growth of over 10%, which is our stated external target.

We get asked a lot about our new unit financial model and our performance. To iterate what we discussed on the road show and related presentations, we build shops to make money and we generate cash-on-cash returns greater than 25%. We measure those returns after the first two years of operations. Our real estate model determines how much in rent we can afford to pay for given site in the neighborhood. As a result, our sales volumes vary. We open new shops, but we deliver value as long as we generate the required cash-on-cash return.

Our ROI for our 2011 class shops, which include first five shops in New York City is well above the 25% target. Today we’re encouraged by 2012 and the 2013 shop classes. In recent years we have expanded into new markets. We opened hub cities of New York City; Seattle, Boston and Phoenix. We opened spoke cities of Cleveland, Kansas City and Portland.

We expect to open a new hub market in 2014 which is inline with our stated strategy of opening a new hub market approximately every 18 to 24 months. I believe our entry into these new markets coupled with the growth in our legacy markets as well as the significant amount of wide space that we remain untapped sets up about to deliver a long-term financial goals, and more importantly achieve our stated, at least 10% new unit growth for long period of time.

Our comparable sales mindset is something our folks always asked about also. Our long-term guidance and our 2014 outlook calls for low single-digit on an annual basis. We always strive to drive comps higher than this level. But in reality our model does not require heroic comp growth in order to achieve healthy return and to grow our profits.

With that being said, I just want to talk through our mindset and our philosophy. Our same-store sales growth is based on our sales growth pyramid. The base of that pyramid is what we call “The Best Place For Lunch”, is the foundation of what we do. 6% of our business between 11:30 and 2:30 and the goal there is to run it for a compete. We will use excellent operations, additional staffing, technology and equipment innovation to drive throughput through this period of time, 11:30 to 2:30 in majority of our shops. We believe that this will allow us to continue to grow in each of our neighborhoods, new markets as well as legacy markets.

The second run of the sales pyramid is what we call neighborhood growth drivers. It comprise three things. Backline sales, those are all the sales that are not done on the frontline, neighborhood outreach and music events. We use traditional media in our two large markets of Chicago and D.C. We run a low marketing spend, high touch, high experience, high loyalty business, which means open shops in neighborhood, grab back their share, rode over time and through our experience, through our operations, customers are very loyal.

We do continue to look to the sales building pyramid as our road map and we believe that is the right strategy for us. “The Best Place for Lunch” is important, we have a go-to-market approach with backline are our catering sales which will increasingly come important part of our business. We’ll always have good promotions quarterly that speaks to our innovation around our menu and sandwiches, and we expect our operators to beat marketers at the shop level, to reach neighborhood outreach and excellent operations.

We believe in the Potbelly story, we believing we have tremendous runway for growth. I am pleased with the progress we have made so far since becoming a public company. It was challenging in December through the conditions we didn’t control, the things we did control we believe we performed well.

So, I’d like to turn the call over to Charlie and he will walk you through the details of our financial results.

Charles Talbot

Thanks Aylwin. Good afternoon everyone, as Aylwin mentioned we are proud of our fiscal fourth quarter financial results. Overall total revenue increased 9.9% in the quarter to $75 million driven by strong new unit results and an increase of company operated comparable shop sales of 0.7%.

As I mentioned at the beginning of the call our 0.7% comp in the fourth quarters of 13 week to 13 week comparison including holiday weeks in both years. As Aylwin stated before the 7% comp growth for the quarter is below our total expectations. But I think it is really important to understand the story behind the numbers to gain a more accurate picture of our comp and revenue performance for the quarter.

As we have discussed on our Q3 call, our comps were trended in line with our expectations in October and November excluded the impact from the government shutdown in October, re-estimated to be around 30 basis points for the quarter.

As a team here will attest, I hate talking about weather in related to our sales results. Generally it snows and its cold every winter, but this year it’s been extremes, but I have to talk about weather. There is no doubt that the disruptive weather conditions in early December adversely impacted the traffic trends, particularly in our stores in the mid-west, northeast and Texas which comprise over 50% of our comp store base.

We are encouraged by our performance in late December sales were bounded back to positive comp levels. We estimated the impact of more severe weather this year versus a year ago in Q4, to be roughly 120 basis points for the quarter and 310 basis points for the month of December. Knowing this the 0.7% comp growth was driven primarily by traffic growth from our price increase in Q1. We did not take any additional price increases in the fourth quarter. As enhanced pizza sandwich served as our quarterly promotion and across the majority of our existing markets in addition to the Clubby sandwich promotion in some of our emerging markets both were well received by our customers and also contributed to the check growth.

During the quarter we ran a promotional featuring our peppermint shake which helped drive add-ons and increase our average check. With the holiday season we also had promotions around gift cards and box set of cookies, all these initiatives performed inline with expectations.

Moving down the P&L, shop-level profit margin was 19% and the adjusted EBITDA margin was 12% for the quarter. The following are some additional detail on Q4 results in our 2014 outlook for major areas of the P&L.

Cost of good sold as a percentage of net sandwich shop sales decreased in accordance 29.1% down 20 basis points from prior year and 50 basis points from Q3. This is driven by favorable menu primarily.

Inflation for the year was roughly 2%, which was covered by price increase we took at the beginning of 2013. At this time we expect roughly 1% to 2% inflation in 2014. Labors as a percent of net sandwich shop sales increased in the quarter to 28.7%, an increase of 20 basis points from prior year. This was driven primarily by our 9 company-operated shop openings during the quarter versus 7 in prior year.

For the full year of fiscal 2014, we expect labor as a percentage of net sandwich shop sales to range from 28% to 29%. We anticipate continued leverage from our comp units partially offset by labor and efficiencies from the 35 company-operated to 40 company-operated new openings in 2014. December will fluctuate by quarter, based on the sales seasonality and timing of new unit openings. In addition, we recognized there maybe some timing fluctuation from payroll tax expense on option exercises of 2014 that we obviously have not experienced in the past.

Operating expenses, as a percentage of net sandwich shop sales increased in the quarter to 10.4%, up 30 basis points from prior year, driven primarily by higher credit card usage from our customers.

For 2014, we expect operating expenses as a percent of net sandwich shop sales remains at similar levels as 2013. Occupancy expenses as a percent of net sandwich shop sales increased in the quarter to 12.9%, up 40 basis points from prior year, driven primarily by our nine company-operated shop openings during the quarter. For 2014, we expect occupancy expenses as a percent of net sandwich shop sales to range from 12% to 12.5%.

General and administrative expenses increased to $15.4 million during the fourth quarter from $7.1 million in the fourth quarter of 2012. The increase was driven by approximately $9.5 million of costs associated with our IPO and ongoing public company costs, including $8.8 million of one-time stock-based compensation charges at the IPO, as well as $600,000 of ongoing public company costs and $100,000 of one-time expenses. Excluding the IPO and ongoing public company costs, general and administrative expenses were approximately $5.9 million or 8% of revenue, driven by healthy cost controls.

In 2014, excluding the IPO and ongoing public company costs which we predict to be approximately $2million to $2.5 million in 2014, we expect an increase to general and administrative dollars from 2013 levels, given our overhead investments in the business to support our growth. Our intent is to continue leveraging our fixed costs over time, which we have done a nice job of in 2013. However, we do not expect the same leverage, level of leverage in 2014 as we experienced the 2013, driven by the level of investment we are making in the field leadership teams and corporate office to ensure we have solid instruction to grow the business at the pace we intend to.

You will see an increase in dollars in Q1 from Q4 levels related to these investments. As you see in the income statement, we have tax adjustments in both years. So, I wanted to provide some color to help you understand these adjustments. At the end of 2012, we’ve reported a $16.9 million benefit to income taxes in order to release the full valuation allowance against our deferred tax assets based on a determination that more likely than not we would use our deferred tax assets.

At the time of the release the deferred tax assets were measured based on a resumed federal tax rate of 34%, primarily due to historical net operating losses the Company reported on its balance sheet as well as favorable tax depreciation rules.

In Q4 of 2013, we determined our deferred tax assets should be measured based on a federal tax rate of 35% as a result of the expiration of our favorable federal tax depreciation rules as well as the utilization of our NOLs. As a result of our analysis, we recorded a $600,000 tax benefit related to the increase in the federal statutory rate. Both adjustments are removed in our adjusted net income numbers. For 2014, we expect our effective tax rate not to exceed 39.5%.

As Aylwin mentioned, our adjusted net income for the fourth quarter was $1.9 million or $0.06 per diluted share when neutralizing the effective tax rate difference of 8.3% in 2012 and 39.1% in 2013, as well as removing the estimated extra week impact in 2012, our adjusted net income growth is roughly 35%.

For a reconciliation of reported to adjusted net income please refer to the reconciliation table we included in our fourth quarter earnings release. Additionally, we’ve posted a supplemental schedule to our Investor Relations website that outlines our comparable year-over-year growth rate.

Now turning to development, during the quarter we opened nine new company-operated shops and four franchise shops bringing our total to 34 company and eight franchise openings for the year. The nine new company-operated shops opened roughly an even mix of what we consider our new and our legacy markets. As we move forward, we anticipate roughly 50/50 new versus legacy market split continue to fill out the nation.

At the end of the fourth quarter, we had 319 shops of which 296 company-operated shops are located in 21 states and the District of Columbia as well as 23 franchise shops including 12 in the Middle East and 11 in the U.S. The 319 shops at the year-end reflects two shop closures during the year, one of which was in Q4. We have no specific plans to close any shops in 2014, although we will close shops if it makes sense to do so financially.

Now, let me turn to the full year outlook for fiscal 2014. But before we get into the detail, I think it’s important to reiterate our long-term growth targets that we communicated during the IPO process. These include total new shop growth of at least 10%, low single-digit comparable shop sales growth, annual adjusted EBITDA growth of 20%, annual adjusted net income growth of 20% or more and return on capital investments of at least 25%.

Our projected adjusted net income growth for the fiscal 2014 is between 25% and 35%, which is in line with our long-term guidance. The projection is driven by 35 to 40 new company-operated shops including at least one new hub market and at least five franchise shops.

Low single-digit company-operating comparable sales growth driven by a combination of traffic and check, overhead investments to enhance infrastructure to support our growth plans, shop leader bench to building investments and new hub market expansion costs, effective tax rate not to exceed 39.5%, capital expenditures of $30 million to $35 million driven primarily by the 35 to 40 new company-operated shops, continued refresh and revenue enhancing investments, and finally full year 2014 shares outstanding should range between 30 million and 32 million shares.

With all this being said, Q1, to-date has been extremely challenging as top and bottom line results to-date are below our targets driven by disruptive weather in all of our major markets.

So, projected top line revenue, weather impacted Q1 to-date is worse than the estimated 310 basis point projected impact in December. But despite these early challenges we remain committed to achieving our full year adjusted net income growth of 25% to 35%. Given the challenges we discussed in Q1, we expect this growth will be driven by the last three quarters of the year.

Now with that, I’ll turn it back over to Aylwin for summary remarks.

Aylwin Lewis

Thanks, Charlie. I like Charlie hate talking about the weather, but here’s the reality, was the reality for 2013 December is reality of January and February of 2014. It’s not only disruptive from a business perspective, but was very disruptive to our employees and to our customers. We’re waiting for some normal days, so we get a sense of kind of when the business will be back.

Now in D.C. last week when I got the 12 inches snow and through horrible situation I was proud of the members the Potbelly Nation at D.C. We had about 10 of our shops opened in the district, one of the few companies that opened that day. We had heroic efforts by our associates in those shops, managers sweeping the shops, folks taking deliveries to customers in the snow, dragging the product through snow laden streets and I think that spirit just talks about what we have made of as a company.

We’re very committed to our long-term goals. We’re very excited about our ability to create value. We’re very confident in our ability to grow this business. Like Charlie said, we have not come off of our 2014 targets, because we still have 10 periods left in the year. We believe we have very innovative and exciting marketing calendar for the balance of the year and we will be well controlled.

So with that, I’ll open it up for questions. So, operator, we open the lines.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is from David Tarantino.

David E. Tarantino – Robert W. Baird & Co.

Hi. Good afternoon. A couple of questions on the outlook, maybe first related to Q1. I know you mentioned that the quarter started in tough fashion given all the weather issues, but I’m curious Charlie, if you can give us any sort of directional guidance on how to model Q1. It sounds like perhaps you’re not looking for much earnings growth or and you might see comps may be come in shy of where you were in Q4. But just if you could give us some directional guidance to help model Q1 that would be helpful.

Charles Talbot

Yes, I mean it's going to be directional, David. Obviously we’re not through the quarter, yet and we’ve had a number of weeks. That was very hard to get a read on the business because of everything we talked about on the call. What I will tell you and what I mentioned in my remarks is that simply for the first, call, six, seven weeks of the quarter, the impact was more significant than what was on December in terms of our results versus the trend. So, I hate to guide you on Q1 at this point other than to tell you, what has already happened. As Aylwin talked about we’re very optimistic where we’ve seen normal conditions, we’ve had a healthy business. And so, hopefully we’ll get to that point here very soon.

David E. Tarantino – Robert W. Baird & Co.

And then on the earnings front, I guess, perhaps it would be helpful if you just maybe highlight what you are thinking for Q1 now that you are seeing all the weather issues? And then overall the 2014 earnings outlook was a little bit lower than what we are looking for. And I was wondering how much of that has to do with Q1 on its own or I think you also mentioned that labor expenses could be leveraged maybe can you explain kind of the underlying underpinning of the labor line as we look out to this year, so…

Charles Talbot

Yes, so good question David. I think two things, one is, there is a recognition that we are off to a slow start, but that doesn’t suggest we won’t achieve the desired targets that we have from a long-term growth perspective. And so that’s what we are really holding to.

The second thing as Aylwin mentioned, we are planning to open a new hub city this year with that comes from investments that are – that didn’t happen in 2013 and so we try to incorporate a reasonable estimate on what it will cost to open that new market and new foundation for growth in the business. So, that that’s really what you are seeing relative to new what you had looked at before.

David E. Tarantino – Robert W. Baird & Co.

Great. Thank you.

Operator

Your next question comes from Michael Kelter.

Michael Kelter – Goldman Sachs & Co.

Yes. First, I guess the first thing I wanted to ask is, unit guidance for company openings and franchise openings. The midpoint of your ranges are assumed to be a bit below the prior thinking, have any of the previously anticipated openings went into 2015 have been removed from the schedule at all or might there be some conservatism built in?

Aylwin Lewis

Yes. We were 35 to 40 as we stated for the company perspective. We said plus 5 for franchise we just said, but I think we got it about eight from a franchisee perspective, so that’s kind of where we are. We have not changed and actually that’s one phase of the business weather hasn’t impacted. We have very good visibility on 2014 in terms of what’s again what’s under lease and what’s under construction, and we feel very good about the targets we’ve got.

Michael Kelter – Goldman Sachs & Co.

And then you mentioned that the 2011 class was above the 25% ROIC hurdle rate after the two years in market. How does the 2012 class and 2013 class compared to that 2011 class in terms of AUV’s margins, how is it evolving over time and even after 25% plus numbers intact, what are some of the differences as you evolve?

Aylwin Lewis

2012 had more New York shops and New York and Boston and we’ve talked about this on the road show, those were lower shop margin businesses and high dollar businesses. So, you have New York and Boston in 2012, and then in 2013, I would say 2013 is very close to what we did in 2011, but it’s very early on those set class to calculate the returns. But our commitment that we talked about on the road show we’re opening shops we’ve had some ability to grow the business over time, so in return and we keep growing it. And we haven’t seen a marked difference in that in these two classes.

Michael Kelter – Goldman Sachs & Co.

And the increased infrastructure expenses that you talked about for 2014, can you elaborate on that for us. Give us an idea of what you’re spending on, what you need to do there. And then, also talk about maybe any other step-ups that may need to happen in future years?

Aylwin Lewis

Well we are opening a new hub market and like we said on the Road Show those – those are expensive, we are moving both from legacy markets there, we’re acquiring new labor in the market – in those new cities we’re in, that is expensive. That is why we can only afford to open a hub city every 18 months to 24 months. So it’s strictly moving Potbelly nation folks growth from the core business to a hub city. It’s a training and hiring of folks in those new cities.

And then it’s, since the general support around as we continue to grow we need real estate folks, we need construction folks and that – you’ve got to stay ahead of that or else your pipeline won’t grow.

And then we had expenses of being a public company which is part of that of course that will be in the base. And we don’t see that increasing, but that is the difference between this year and last year. So those two things are primarily what it is. And again, we are very transparent on when we go to hub cities and like I said that’s every 18 months to 24 months.

Michael Kelter – Goldman Sachs & Co.

And then the last thing, I know you guys aren’t reliant on constant new product launches or promotions to drive same-store sales. But and that said, is there anything on the horizon in 2014 that we should be paying attention to?

Aylwin Lewis

We believe we have a couple of new exciting items, one in the spring and then one in the early summer that we think we should see. We get quarterly promotions, we have an interesting approach to the IPOs and we don’t bring items there and we kind of use our underground menu to do that. And then occasionally we have major product innovations in this year we have a couple major product innovations that will help drive the business. And quite frankly, as we are kind of excited about the balance in the year and our ability to overcome the first seven weeks.

Charles Talbot

And Michael, just one thing add to Aylwin’s comments just one other things that we will continue to drive to the business at neighborhood-by-neighborhood is the sole notion of building our backline business. We think it’s an opportunity that is in early stages if you will, and so that’s another part of the growth that we have looking at 2014.

Michael Kelter – Goldman Sachs & Co.

Thank you very much.

Operator

And your next question is from Sharon Zackfia.

Sharon Zackfia – William Blair & Co. LLC

Hi, good afternoon. Question on food inflation, I think you said 1% to 2% food inflation for 2014. Can you talk about your pricing plans and the context of that about food inflation, and then Charlie, just to clarify, I think you did 1.5% comp for 2013, is that the same kind of comparable to the guidance that was 1% to 1.3% or was there any loss there with the 52 weeks, 53 weeks?

Charles Talbot

Okay first, so to start with the inflation, Sharon, the biggest thing that we see in terms of inflation is really potential base around dairy, pork and beef and so that – some beverages. So we will adhere to our policy of pricing all in to cover inflation. So you will see very balanced pricing in 2014 as we sit here today. And I think that in terms of the year-over-year comp growth for the 53rd week that was your second question.

Sharon Zackfia – William Blair & Co. LLC

Yes, I’m just trying to figure out that 1.5%. If that’s comparable to the guidance you had given last quarter, 1% to 1.3% for the full year.

Charles Talbot

Yes, that is comparable. So I think that’s the short answer.

Sharon Zackfia – William Blair & Co. LLC

Okay, great. Thank you.

Operator

And your next question comes from Nicole Miller.

Nicole Miller Regan – Piper Jaffray

Thanks. Good afternoon. On normal days in the quarter, could you talk about the throughput on a store basis? You’ve made investments with ovens, the shake stations technology. So just what is the performance of those stores, is it fully implemented and has it been fully realized in the system, the benefit?

Aylwin Lewis

We’ll have best ovens in ever shop by the middle of the year and so we’re in the process of building that out. What I would tell you, Sharon, is the normal days we’ve had, the few we have had, we’ve seen the normal operations and we’ve seen a reasonable sales trend in markets that have not been impacted by weather at all. We are well within our guidance of the low single-digit same-store sales. And so that gives us hope. It’s stuff like this – there is nothing you can do about the weather. It’s so frustrating and each week you’re like is this the week? Is this the week? We have just had waves and waves and waves. And so, I think someone wrote that the industry will figure out where the comps are made.

We hope it sooner than that, but we’re confident of what we’re doing. We believe our customers are very loyal to the brand because of the relationship we have and our approach to marketing. So we think in a single day we’ll be back in driving the business hard. But I would say the operations even in the turbulence time, I’m very proud of men and women in the shops and their ability to operate under a worst situation. We have not seen a drop off in throughput with the customers coming in the door. We have not seen a drop off in the mystery shops or anything like that.

Nicole Miller Regan – Piper Jaffray

And just a last real quick one. The shop managers that live in their neighborhood, can you tell us where is that back today and versus a long-term goal and just a real point of curiosity here, maybe those are the guys that kept those stores opened in those bad weather days and those are the guys that are delivering. Is that true?

Aylwin Lewis

Well, partially. So we’re at mid 60s for the managers that live in the neighborhood. The long-term goal is 80% and we’re driven towards that out there. Some markets are very close to that and others are not. I will tell you my experience in D.C. We had folks, the three of four managers that slept in the stores. They lived far away. There are few folks who live in D.C. So as you live in closer to neighborhood, it helps. I talked personally to an associate that walks two miles to get to the metro station because the buses weren’t running, so he could get to work. So that type of stuff is just tremendous. I hate it, being in that weather, but being there to say thank you to those associates and everybody that had to stay home, it was tremendous and that type of spirit is what makes us special, is what makes me believe in what we are doing, our their ability to drive short-term, long-term value creation.

Nicole Miller Regan – Piper Jaffray

Thank you.

Charles Talbot

Thanks Nicole.

Aylwin Lewis

Okay. So if there is no other questions, I want to thank everybody for participating in the call. Again we believe in what we’re doing. We have another…

Charles Talbot

Operator, can we hold for just for one [ph].

Operator

(Operator Instructions) Your next question comes from Joe Buckley.

Joseph T. Buckley – Bank of America Merrill Lynch

Thank you. I thought I was queued out, but apparently not to the last moment. Just a couple of questions. Was the new hub market for this year, was that in your plans at the time of the IPO, is that a relatively new decision, and then if you can, what market is it?

Aylwin Lewis

Joe, you’re really good man, but obviously we probably won’t tell you that. Listen, we made that decision late last year after we looked at our strategy. We did the strategy in September, do capital planning and that was part of the capital planning and strategy. So we did that late last year. It was not something that we had decided as we’re doing the road show.

Joseph T. Buckley – Bank of America Merrill Lynch

Okay. And then, to make sure everything is clear on the guidance. So, the up 25% to 35% is of the 1 million of adjusted net income for 2013. Is that correct?

Charles Talbot

I'm sorry. It's up. Could you ask that again, Joe? I didn’t quite hear you.

Joseph T. Buckley – Bank of America Merrill Lynch

Sure. You guided up 25% to 35% in adjusted net income. Is that about the $8 million number for 2013?

Charles Talbot

Yes, it is.

Joseph T. Buckley – Bank of America Merrill Lynch

Okay. And so, obviously you’re making some assumptions about the first quarter. That range is less than we were expecting. Can you elaborate, I mean is the first quarter going to be a loss or how big a variance of the first quarter do you think you will be?

Charles Talbot

Well, I think I’d answer that earlier, Joe, I mean I think that we’ve gone through part of the first quarter and we beat this up already. So I’m not really – I don’t need to go back there, but it’s been really challenging first quarter. That’s obviously contemplated as we think about full year and the growth that we’re planning I’m clear now. What I will tell you is that we will do everything we can to make up the gap that we’ve had over the first couple of period and a half or so a few months and we had time to do that. So just now that's our mission at this point.

Joseph T. Buckley – Bank of America Merrill Lynch

Yes, I guess the gist of my question is, if you are going to be lower than we thought for 2014, it's because of horrible weather for seven weeks. That's one day. If you guys come in lower than…

Charles Talbot

Sorry.

Joseph T. Buckley – Bank of America Merrill Lynch

If you guys come in lower than 2014 for other reasons that’s another thing.

Charles Talbot

Yes. And that’s the other piece of the puzzle, which is we are going to enter a new hub market as Aylwin talks about. It has some investments that are necessary to do that. We’re going to do it the right way. So those are the two main stories as you think about the growth rate we committed relative to where you might be.

Joseph T. Buckley – Bank of America Merrill Lynch

Okay. Thank you.

Charles Talbot

Okay.

Aylwin Lewis

So we’ve had – appreciate everybody, great questions and like I said we believe in what we are doing and long-term, short-term, I think we have a great concept here and we’re going to stay busy, trying to create value. So, thank you very much and thank you for your time.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. You may new disconnect your lines.

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