Nov 12, 2013
Operator
Good afternoon, and welcome to Potbelly Corporation's Third Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] Please note, today's call is being recorded.
I would now like to turn the call over to Charlie Talbot, Potbelly's Chief Financial Officer. Please go ahead, sir.
Charles Talbot
Thanks. Good afternoon, everyone, and welcome to our Third Quarter 2013 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 items, including targeted results for 2013 and details related to our future performance should be considered forward-looking statements within the meaning of the 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 files with the Securities and Exchange Commission, specifically the company's final prospectus for its initial public offering, which was filed October 4, 2013.
This document contains and identifies important factors that could cause actual results to differ materially from those contained in our projections and forward-looking statements.
Charles Talbot
Now I'd like to return it over to Aylwin Lewis, Potbelly's Chairman and Chief Executive Officer.
Aylwin Lewis
Thanks, Charlie. And welcome, everyone.
Quite a story. I'd like to give a moment to thank everyone that helped us through the recent IPO process, our employees, customers, investors and adviser all essential to this effort.
I want to thank the new investors who spent time learning our story, and they recognize hopefully the tremendous opportunity we have here to become a global iconic brand and to create shareholder value. And our mind set around the IPO was never that it was a destination, but rather it was a threshold, and we're on this journey toward excellence.
And excellence to us is meeting commitments to our long-term targets. During the IPO process, we communicated the following long-term targets: new unit growth, plus 10% for a long period of time; low-single-digit, same-store sales growth; at least 20% growth on our adjusted EBITDA; at least 20% growth on net income; and at least 25% return on invested capital, as measured by second full year profit of our new shops.
Also, we communicated, our shop margins will stay over 20%.
Aylwin Lewis
We will continue to report non-GAAP measures such as adjusted EBITDA and adjusted net income. We believe for the foreseeable future, these metrics would help our investors get an appropriate view on the underlying growth of the business.
In regards to Quarter 3, our results were in line with our communicated targets. During the quarter, we opened 8 new company-operated shops and 1 franchise shop, bringing our year-to-date total to 25 company-owned shops and 4 franchise openings.
This equates roughly to a 14% shop growth over the last 12 months. Fourth quarter, our comp sales growth for company operated shops were 2.5%.
Adjusted EBITDA improved by 24.9%. Our net income rose 26.7%, to $0.15 per share on a diluted basis.
Charlie will go into much more detail about the numbers, but overall, we're pleased with our first quarter reporting and we're likely off to a good start.
Aylwin Lewis
Just want to take a minute to kind of reiterate who we are, what we are, what we're trying to do here. We compete in the fast casual category, we also compete in the sandwich category.
The intersection of those 2 spaces, we believe the concept has a lot of room to grow. We're fast casual because we have irresistible food at fair price.
We have customizable product, ease of ordering. We really spent a lot of time thinking about our experience, which is our awesome product, people and place.
Aylwin Lewis
We operate at the end of the quarter about 307 shops. 288 are company-owned, located in 18 states in the District of Columbia.
We have 19 franchise shops, 12 in the Middle East and 7 in the U.S. We talked about on the road show the 4 things that investors should look for and invest in us, and I want to reiterate that.
We believe we have significant white space from a geography standpoint, from a concept standpoint. Have strong economics with our shop margins of over 20%.
This is a self-funding model, we use our cash that we generate from existing shops and invest in new shops. We also have a very bulletproof balance sheet.
We have a deep and abiding culture that we spend a tremendous amount of time talking about and using to run the company. And then we have a strong management team, the core has been together since 2008, largely responsible of the results we've accomplished in that time frame.
It's very important that everyone understands we run the business to grow cash each year. We have big -- year-ago mentality around everything we do, supplies the shop level sales, supplies profit results, supplies G&A productivity.
We build shops to make money. So our focus is on the returns generated by our capital investments.
Important to understand that our new unit development and the models we use help us understand how much our occupancy costs -- how much occupancy costs we should pay for our new shops. We have a salary cap mentality at our support center, which means that we have a fixed dollar amount as we think about G&A.
It's important that we leverage it over time as we grow the business. Very disciplined around our spending initiatives, and we want to spend our money closer to the shops.
Same-store sales is important to us, and we have committed to low-single-digits. We have a process called the sales pyramid that we use to grow sales organically. Based on that pyramid is our best-place-for-lunch, which means that between the hours of 11
30 and 2:30, we want to grow our business. This foundation is established to help us really understand how to grow -- our operators to understand how they should grow their sales day in and day out in our shops.
Second part of the pyramid is what we call growth drivers, background in catering, neighborhood outreach and music are all part of the tools that our operators can use at the shop level to grow their sales. From a promotional standpoint, we have 4 windows a year that we merchandise and promote in shops.
For example, in Quarter 3, we introduced our Toasty Turkey BLT featuring premium bacon, and that has performed well. This quarter, you'll find us advertising our new pizza sandwich in most of the markets.
Same-store sales is important to us, and we have committed to low-single-digits. We have a process called the sales pyramid that we use to grow sales organically. Based on that pyramid is our best-place-for-lunch, which means that between the hours of 11
Our promoted items are made from ingredients, existing ingredients. So although they are a limited time offering, you can always get the product in the shop once it is not advertised.
The label Sandwich Shop is more than a slogan for us. It is our building model.
It means that we expect the shops to open, creates tremendous loyalty, word of mouth, that allows us to be a low marketing spend; which in fact, has been less than 2% of our sales on marketing. As we discussed in the road show, the foundation to our success is predicated around running great operations.
We measure operators using a balanced go-cart approach, which focuses on people, customer sales and profits.
Same-store sales is important to us, and we have committed to low-single-digits. We have a process called the sales pyramid that we use to grow sales organically. Based on that pyramid is our best-place-for-lunch, which means that between the hours of 11
Turning to development. We mentioned before, in Quarter 3, we opened 8 new company restaurants and 1 franchise restaurant.
And as of September 29, we've opened 25 company-operated shops and 4 franchise shops. Over the last 2 years, we will open 4 hub markets, which are Seattle, Boston, New York and Phoenix.
We've also opened some hub markets in Cleveland, Kansas City, St. Louis and Portland.
Entry into these markets are key for us. We'll open a hub city every 18 to 24 months.
Every market that we currently do business in is open to growth. We expect that growth to be at least 10% in our legacy markets, and in the hub markets, growth to average between 10% and 20%.
People ask us how and why, can we grow faster? Our answer is we always have to manage our people capability with our financial capability.
So the limit factor on our growth is building great Potbelly leaders that can run our shops, manage our shop. So we continue to have excellent operations and have an excellent business model.
So the headlines here is that, we kind of delivered on what we promised. We recognize this is our first quarter reporting, but it's good news so far.
So I'll turn it over to Charlie, and he'll go through the details of our financial results.
Charles Talbot
Thanks, Aylwin. As Aylwin mentioned, we're pleased with our fiscal third quarter results.
Overall, total revenue increased 11.7% in the quarter to $78 million, driven by strong new unit results and an increase of company-operated comparable shop sales of 2.5%. 2.5% comparable, which continued the momentum from Q2, was driven primarily by check growth from our price increase back in Q1 of roughly 2%, and also as Aylwin referenced, our Toasty Turkey BLT Q3 promotion, which helped our check.
Charles Talbot
Same-stores traffic during the quarter was slightly negative, but improving sequentially from the first half of the year. And one additional note, there will not be -- there's no additional pricing contemplated for the fourth quarter.
Charles Talbot
Moving now to the P&L, shop-level profit margin for the quarter was 20.9%, above our long-term target of at least 20%, an increase of 50 basis points from prior year. This improvement was driven by our comp growth and strong shop-level flow-through, specifically in labor and operating expenses, slightly offset by new unit opening inefficiencies.
The following are some additional detail in Q3 results and Q4 outlook for major areas of our P&L. Cost of goods sold as a percent of net sandwich shop sales increased in the quarter to 29.6%, which is up 50 basis points from prior year and 40 basis points from Q2, driven by inflation and introduction of the new higher-quality bacon that Aylwin mentioned in conjunction with our toasty Turkey BLT launch.
From a dollars perspective, year-over-year food inflation was roughly offset by pricing, and then looking at Q4, we expect food cost to come down slightly from current levels, driven by a lower mix of Toasty Turkey BLT sandwich and similar levels of food inflation, which should be mostly offset by our Q1 price increase.
Charles Talbot
Labor, as a percent of net sandwich shop sales, decreased in the quarter to 27.3%, down 90 basis points from prior year, driven by sales leverage from comp growth, timing and new shop and efficiencies. As a reminder, our new shops on average will open up with shop-level profit margins in the high single digit or low-double-digit territory as we invest in labor and staff of the unit to enable a good, strong opening.
This initial investment can vary depending on whether the shop is in a new market, which typically requires more investment to staff, the bench or existing market, which typically requires less. In Q4, we expect labor, as a percent of net sandwich shop sales, to increase by 75 to 100 basis points from Q3, driven by normal business seasonality in Q4, including holiday week and the de-leverage of fixed labor.
Charles Talbot
Operating expenses, as a percent of net sandwich shops sales, decreased in the quarter to 10.2%, down 30 basis points from prior year, driven primarily from strong operating controls at the shop level and sales de-leverage -- sales leverage. In Q4, we expect operating expenses as a percent of net sandwich shop sales to increase 30 to 40 basis points from Q3, driven primarily by normal business seasonality in Q4.
Charles Talbot
Occupancy expense, as a percent of net sandwich shop sales, increased in the quarter to 12%, up 30 basis points from prior year, driven primarily by more shops operating in higher-rent markets such as New York City and Boston. In Q4, we expect occupancy expense as a percent of net sandwich shop sales to increase 50 basis points to 100 basis points from Q3, due to normal business seasonality in Q4.
General administrative expenses increased to $8.3 million during the third quarter from $6.9 million in the third quarter of 2012. The increase was driven by approximately $1.8 million of costs associated with our IPO and ongoing public company costs, including a one time $1.1 million charge for stock-based compensation and $300,000 of nonrecurring legal expense.
Upon completion of the IPO in Q4, we expect an additional nonrecurring stock-based compensation expense of approximately $8.8 million and one time IPO related expenses of approximately $200,000. As a percentage of revenues, general and administrative expenses increased to 10.6% during the third quarter from 9.8% during the same period last year.
Excluding the public offering, planning and ongoing public company costs, general and administrative expenses was approximately $6.5 million, or 8.3% of revenue, which is 140 basis point improvement from prior year, driven partially by lower support center bonus and leverage. In Q4, we expect base G&A dollars to track similarly to Q3 levels.
Charles Talbot
Now as Aylwin mentioned, our adjusted net income for the third quarter was $3.2 million, or $0.15 per diluted share, compared to $2.5 million, or $0.12 per diluted share, in the same fiscal period of 2012, which equates to 26.7% growth over the prior year. For clarity, Q3 adjusted net income excludes the impact of the $900,000 of nonrecurring public offering planning expenses, as well as $200,000 impairment expense net of tax.
Additionally, it's important to note that we had a full valuation allowance against our deferred tax assets, which in effect, reduced our tax -- effective tax rate in 2012 to approximately 8%, while our effective tax rate in 2013, subsequent to the release of our full valuation allowance is approximately 38%. So if you apply the 2013 effective tax rate of 38% to the prior year, our adjusted net income increased by approximately 95% versus 2012.
Charles Talbot
Adjusted EBITDA for the third quarter was $10 million compared to $8 million in the same fiscal period of 2012, equating to 24.9% growth over prior year. Adjusted EBITDA excludes the impact of impairments, closures and noncash stock compensation expense, preopening expense, public offering planning and ongoing public company cost.
For a reconciliation of our reported to adjusted net income and adjusted EBITDA, please refer to the reconciliation table included in our third quarter earnings release.
Charles Talbot
Now let me turn to the fourth quarter and full year outlook. We will open 33 to 34 company-operated units, and 7 to 8 franchise shops, for a total of 40 to 42 shops, representing total shop growth of 14% to 15% for the full year.
Looking ahead, our 2014 outlook is 35 to 40 company-operated shop openings and 5 to 8 franchise openings, equating to 13% to 14% growth.
Charles Talbot
Turning to company-operated sales growth, I want to make sure everyone understands the holiday week comparability in 2013 versus 2012 due to the 53rd week in 2012 and the corresponding impact of our Q4 comp projection. So in Week 52 of 2012, it was a non-holiday week when compared to Week 52 of 2011, which was a holiday week.
Week 53 of 2012 was a holiday week compared against Week 1 of 2012, which was a non-holiday week. Therefore, Q4 2012 comps, as reported at 2%, is reflective of 14 weeks versus 14 weeks with holiday weeks included in both years.
In 2013, Week 52 will be compared to a non-holiday week, Week 52 of 2012. This will negatively impact our quarterly and full year comp result.
The impact due to the holiday shift is approximately 230 basis points and 50 basis points for the quarter and full year, respectively. With that being said, our full year outlook, including the impact of cycling the 53rd week, is 1% to 1.3%.
Excluding the holiday week impact, this guidance would equate to comps of 1.5% to 1.8%. Our projected adjusted net income for full year is between $7.5 million and $8.1 million, which equates to a growth of approximately 40% when neutralizing the tax rate difference and eliminating the one time benefit recorded for the release of our valuation allowance in Q4 2012.
As we have outlined in the press release, adjusted net income excludes the impact of onetime IPO costs related to expenses and impairment, closures and disposal of expense. Our projected number of shares outstanding for the full year 2013 is expected to range from 23.5 million to 24.5 million shares.
This range is estimated based on the weighted average basis in accordance with GAAP, as well as certain other assumptions. For the full year, as well as for Q4, we expect an effective tax rate of 36% to 38%.
Charles Talbot
In addition, in the fourth quarter upon closing of the IPO in October, on October 9, we received net proceeds from the offering of approximately $108.8 million. After deducting the underwriting discounts and other estimated operating expenses, in the fourth quarter, we've paid the previously declared cash dividend of approximately $49.9 million, and repaid borrowings of $14 million under our credit facility.
We project our year-end cash balance in the range of $70 million to $75 million. Finally, for the full year, we project our CapEx to be between $28 million and $30 million.
With that, I'll turn it over to Aylwin for his summary remarks.
Aylwin Lewis
Thanks, Charlie. We really appreciate your willingness to join on the call and your interest in the Potbelly story.
It's our first report. So it's positive, we feel good about that.
This is a journey to us. We take our annual commitments very seriously, and we're going to work as a management team to meet or exceed those on a routine basis.
We continue to work to deliver on our passion to be the best place for lunch, to be the neighborhood sandwich shop, and our culture is what really helps us drive the business day in and day out. So with that, I'll turn it back over to the operator, and we'll open it up for any calls -- for any questions you may have.
Operator
[Operator Instructions] Your first question comes from the line of Joseph Buckley of Bank of America.
Joseph Buckley
A lot of information in this release. So I guess, let me ask first just on the expansion numbers, are they coming in towards the low-end of your expectations?
Are they a little bit lower than what you're thinking couple of months ago? And can you talk a little bit about where you're opening the stores and kind of high-volume markets, low-volume markets, how the effect of the store openings is playing out in terms of the effect on the revenue growth?
Charles Talbot
Well, Joe, this is Charlie. Just really quickly on the numbers, I think we're right where we thought we'd be from an opening standpoint.
And so, we're pretty happy with the way this year's playing out with the 33 to 34 outlook. In terms of where we're opening the stores, like we told you before, it's a mix between our heritage markets, which are markets we've been in for a number of years, and some of the newer hub cities that Aylwin talked about.
And so it's been roughly 50-50 for most of the year on that.
Joseph Buckley
Okay. And then I guess just the guidance, I guess, for the rest of 2013, could you go just through the same sales assumptions again for the fourth quarter kind of extra holiday week just likely to like week?
Charles Talbot
Sure. So I just to, I mean -- I want to make sure measure because of 53rd week last year that we're consistent with how we're talking about this.
So for Q4, from a reported standpoint, we're looking at negative 1.2% to negative 0.5%. That's an actual number.
Once adjusted, Q4 would be in the 1.1% to 1.7% range, positive.
Joseph Buckley
Okay. Okay.
Yep, that's helpful. And just a question here, you gave us in the prospectus the account numbers to the first 11 weeks of the quarter and of 2.3, you did 2.5 for the full quarter.
So it looks like you closed the quarter on a pretty strong note. A lot of companies have talked about sales can be better in October.
So can you just talk a little bit about the trends you saw at the end of the quarter or maybe what you're seeing at the beginning of the fourth?
Charles Talbot
Yes, we saw -- I mean, we've been -- our trends have been very stable for most of Q3 and into Q4. So really what you're seeing -- we measure our business from a sales standpoint, and D.C.
live trend perspective. So we don't get into the last year's noise discussions.
So our trends are very stable. We feel good about where we are, and are very consistent with where we were and in Q3.
Operator
Your next question comes from the line of Nicole Miller with Piper Jaffray.
Nicole Regan
Could you please give us an update on the percentage of managers living in the market and where that still is from a long-term opportunity?
Aylwin Lewis
67%. It's got the same number.
We kind of reported at the analyst day. The goal is to get to 80% over time.
So we're at 67%.
Nicole Regan
Okay. And then in terms of the extended hours and drive-throughs, can you give us an update on those numbers, as well?
Because I think those are a couple of the comp drivers.
Charles Talbot
Drive-through hours are pretty -- we don't have extended hours in the drive-through so...
Nicole Regan
2 separate things, I'm sorry, Aylwin. I mean, which -- I think you're going a little bit in some cases where you could extend maybe in the 2 p.m.
to 5 p.m. dinner hour?
Sorry to not have been clear. And then separately, how many stores were drive-throughs today and would that be part of the remodels or just new unit development?
Aylwin Lewis
So 15 to 20 drive-throughs. We like drive-throughs, we'll continue to build them.
And the 3 to 5 day part is something that we believe we have an opportunity to grow. We haven't spent a lot of time putting plans together on it, but it's an opportunity for us.
Nicole Regan
Okay. And just the last one, can you please hit on the investments you've made historically to achieve the 50% flow-through?
Which I believe is higher than your peers. And is that still the same flow-through you're seeing today?
Aylwin Lewis
Are you talking about flow-through on incremental sales growth?
Nicole Regan
Yes.
Aylwin Lewis
Yes. So that's a measure that we pay close attention to, and we are on track to do 50% plus this year.
So it's a number that we've built plans around -- it's a number we talk about all the time. So we're very focused on that.
Operator
Your next question comes from the line of Michael Kelter with Goldman Sachs.
Michael Kelter
I just wanted to maybe first follow-up on Joe's question on same-store sales. So the guidance, if we just do it adjusted and just for these holiday week, so adjusted 1.1% to 1.7% is below the 2.5% that you just posted.
So I'm curious just to hear what other moving parts. I noticed some other puts and takes around the fourth quarter you had talked about over the last few months.
Can you just remind us what those moving parts are and how we should be thinking about the fourth quarter number?
Aylwin Lewis
Yes. Well, I think the best way to think about it, and the way we think about it is just really to look at, as I mentioned, D.C.'
s live trends. And so the way we've modeled the business is assuming trends consistent with Q3.
So you get into all sorts of questions around to 2-year, 3-year rollover, but I guess the short answer is Q4 is modeled basically with consistent trends to Q3.
Charles Talbot
And we also -- we had this little thing called the government shutdown that impact looks like going to be 0.3% to 0.5% from a D.C. standpoint.
So you had 2 weeks of those shops with their business severely impacted. So that's the moving part that, obviously, we didn't plan for and has a negative impact.
Michael Kelter
And then you ended the IPO process with a lot of cash. I think you said $70 million, $75 million by the end of the year.
But the unit growth, as you mentioned, is self-funded. So what was the thought on the cash that's now sitting on the balance sheet?
Is it something that makes sense for you to keep just for the strength of the balance sheet? Is there a thought towards deploying it back to shareholders at some point?
Or, might this go towards accelerating unit growth over the next couple of years?
Aylwin Lewis
Well, so obviously, having the cash on the balance sheet is very helpful at this point, and we have not, as a management team where the board kind of formulated the uses of that. Obviously, having it means that we're pretty bullet proof and we kind of like that.
And over time, we'll determine what we're going to do with it.
Michael Kelter
And the class of stores for 2013 now that you're almost through the year, can you maybe kind of retroactively, look back and talk about what worked, what didn't, what the AUVs and restaurant margins look like, system average, things like that?
Aylwin Lewis
Well, it's kind of what we've communicated before that the range is between 8% and 1.4% with the average of 1.1%. And like Charlie mentioned, the first year, margin is 10% to 15%, depending on whether it's a hub market or legacy market, and we fully expect those to get to the return of full second year, but the class has been a good class for us.
So, it's been a good class. And we're at the point now -- in fact, I've met with development team today, and we talked about lessons learned and what could we apply to 2014.
So we'll be formulating that. We still have a few more to go before the end of the year, but it's been a good class.
Michael Kelter
And then lastly, just kind of talking about labor, it came down quite a bit with 2.5% same-store sales. I guess, what is the level of same-store sales that you generally need to lever your fixed cost base?
Is 2%-plus enough to generate leverage or is there something specific about this quarter?
Aylwin Lewis
Low single digits is what we're promising. And with low single digits, the model kind of works.
Operator
Your next question comes from the line of Sharon Zackfia with William Blair.
Sharon Zackfia
Aylwin, you mentioned the government shutdown, and that was actually one of my questions. I know you've got a lot of locations in the Washington D.C.
area. Can you kind of frame for us what, if any, hole that started for you in the month of October?
I know Charlie said the trends were fairly consistent, but lunch in Washington D.C., I would assume, would have been for the first couple of weeks of the month.
Aylwin Lewis
Yes, and like I said, 0.3% to 0.5%, and obviously, it was unplanned. But literally, in those situations, there's nothing you can do.
We kept the shops open and ran them as tight as possible. But -- the folks that came in, we wanted to give them good service.
So 2 weeks was not onerous. A month would have been very tough, but we'll finish out the quarter and see where we stand, but right now, we're estimating it's 0.3% to 0.5% hit.
Sharon Zackfia
And that's for the full quarter?
Charles Talbot
Yes.
Aylwin Lewis
Yes.
Sharon Zackfia
Okay. And then just on G&A, think it was a lot lower if you adjusted it down to the 6.5% than we had expected, and it sounds like it's going to be lower in the fourth quarter than initially expected.
Is there anything -- it sounds like it must be ongoing if it's lower for 2 quarters than originally planned. So can you give us some more color on what's going with G&A?
Charles Talbot
Well, one of the things to keep in mind, I mentioned in my remarks that the Q3 G&A was supported by a lower bonus accrual, relative to the year before. So that's just something to keep in mind, but we do think the base trends on G&A for Q4 will be consistent with Q3.
Operator
[Operator Instructions] Your next question comes from the line of David Tarantino with Robert W. Baird.
David Tarantino
Charlie, my question, maybe Aylwin too, my question is really related to the same-store traffic trends, I think you mentioned slightly negative in the quarter. And I realized very tough environment to grow traffic, but just curious to know your thoughts on your ability to drive traffic into positive territory, and what do you think some of the levers for that might be, whether it's better throughput during the peak lunch hour or more or different types of marketing tactics?
If you could just talk about your thoughts on that, that would be great.
Aylwin Lewis
Well, I think, I guess to answer your question, yes. I mean, it's a focus on throughput, which is ongoing.
It's a focus on the growth drivers that Aylwin mentioned in his remarks around back line in particular, but certainly, the neighborhood activities that we've got going on, and so I think our mindset is around low single-digit comps. There's going to be some years that's traffic-driven, some years that's spec-driven, and we're going to continue to operate the model at that level.
So, we can make excuses, we can talk about the environment, but the reality is we delivered 2.5% growth, and that helped us with the model.
David Tarantino
Great. And then maybe as a follow-up, do you think you're somewhat constrained in your ability to drive that traffic at lunch, given the high volumes you already have at lunch?
Or do you think there is opportunity to really get more people through the line during that period?
Aylwin Lewis
No, we don't. In fact, it's the base of the sales permit, and we'll use staffing levels.
We'll use new equipment. We'll use technology to help us with throughput.
Our mission is, #1, we win by winning at lunch. We'll fish where the customers are biting, and we will continue to focus on throughput during that period of time.
It's essential for us, and it's a high focus area.
Charles Talbot
And I think the way we do that -- just to give some color on Aylwin's point -- we don't think there's any constraints that we can see simply because when you have 200, 300 shops in your system, there's always someone doing something that the other shops can learn from. And so, we have shops that are doing significantly higher throughput numbers than others, and we point those shops that have opportunities to the shops performing well, and so we'll continue to do that.
And so I think that from an opportunity standpoint, we'll continue to drive it.
David Tarantino
Great. And one last one on the equipment side.
I think you've talked in the past about rolling out faster ovens. Can you give us an update on where you are on that at the end of the quarter, and where you think you'll be as you exit this year on that front?
Charles Talbot
Well, we'll have -- the goal is to have them in every shop by the end of next year. We'll have about 80 that we'll need to deploy by the -- for next year.
Operator
Your next question comes from the line of Joseph Buckley with Bank of America.
Joseph Buckley
I wanted to hop back in line, I've got your opening range, 35% to 40%, just as you told us. I was wondering if you could help us, just the type of markets you're planning to open in next year, do you have a sense of the mix in the hub markets or legacy markets?
Aylwin Lewis
Joe, we have said on the road show, we said to 60% of next year's target will be in legacy markets, which means 40% will be in the newer hub markets.
Joseph Buckley
Okay. And then just a question on the pizza sandwich promotion -- and actually in New York City, we've seen the Clubby, I guess, and what impacts -- so the bacon sandwich is probably the more prevalent one throughout your system.
What impact will that have on check, and is that a little bit more food-friendly, food cost friendly, I guess, than the Toasted Turkey BLT?
Aylwin Lewis
Yes, because the Toasty Turkey has the premium bacon, this one does not. And I've got to say that in the hub cities who are on a different calendar, we don't have a full menu into the hub city.
So that's why we're doing the Clubby in New York. It's also in Seattle, Phoenix and Boston.
And over time, we'll merge the menu, but we call it life cycle marketing towards the hub city. But the pizza is much more friendlier from a food cost perspective than the Toasty Turkey BLT.
Joseph Buckley
Okay. And would it have a similar impact on check as to those of Turkey BLT?
Will that be a little bit lower as well?
Aylwin Lewis
Yes, it's the same price point.
Operator
And there are no further questions at this time. I would now like to turn the call back over to management for any closing remarks.
Aylwin Lewis
Well, we want to thank everybody for participating in the call and for your interest in Potbelly. We're a lunch sales type of company.
We believe in hard work. We're very dedicated to our customers and to our employees and to our investors.
So we look forward to speaking to you next quarter, and if you have a chance, get out to the local Potbelly.
Operator
Thank you for participating in today's conference. You may now disconnect.