And a lot of our 650 is rooted in some historical costs that go back even before a lot of that inflation hit. So we will keep you posted as we build more of them. And the same team that’s been extracting costs out of our operating model for these last 3 years is the one that oversees this work. So we’re just getting started on building it as efficiently as possible. I will tell you this, while we don’t publish their numbers, the more recent franchise openings, while not formally the prototype. We’ve been bringing some of the elements of that design into some of these more recent openings. We didn’t want to go all the way and have to re-permit and do redone drawings, but you can get some of the aesthetic elements and those things in there.
But our more recent franchise builds have been less than our published average of 650. So one of the greatest things about the franchise business is that they are going to help us find ways to improve the investment economics on these builds. And then because we’ve got the engineering teams and the more contractors we get involved, I think our best days are ahead on the cost.
Todd Brooks: That’s great. Two follow-ups, if I may. One, in the discussion with potential franchising partners, now that you can point to this prototype, their excitement, just kind of accelerating the whole effort if you can build the box at 1,800 square feet, do the same AUVs and do it at a lower cost. How much easier is that making it to sell new units? And then if I think about the work that you do for the franchisees as far as site identification within a market. How much does the 1,800 square foot footprint open up the number of sites that some of these franchisees have to choose from in the market as well?
Robert Wright: Yeah, both of those are advantages. We’ve been putting this prototype work in our Discovery Day materials for a couple of quarters now. So we have been seeing the benefit of those franchisees that are interested in signing development deals with us. They’ve had some exposure to what we’ve been working on, while we’ve been getting everything engineered and finalized, and they’re very excited about it. And I tried to be careful with what I said in the remarks that our ability to fit their real estate is one of the big things. The world I come from in QSR, a prototype was a fixed specific box, it was exactly the same size every time you built it. I mean down to the inches the counter was from the front door and so on and so forth.
Our prototype is a standard build from which you then fit it into a shop. Some of these are a little more square, some are a little more rectangle. We’ve built and designed some recently that look a little more triangular than they do. And if it needs to be 1,500 feet, because that’s the best location, well then we can work with that. And I think that’s what franchisees are the most excited about. We’ve got this wonderful starting place that’s smaller than we used to build. Deal keeps all of the best aesthetic elements of this classic Potbelly in-shop experience. We’ve got plenty of seating for today’s mix of digital and dine-in. We’ve reoriented the pickup shelf and some of the other elements of the digital experience. Highlighted some things that we thought were flow issues for our customers and for our associates, and even made the line a little more efficient.
So those are the things that excite franchisees. And you are exactly right, when you are attacking the market with a master broker and a set of local brokers, knowing that you’ve got flexibility, but your flexibility begins at $1,800 and not $2,300, $2,500, it really opens up the potential for some earlier real estate development. So, I think it’s one of those that’s a win all the way around. And I firmly believe we’ve not only not compromised the brand experience, we’ve improved it.
Todd Brooks: That’s great. Shifting gears, Bob you talked about maybe the need to for in-shop customers, maybe non-digital channel customers to try to deliver some more value to them over the course of this year. I’m sure you’re not going to walk through specific tactics about how to do that, but can you at least point us in the direction of how you deliver and how you communicate value to that customer where it’s fairly overt once they walk into the shop?
Robert Wright: Yes, it is an additional layer for us, because if you accept the conclusion we’ve come to, and we certainly do, is that this infrequent customer who is familiar with and has affinity for the brand is managing their personal financial situation. And they’re pulling back ever so slightly and probably from a lot of places. We’re competing with all other restaurants, and we’re competing with the refrigerator. And when people’s entire food budget is under pressure, they don’t want to do is start compromising on their meal choices. And at the same time, they’d love to see some everyday options that can work into their mix over the month or over the quarter that they trade with certain restaurants. So because the more infrequent consumer for us overlaps with our non-digital consumer.
Our digital consumers, we’ve talked very openly about the meaningfully higher frequency rate with Perks members for example. So it’s a little harder to reach those customers. But for us, we still use digital advertising in addition, in fact, that’s where a large majority of our effort goes is through their digital advertising efforts. So we want to make sure that we are using that to spread the word to those people who are still picking up our digital ads even if they are not yet part of our Perks program. And then, I think you have to do some things in shop too, so that when they do come in and visit, because they do skew slightly more in shop that they are seeing those messages and they are remembering those messages which brings them back and keeps that that frequency just a little bit higher than where maybe they would naturally go as they are trying to manage their wallet.
Todd Brooks: Is that a long-tail effort or can that be delivered at the shop level pretty quickly?
Robert Wright: We can deliver pretty quickly, yeah.
Todd Brooks: And then just one quick follow-up for Steve, and I’ll jump back in queue. Within the guidance for second quarter same-store sales that flat up to and I think Bob you commented that were positive low-single-digit quarter-to-date. What’s the assumption on price mix that’s baked into the flat up to assumption? Thanks.
Steven Cirulis: Yeah. Thanks for the question. I’ll just start with kind of the way we have discussed pricing for the last couple of years, which is we will manage price in order to outrun some of the costs for our inputs, our food and paper and our labor. And the good news is, for this quarter, we saw commodity costs actually deflate a little bit. Labor costs kind of stayed in the same kind of zone that low kind of mid-lows in the single-digit area. So that is good for us. And we had a price increase for this quarter modest like we said in kind of the low – the mid-ones. We carried about 3.3% of price into the quarter and we netted about 4%. That’s a way of me saying like 4% price kind of gross is what you will see through the year.
We will probably end the year in that same range carrying forward for the year about 2%. So when you see our comps right at 0% to 2%. You can understand that we will bring in some of that price increase to offset, perhaps some traffic challenges. But as Bob was describing with all of the efforts on the digital marketing side and the efforts with some of these new value offers that we’re going to start to push, that our expectations that we’ll strengthen traffic. And we’ll continue to get the benefits from that and that should show up ultimately in our same-store sales.
Todd Brooks: Okay. Perfect. Thanks, Steve. The next question is from Matt Curtis with William Blair. Please go ahead.
Matt Curtis: Hi. Thanks. Good afternoon. Bob, I think last quarter you said you had the opportunity to get to a 16% restaurant level margin this year. Is that still in play at this point given the narrowing in full year comp guidance?
Robert Wright: Yeah, I think if you take the comments that Steve shared about what we saw in Q1. And you kind of project where that would put us with margin expansion through the year, of course, I think it’s going to be tougher for us to get to 16, if we maintain some of this softer sales against what our original plan was, especially with where we were in Q1. But, I think the emphasis there is, it’s still expanding margins, and there’s still other ways for us to keep expanding those margins. And one of the great things we are talking about with new development which is where the franchisees care the most about how quickly can they get to those margins is this prototype. That’s the kind of margin expansion that just keeps delivering after you build those shops.
So I think you are right to point that out. What I would tell you is that we recognize with our – still significantly majority company-owned portfolio that our shop profitability driven by those margins and top-line, of course, is such an important part of our overall adjusted EBITDA for the company for the year. Steve mentioned this already. But we look at our other measures and other opportunities that we have to manage our cost as a corporation and still continue to deliver what we’ve guided to on that adjusted EBITDA growth for the year in the mid- to high-single-digits. Well, that clearly means you see some savings elsewhere. We are a growth company though, Matt, so we can meter some of those investments in things like G&A and still serve the growth, but be the most responsible on our way to building that earnings growth that goes with it.
While we are also continuing to expand those shop level margins. So I think that’s how those two are working together.
Matt Curtis: Okay. Got it. Thanks for that. And then, I guess the full year comp guidance implies that traffic will be sort of flattish, I guess, for the full year. So, assuming that’s the case, would you expect that the unit level margin expansion this year would be more driven by levers like supply chain efficiency and labor optimization as opposed to sales leverage?
Robert Wright: Yeah. I mean, the sales leverage…
Steven Cirulis: Yeah, I think that’s it.
Robert Wright: Oh, sorry, Steve. Go ahead.
Steven Cirulis: Sorry, Bob. Yeah, I was – Sorry, Matt. Well, as we have the plan laid out, right, we’re still expecting to expand the margins throughout the year. We expect the sales to help play a role there, perhaps less of a role than we had thought the last time we spoke, but nevertheless, that’s going to be a component of it. But as we go down kind of the middle of that, the little middle of the P&L, we continue to see some gains, at least we’ll see them in the second quarter on some of our commodities. That’ll settle down a bit in the second half as we see some commodity inflation in some areas come back a little bit. But labor is one area where we continue to make strides. Our labor guide, we continue to find ways to pull some hours out of that, which is fantastic.
We’ll continue to expand our Potbelly Digital Kitchen through which we see some labor benefits there. And also, we continue to kind of marginally tweak our hours of operation, which ends up being a benefit to some of that labor as well. So leverage in that labor line, for sure. We also, I think, see some continued leverage in our occupancy, that there’s opportunities for us with new leases and so forth, to continue to push that even though the sales leverage is not as intense as it would otherwise be. On the other OpEx side, we just talked about a little earlier, we’ll still get a little bit of drag from the brand fund lapping in that line until we get to the back half of the year. So that nets out to us. We think we can continue to expand margin, just the shop level margin.
