Potbelly Corp's (PBPB) CEO Michael Coyne on Q3 2017 Results - Earnings Call Transcript
Potbelly Corp (NASDAQ:PBPB) Q3 2017 Earnings Conference Call November 2, 2017 8:00 AM ET
Matthew Revord - Senior VP, Chief Legal Officer, General Counsel & Secretary
Michael Coyne - Interim CEO & CFO
Nicole Regan - Piper Jaffray Companies
Sharon Zackfia - William Blair & Company
Mary McNellis - Robert W. Baird & Co.
Gregory Francfort - Bank of America Merrill Lynch
Stephen Anderson - Maxim Group
Karen Holthouse - Goldman Sachs Group
Greetings, and welcome to the Potbelly Corporation Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Revord, Chief Legal Officer for Potbelly Corporation. Thank you. You may begin.
Good morning, everyone, and welcome to our third quarter earnings call. Before we get started, I'd like to note that certain comments made on this call will contain forward-looking statements regarding future events or the future financial performance of the company. Any such statements, including our outlook for 2017 or any other future periods, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance nor should they be relied upon as representing management's views as of any subsequent date.
Forward-looking statements involve significant risks and uncertainties and events or results could differ materially from those presented due to a number of risks and uncertainties. Additional detailed information concerning these risks regarding our business and the factors that could cause actual results to differ materially from the forward-looking statements and other information we'll be giving today can be found in our most recent annual report on Form 10-K under the headings Risk Factors and MD&A and in our subsequent filings with the Securities and Exchange Commission, which are available at sec.gov.
I'll now turn the call over to Mike Coyne, our Chief Financial Officer and interim Chief Executive Officer. We'll begin with his perspective on the third quarter performance, provide a discussion on our ongoing strategic initiatives. We'll then review our financial results and future outlook in more detail before we open the call up for your questions. Mike?
Thanks, Matt. Good morning, everyone, and thank you for joining the call. I'd first like to give you a quick recap of what we highlighted in our press release that we issued this morning. During the third quarter, we generated revenue of $106 million, an increase of 2%, driven by new unit growth. We opened 8 new shops, including 6 company-operated shops and 2 franchised shops. We generated adjusted EBITDA of $9.6 million and adjusted net income of $1.9 million or $0.07 per diluted share. Comparable store sales, which decreased 4.8%, reflect a continuation of the negative traffic trends that we saw in the second quarter.
As we had stated at the beginning of the year, we expect that 2017 to be a tough year due to the overall macro environment. And our performance in the third quarter reflects a continuation of the headwinds that we and others in the industry have pointed to. It is against this backdrop that we are focused on executing our strategies to address near-term sales challenges as well as to position Potbelly for success over the long term.
Let me update you on a few of the sales initiatives designed to improve traffic and grow sales in the near term. First, we remain focused on increasing convenience and customer engagement through investments in technology to drive sales growth. As I previously discussed, we launched our new mobile app and redesigned website earlier this year to allow consumers to more conveniently access Potbelly.
During the third quarter, we launched several initiatives to drive app downloads and online order conversions. First, we launched a Week of Perks to kick off National Sandwich Month in August. This inaugural campaign was designed to encourage people to download our app or visit our website to enroll in Potbelly Perks. The campaign aimed to feed our customers' smile with a new perk every day for a week with featured perks including the chance to win Potbelly for a year, free desserts and chips, offers for sandwiches and opportunities to receive double smiles for purchases.
In addition, we also deployed tactics to leverage the mobile app and Potbelly Perks loyalty program to drive non-lunch daypart traffic and sales around our fantastic cookies, snacks and shakes. We continue to see strong customer adoption of Potbelly Perks and currently have a growing database of over 460,000 registered Perks members and we will continue to leverage digital advertising to drive frequency and sales.
In addition to technology, we continue to focus on menu innovation and backline as sales growth drivers. Last quarter, we introduced our new premium Turkey Club Sandwich, which featured all-natural, slow-roasted premium turkey with Nueske's bacon and melted cheddar cheese. The Turkey Club was very well received and provided a contribution to mix that exceeded our expectations. In fact, it had done so well that it became our best-performing L TO and therefore has earned a permanent spot on our menu.
In October, we have brought back our Craft-Your-Own Macaroni & Cheese and our Pumpkin Pie Cookie, which are seasonal favorites, as well as our hot pastrami sandwich. Our high-quality premium sandwiches continue to do well for us. Our menu innovation pipeline remains robust. And we continue to look for ways to evolve our menu to drive high-quality premium offerings, address relevant trends and customer expectations and to drive same-store sales.
Now turning to backline. Our backline is about 15% of sales and we believe there remains a tremendous opportunity to grow this business. Backline is an important sales driver with great flow-through and minimal capital requirements. And we continue to make investments in catering sales managers, optimized delivery models and catering kitchens. During the third quarter, we opened a catering kitchen in Virginia. And we will continue to be opportunistic with investments in additional catering kitchens over time.
Now turning to our third quarter advertising and marketing initiatives. During the quarter, we tested television advertising for the first time with a commercial in Chicago, which we believe will help drive greater top-of-mind awareness and traffic. The spot highlighted our premium Turkey Club LTO and ended with a call to action to download our app and come in for the LTO. We are encouraged by the initial results and expect to continue to explore this channel as a way to reach a broader audience. We will increase our advertising to our more traditional channels, focusing on our major markets with scale to get the best leverage on this investment.
In addition, last quarter, we refreshed our messaging with the launch of our new Feed Your Smile campaign. Feed Your Smile is not only the Potbelly tagline but also the umbrella marketing theme that will integrate our LTOs, our neighborhood initiatives and Potbelly Perks. We intend to reinforce this key brand messaging across multiple channels through customer-engaging campaigns. We believe the combination of our friendly people, our welcoming atmosphere with live music and customizing your food exactly the way you want lets us provide a little escape in your day to truly Feed Your Smile. We are committed to these tactical initiatives and brand strategies to help drive both sales growth and profitability over the near and long term.
Now turning to our strategic review. As I discussed last quarter, we've undertaken a comprehensive review of our business strategy to analyze every aspect of our business, including, but not limited to, our capital structure and allocation, operational productivity, our marketing strategy, company-owned unit growth and potential ways to accelerate franchising. The ongoing strategic review remains a priority for the board and the management team as we continue to work to evaluate all opportunities with the ultimate objective to maximize shareholder value.
Let me spend a few minutes to provide an update on our progress. First, I'll provide an update on our unit development strategy. As you know, we've been moderating our company-operated shop growth recently. And we expect this to continue over the near term. As a reminder, in early 2016, we announced our intent to open 45 to 50 company-operated shops. And we finished the year with 40 new company-operated shops. Earlier this year, we announced our intention to open 30 to 40 new company-operated shops for the year. Last quarter, we revised our outlook to 30 to 35 new company-operated shops for the year. As we look out to 2018, we expect our company-operated shop growth to continue to moderate. And while we are not providing 2018 guidance at this time, as a result of our strategic review, we now expect our company-operated store growth to be less than half of 2017 levels.
At the same time, we expect to make investments to accelerate our franchised unit growth strategy. One of the pillars of our strategic framework is to be a great franchisor. However, we have historically taken a more measured approach, working with single unit operators in secondary markets, and more recently, with small multiunit operators. As we look out to 2018, we are we recommitting ourselves to the franchise business, and we'll be allocating more resources towards this business. We have been engaging with key franchise industry players to build our institutional knowledge base. We utilize a franchise consultant to help us assess our current state, identify opportunities and develop a game plan to build capabilities and accelerate growth. In addition, in the fourth quarter, we will begin a search for a franchise executive, who will be tasked with spearheading this strategy to meaningfully increase the franchise mix of our portfolio going forward. We believe there remains a tremendous whitespace opportunity for the Potbelly brand.
In addition to new shop development, we are also focused on portfolio optimization. We have engaged our real estate adviser to assist us in a focused evaluation of a targeted group of underperforming shops. We are exploring opportunities to exit our least profitable locations in order to improve our portfolio returns. We were able to successfully close 3 underperforming locations within the third quarter. And these efforts will continue as we move forward.
As we continue to evaluate the composition of our system mix going forward, it's also important to consider how we envision the Potbelly shop of the future. We are in the process of designing a shop that will modernize and streamline the customer experience and convenience through the use of technology while highlighting our brand differentiation. Critical to this process is finding ways to reduce the cost of the box while maintaining the brand experience, which should improve the returns for the company as well as for our franchise partners. We expect to open a prototype location in 2018.
Finally, we have also been evaluating our allocation of capital. As I mentioned earlier, we will be substantially slowing the pace of company-owned unit growth in the near term. This will generate additional excess cash flows and provide even greater liquidity and financial flexibility for the company. While we will use some of the capital for continued investments in technology and brand-building initiatives, the majority of the excess cash flows will be utilized to repurchase additional shares. The strategic review remains ongoing, and we look forward to providing an update as appropriate over time.
Now I'll turn to a brief walkthrough of our P&L and then an outlook for the year. And as I mentioned earlier, our total revenue was $106 million in the third quarter, with a company-operated same-store sales decrease of 4.8%. Breaking down same-store sales, our average check grew approximately 4%, driven by a combination of price and mix. In addition, the overall comp base was negatively impacted by about 30 basis points due to Hurricane Harvey, which shut down over 20 shops that we owned in the greater Houston area for several days. All of these shops, except one, have since reopened and have returned to normal levels.
Our shop-level margin for the quarter was 18% of company-operated sales as compared to 19.5% in the prior year period. Cost of goods sold was up 27% in the third quarter, an improvement of 60 basis points to the prior year, driven by pricing and partially offset by modest inflation. Labor was 29.6%, which was an increase of about 40 basis points from the prior year, primarily driven by wage inflation, partially offset by our price increases. Occupancy expense was 13.6% in the third quarter, an increase of 90 basis points as compared to the prior year period due to sales deleverage and inflation in certain occupancy-related costs, including lease renewals, real estate taxes and common area maintenance.
Operating expenses were 11.8% in the third quarter, an increase of 80 basis points compared to the prior year period due largely to sales deleverage in operating expense items, such as repairs, maintenance, utilities and other expenses not directly variable with sales. Our general and administrative expenses were approximately $12 million in the third quarter, an increase of about $2 million, driven primarily from severance and equity compensation charges related to the departure of our previous CEO. Excluding these expenses, our adjusted G&A is approximately $10.9 million or 10.3% of total revenue, which is an increase of about 60 basis points, driven primarily by our investments in advertising.
Our adjusted EBITDA was $9.6 million for the quarter, which was a decrease of 13.5% from the prior year period, mostly driven from our decline in same-store sales and labor and occupancy inflation. For the third quarter, we had an income tax benefit of $487,000, which resulted in a year-to-date income tax expense of $252,000 or approximately a 34% effective tax rate. As we look to the fourth quarter of 2017, we expect Accounting Standards Update 2016-09, which pertains to the recognition of excess tax benefits and deficiencies related to share-based compensation, to have a material unfavorable impact on our income tax provision based upon the options which will expire during the quarter and the associated deferred tax assets.
Our adjusted net income for the third quarter was $1.9 million or $0.07 per diluted share as compared to adjusted net income of $3 million or $0.12 per diluted share in the prior year period. Regarding our share repurchase program, in the third quarter, we repurchased approximately 330,000 shares of Potbelly common stock in the open market for a total of approximately $3.9 million. And at the end of the third quarter, we had $18.8 million available from our board-authorized program for repurchases, which will continue as we move forward. Our CapEx came in at approximately $8.2 million. Our balance sheet remains very strong with a cash balance at the end of the third quarter of $22.2 million and we have 0 debt.
Turning now to our outlook for the full fiscal year 2017. We reaffirm our account sales guidance to be a decline in the mid-single-digits range for the full year 2017. We continue to expect relatively modest levels of goods inflation for the full year. While we have seen recent inflation in certain specific produce items, we continue to expect cost of goods sold in the range of 26.5% to 27% for the full year. We continue to expect labor as a percentage of sales to trend around 30%. Our guidance assumes continued wage pressures from minimum wage increases implemented last year as well as expected statutory and inflationary pressures in part offset by the price we have taken.
For the year, we continue to expect our adjusted G&A expense to be in the range of $41.5 million to $42 million, excluding the full year onetime cost of approximately $2.5 million related to the CEO transition. Given the continued macro challenges on the top line, the recent hurricanes, specific COGS inflation and the investments in our near-term sales tactics and investments related to our evolving strat review, we are now expecting our adjusted net income per diluted share to be at the low end of our guidance in the range of $0.30 to $0.33.
Our guidance of a 36% to 38% tax rate as well as our guidance on our adjusted EPS excludes the previously mentioned expected material unfavorable income tax impact of Accounting Standards Update 2016-09. Finally, as we have previously guided, we expect to open 30 to 35 new company-operated shops and the low end of our outlook of 15 to 20 new franchised shops. We continue to expect to spend between $33 million and $35 million on CapEx in 2017.
In closing, Potbelly is a proven and differentiated brand. While we are disappointed with our sales performance in what continues to be a very challenging and competitive environment, we remain focused on executing against our initiative that we believe will drive sales and traffic. We've made and will continue to make investments in technology and convenience to drive a superior guest experience. We have a strong pipeline of menu innovation, which will further strengthen our connection with our customer. And we are committed to building a brand for the long term through our ongoing strategic review.
Thank you all for your time today. We appreciate you being on our call and the support of our business. Now we'll turn it over to the operator and we'll open it up for questions.
[Operator Instructions]. Our first question comes from the line of Nicole Miller with Piper Jaffray.
A couple of quick ones. First, on the comp, could you please talk through the components of price, mix and traffic?
Sure. Thanks for joining the call. Yes, so we had a price in there at about 2.8% of price. We had a very good mix quarter for the reasons I mentioned on the call. That contributed 1.2%. But it left our traffic down 8.8% for the quarter. I mentioned that we had the impacts from the hurricane. And that impacted us about 0.3% or so.
And then on the mobile loyalty launch, what consumer data are you collecting, if any yet? And if you are, what does it tell you?
We're still even at 460,000 or so, I would still call it in the early stages of collecting that data. We certainly are able to start differentiating our marketing offers against the different customer profiles and their activities and what they buy and the frequency, et cetera. But I would not say that we're at that stage of where we'll be in, let's say, another year from now in terms of mining that in a more robust way.
And then just a last question if I may. Would you lever up? Would you consider taking on debt to do incremental share repurchase beyond cash on hand?
Thank you for asking. It's something that we certainly take a look at. And one of the elements of our strategic review that I didn't specifically call out in our prepared remarks, in part because it's still ongoing, we obviously have a terrific balance sheet with no debt right now and ample cash and plenty of overall liquidity. So I would say today, we're not saying that we're levering up. But as we complete kind of our ongoing review, it is something that we will consider.
Our next question comes from the line of Sharon Zackfia with William Blair.
I guess a question on cadence in the quarter. I mean, if you exclude the hurricanes, it seems like things maybe got a little bit better for you as the quarter went on or at least better than what it sounded like in July. I'm not sure if I'm inferring that correctly. And obviously, the full year guidance range gives a lot of options for what the fourth quarter could look like. So I don't know if you want to maybe give us any indication of how you're expecting the fourth quarter comp to shape up. And then moving on to the franchise initiative, I guess I'm just curious as you start to focus on that more kind of build out your muscle to do that more aggressively, how much of a lag would we expect before that's kind of a material acceleration, if you will, in terms of the growth rate.
Okay, good, thanks. I think I've got that all in. At the cadence, yes, you have that right, that August and September were certainly at least incrementally better than July. Even after you adjust for the 4th of July shift, it was still incrementally better in August and September. And like I think you've heard from some others as well, as we finished the quarter, the last week or 2 of September and then into October were better than kind of the quarter average as well. So that's the comment on cadence. Relative to the fourth quarter, you're right, what we - we didn't change the guidance. We said we would be down mid-single digits. That has, for us, meant in that 4.5% to 5% range is where we've been for the last couple of quarters, right?
And so what I would say is even though we've seen a little bit of improvement in October relative to September or the Q3 average, I would say that you should expect us to be in a similar range in which we've been running. And then lastly, and you can follow up on any of those, lastly on franchising - thank you for the question, right, because as we, as you say, are building out the muscle, right, we're building something foundational here that we really have not had before in terms of both knowledge and resources and capabilities. And it does take some time. I think of what we're starting to do now and what we'll be doing in '18 is that capabilities building and building a foundation. I think we'll make some progress to be sure. But what we have learned is that it does take a little bit of time. For certain, we can continue to do the types of things we've been doing with the one-offs or the small multiunit deals. But to get to - to move up that food chain, if you will, that's going to take a little bit of time. And we need to get somebody in here to help us run that.
I mean, just to follow up, Mike, is this something where you would anticipate like 2019 that we start to see you move up that food chain? Or is that still too aggressive of a pace?
I don't think that's too aggressive a pace. I think that with what we have intended to do here really, I'll say starting today, right, starting as a result of what the progress we made so far on the strategic review and through into '18 should set us up really well as we get into '19 and beyond.
Our next question comes from the line of Mary McNellis with Robert W. Baird.
First up, do you see potential for refranchising to be a bigger part of the strategy going forward? And would you be willing to provide any perspective about how you're to think about that at this stage?
Sure. Thanks, Mary, and thanks for joining the call. Yes, we talked a little bit on the last call about this as well. And as we've done more and more work in talking to the - as we said on the prepared remarks, talked to many different players within the franchising world, big- and medium-sized and small-sized franchisee groups and the middleman that broker those deals, our franchise finance groups, the commercial banks. We talked to a lot of different folks. And what I would say about refranchising is as we look to do larger and larger deals, if refranchising is a, I'll say, a required component of those deals as it often is, we are open to doing that. With the qualifier, there's always a qualifier, which is as long as it's done on solid economic terms. If it makes financial sense for us, we will be open to it.
Helpful. And then can you talk a little bit more about the TV ads that you ran in Q3 and possibly what kind of lift those generated in those tests? And then how are you measuring the ROI of that initiative?
Yes. No, thanks again for that. We're excited by it. To be perfectly honest, before we ran the first round of commercials, it was a test for us because we had never done it, in the 40 years of the company, had never done it. But as we talked before, we need to figure out ways to raise our share of voice here in a very economical way. So we started in Chicago, our homeland, where we certainly have scale. And the focus is it was bolstered by our new kind of - thematically, our new marketing theme around Feed Your Smile. We think it's a terrific spot for the amount of money that we put into it, which is very economical, I'll put it that way. And so we measure these things in all the traditional ways. And we're looking at the before-and-after pictures.
Before we do these things, we look at the year-over-year, we look at the market where we're running these test in versus the markets that we're not and what is it we're actually - what is our goal out of this. So when we ran the first ones, it was really about Turkey Club. It was our LTO at the time. And also it was about downloading the app. And so we've evolved now. We've got another run that is highlighting our pastrami sandwich and again downloading the app, the joining of Potbelly Perks. And the downloading of the app, the joining of Potbelly Perks, the success of the LTOs, have really been terrific. We feel really great about that element. When it comes to the adding to - which is added to mix benefit of our comp, when it comes to traffic, what I'll say is, and I'll say it I think in kind of tempered words here, what I would say is we see incremental benefit. Directionally, we feel like we're going the right way and enough so that we had felt comfortable doing a second and a third time round of television.
That's great. And then just lastly for me, are you expecting the calendar to be unfavorable in Q4 with the holiday shifting back to a weekday? Would that be material for the quarter?
I wouldn't say it to be material for the quarter.
Our next question comes from the line of Gregory Francfort with Bank of America.
I've got a couple of questions. The first is just to walk through the slowing unit growth and the impact of that on the business. And I guess maybe the first component is how much of a drag has growth been on the restaurant margins? And maybe said a different way, does this - what is the comparable store restaurant margin? And kind of how much is that being impacted by growth?
Right, good question. What you've got when you're growing significantly is that component or mix of new shops certainly has a drag on shop margin. So without getting into the specifics, it would - it is certainly the case that our more kind of seasoned shops, those that are in our, we call, static comp-based shop margins that are greater than the average you see in the P&L, maybe not dramatically so but a couple of points worth anyway. And so the new shop is obviously much lower than that.
In fact, brand-new shops start out in a single-digit kind of contribution, then work their way up into double digit and then gradually kind of get fine-tuned to get closer to that 20% target. So the flip side then, right, is when you're slowing unit growth, which we will be doing at least in 2018, is you'll get a benefit to the shop margin line, all else equal, as a result of doing that. So that's how it picks up. But one of the things as I know we've talked about in the past, that's true, but there's also over time you'll start to lose as a bit of leverage on G&A. And so you've got to be very mindful of how you control your G&A and what adjustments you make as we kind of transition here a little bit.
You stole my second part of that question. And then maybe how many of your units right now are negative cash flow as you look at the opportunity to potentially reevaluate some of the assets you have out there?
Yes. Without any specific number for you in terms of those that are the negative cash flowing, we're starting out in a fairly modest way. We're looking at the 10 least, lowest-performing shops rather. And we've had some successes already. It's hard to get out from under some of these leases, to be perfectly honest. Any time that we announce that we're getting out of a few of them, just know that we'll make sure that they're positive NPV deals, right? But in some of these cases, you'll have to write a sizeable check to get out from under the remaining life of the lease. So like I said, it's a handful or so that we're running at hard right now.
Got it. And then going back to, I think it was Nicole's question, on the debt, how much debt do you think the business could handle? I know you had a lot of leases on - that maybe are on the balance sheet but are technically debt. And I guess how much debt would the business be able to comfortably handle, whether or not you choose to sort of go down that avenue?
Right. So thanks for the last part of that, right? So not sure we're going down that path. We have more work to do in terms of our overall strat review. I think that I just addressed another point you made. While we have no balance sheet debt, to your point, but we've got leases, right? And you rightly point out that folks ought to think about that as well. That said, there's no doubt with the kind of cash flows that we already have as we sit here today, the balance sheet could support debt. There's no question about that. And with the changes that we're making, at least for the near term, which is the reduction in the new shop growth, we'll have plenty of excess cash flows. And so there'll certainly be the ability to take on debt if we chose to do that.
And I'll sneak one last one in there. I think one of the interesting topics some of the other companies have talked about this quarter is potentially approaching this holiday somewhat differently, given the experience the industry had in the fourth quarter of last year. Is there any kind of shift you guys are making in terms of a change in how you're marketing to consumers or kind of how you're going to think about the product calendar? Any change in how you're approaching the holiday, given the experience that the industry went through in November and December last year?
Yes, what I would say is I don't know that I'd make it specific to doing something different on the holiday like others are doing. But as part of our strategic review, we're thinking about all sorts of ways to approach our marketing and more specifically our advertising tactics in a very different way. You heard me say in some of the prepared remarks. I guess one of these, my call-out that I did mention in the prepared remarks was on the backline business. And we think we can do a lot more with the catering business. Everything from Black Friday on, we can exploit much better than we have in the past. Otherwise, some of the things that we've already talked about, like the television advertising and what we're doing with our LTOs, what we're doing with some of our in-shop training and selling some of the things that we're doing on our seasonal offerings. Those are the things that we're doing. But I wouldn't say it was related to kind of overall industry trends.
[Operator Instructions]. Our next question comes from the line of Stephen Anderson with Maxim Group.
I want to take a look at the labor expense line. And I've noticed that [indiscernible] to that, the pace of the labor cost increase may have moderated from what we've seen over the last several quarters. And so I'll ask what you've done to maybe take a look at that, maintain tighter scrutiny over time or some of the other staffing hours.
Yes. Thanks, Steve, for noticing. Obviously, we're still facing basically mid-single-digit labor inflation. So we've talked in the past about new labor tools that we've put in place in the shops that have helped the managers track the times much more specifically throughout the entire day by 0.5 hour, et cetera, and just provided them better tools, number one. And yes, there's been very much a focus on productivity. We look at kind of volume per hour type of ideas. So for us, it's entrées per hours and we've seen some improvement. And frankly, the team, the entire field team run by Julie Younglove-Webb has really done a terrific job in the face of sales pressure to improve productivity, while maintaining our customer experience because our customer experience scores have stayed in check during this time. So really kudos to Julie and the team for what they've done.
Our next question comes from the line of Karen Holthouse with Goldman Sachs.
Kind of asking the question on maybe underperforming company stores in a different way, instead of unit count, maybe give us a sense of for stores you characterize as underperforming and potentially targets of closure, refranchising, sort of dollars of profit that those stores are generating? Are they actually sort of in aggregate generating profit or loss-making? Maybe it's just a different way to think about it.
Yes. No, thanks, Karen. What I would say is the ones that we are focused on are actually losing money. And I think on the last call, somebody asked whether I was - whether we look at EBITDA or EBITDAR. And I would say essentially we're looking at both, right? For our shop profit, it's really kind of an EBITDA idea. But certainly we look at it before rent as well. And for the ones that we are most focused on, they are losing money at a shop profit level at an EBITDA level.
And then on the - sort of shifting into more franchise-driven development, you're working on a new prototype. The first unit is supposed launch in 2018. We've heard some other companies that have similar work underway that maybe you do get sort of a shorter-term or medium-term drop in franchised unit growth as they sort of say, "I'd rather wait until I have a new prototype to build rather than build with the old one." Are you anticipating anything like that? Or how are conversations with franchisees regarding the potential for a new prototype going?
Yes, thanks again for asking that. We have talked to our existing franchisees, which may be a different profile of those that we talk to in the future. So I'll kind of footnote that. But there's excitement, right? We have folks who are excited with frankly the box that we already have. But the idea that we would have that reenvisioned space and updated and modernized and leveraging technology and a terrific new space that actually also costs less is exciting to folks. In fact, a couple of our existing folks would be excited to be part of piloting these things. So I think there's early on excitement with again the qualifier that future franchise, I'll call it, customer of ours, maybe a different profile than the one that we have today.
[Operator Instructions]. We have come to the end of our time allowed for questions. I'll turn the floor back to Mr. Coyne for any final closing remarks.
Great. Thank you, operator, and thank you to all the participants on the call and for all the questions. Obviously, we think we've got a terrific brand here. We have many different ways to leverage our opportunities as we look forward. I want to thank all of the members of the Potbelly Nation, the associates who work hard every day on our behalf. In particular, I wanted to acknowledge the folks that we have down in the greater Houston area, obviously very challenging times with Hurricane Harvey having rolled through and some very harrowing experiences and some folks are still putting pieces together down there. Yet they collectively, with their leadership, got all of our shops but one up and running in frankly much faster time than I would have believed. Perhaps there's a reward in here that they get a World Series champion since Chicago are not feeling so great about not having a parade today like we had last year at this time. But terrific for the folks in Houston. So anyway, thanks again for everyone on the call. And thank you for your support, and look forward to our next conversations. Bye now.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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