Matthew J. Revord - Potbelly Corp.

Aylwin B. Lewis - Potbelly Corp.

Michael W. Coyne - Potbelly Corp.

Sharon Zackfia - William Blair & Co. LLC David E.

Tarantino - Robert W. Baird & Co., Inc.

Joshua C. Long - Piper Jaffray & Co.

Stephen Anderson - Maxim Group LLC Gregory Paul Francfort - Bank of America Merrill Lynch Karen Holthouse - Goldman Sachs & Co.

Good afternoon, everyone, and welcome to our fourth quarter 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, the future financial performance of the company.

Any such statements including our outlook for 2017 or 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.

Our presenters today are Aylwin Lewis, our Chairman and Chief Executive Officer; and Mike Coyne, our Chief Financial Officer. Aylwin will begin with his perspective on the fourth quarter performance and provide a discussion of our ongoing strategic initiatives.

Mike will then review our financial results and future outlook in more detail before we open the call up for your questions. Aylwin?

Thank you, Matt. Good afternoon, everyone.

Thanks for joining the call. During the fourth quarter, we generated revenue of $102 million, an increase of approximately 8% driven primarily by our new unit growth.

We opened 28 new shops, including 25 company-operated shops and three franchise shops. We delivered adjusted EBITDA growth of 24% to $13.4 million, adjusted net income growth of 65% to $3.8 million, and adjusted EPS growth of 88% to $0.15 per diluted share.

For the full-year, we achieved revenue growth of 9% to $407 million with company same-store sales growth of 1.4%. We delivered adjusted EBITDA growth of 15% to $48 million, adjusted net income growth of 44% to $11.9 million and adjusted EPS growth of 55% to $0.45 per diluted share.

We opened 50 new shops including 40 company-owned shops and 10 franchise shops for total net unit growth of 11.3%. Q4 was just as challenging as we expected relative to sales.

Our same-store sales growth of 0.1% during the quarter was due to continued industry headwinds and several company-specific factors. Internally, this year's menu innovation did not match last year's robust menu innovation calendar.

Although, we tried several ideas, none of them drove the mix that we experienced in 2015. Externally, the cost of meals eaten at home versus eaten away from home is still pointing in the wrong direction for us and the industry in general.

Lastly, we had adverse weather during the quarter that impacted our sales negatively. For the year, our same-store sales were 1.4%.

This was in the middle of the range of 1% to 2% that we announced during Q2 of last year. As we look at our performance in the first quarter of 2017 to date, it is clear that the industry headwinds continue unabated.

Traffic in particular remains in line with levels we saw at the end of the fourth quarter. While we expect comparisons to ease in the second half of this year as we lap last year's industry headwind, our outlook is for flat comp sales growth in 2017.

As we continue to manage the company through the industry challenges, it's critical we lean on our strong culture, our tradition of operational excellence and our daily intensity around the details of the business to drive sales growth and profitability. We know we need to continuously grow opportunities to grow our business, while managing costs and optimizing our capital spend to align with the market conditions.

Let me spend a few minutes to update you on our three value drivers, which are strong GM in every shop, growing sales and opening new shops. Strong GM in every shop, we've implemented a new field organization structure beginning in this year.

The structures allow us to drive additional operational focus, excellence and results. We've gone away from a one-zone structure to a two-zone structure, and this would allow Julie Younglove-Webb, our ops leader to manage her resources in a more targeted fashion.

And we believe it should drive our results overall. Investment in the labor model was complete.

This will help us schedule and control labor better. Our GMs are spending less time scheduling, almost cut in half.

This is going to allow us replace the mandatory GM work week, from 50 hours to 45 hours, which shall enhance their energy level and their results. We're also implementing a new hourly selection tool.

This online tool would greatly enhance our selection process and hopefully decrease our associate turnover. Growing sales, our backline sales grew low double-digits during the fourth quarter, and was 16% of our overall sales.

For all of 2016, our backline grew high single digits and was about 15% of the sales. We will add several additional catering kitchens this year as well as an increase in the number of catering sales managers from eight to two to three more in 2017.

The mobile app and redesigned website will be launched during the first quarter of 2017. This is tremendously good news for us.

The app will have order ahead, one-click ordering ease and mobile pay. We will also be able to geo-target customers with day-part messages.

In conjunction with the launch of these two items, we will introduce Potbelly Perks, a customer engagement program designed to delight, inform and reward our customers. We believe the app will help us drive sales.

Our intent is to have a better menu innovation calendar in 2017 versus 2016. We will also continue to invest in digital marketing with improved story-telling during this year.

Turning now to our new unit development, we believe our proactive efforts to reduce our unit growth and CapEx spend in 2016 from our original guidance was prudent in the light of the challenging macro environment and demonstrates our commitment to drive shareholder value. We're extremely focused on selecting the right sites with the appropriate lease rates to leave us well-positioned to achieve our return threshold.

We have recently made investments in a new analytical tool to further enhance our real estate site selection, market planning, and customer segmentation capability. We remain confident in our ability to find, open and operate new shops.

In light of the current industry backdrop, our development plan for 2017 assumes an increase in the mix of franchise shop, coupled with moderate growth in company-operated shops. Our current plan is to open between 30 to 40 new company-operated shops and 15 to 20 new franchise shops for a total growth of 45 to 60 shops.

The bottom-line is that we need to adapt to innovate to thrive in the current market environment. As I just discussed, I believe we've identified and our investing in the appropriate sales and operational tactics to drive near-term growth with a keen focus on cost management and capital optimization.

Just as importantly, I believe as an organization, we must improve our story-telling of our special company and its long history. Potbelly is a special place, it's the Neighborhood Sandwich Shop and Best Place for Lunch.

Our food and our people are exceptional. Potbelly is turning 40 years old in 2017, and we will be celebrating this birthday later in the year.

We have some exciting activities in place that will help energize our employees, excite our customers, and elevate the brand. We look forward to updating you on these initiatives later in the year.

Before I turn the call over to Mike to review the details of the P&L for the fourth quarter and the full year, I'd like to take the opportunity to thank our shop and support center teams for their combined hard work and commitment. Despite the industry headwinds that contributed to lower sales growth than expected, we exceeded expectations from a profit growth perspective and a margin growth perspective.

I'm proud of the dedicated team, and we will continue to drive, push forward in 2017. Now Mike, turn it over to you.

Great. Thanks, Aylwin, and good afternoon, everyone.

As Aylwin mentioned, I'll review the P&L and give you some of the highlights associated with our fourth quarter and full year results. I will also provide a summary of our outlook for 2017.

Starting with the top line, total revenue increased 8% to $102 million in the fourth quarter driven predominantly by our new unit growth. During the fourth quarter, our company-operated same-store sales were relatively flat at plus 0.1%.

Breaking down same-store sales, our average check grew approximately 4.3% driven predominantly by price. For the full-year, total revenue increased by 9% to $407 million driven by new unit growth and increase in company-operated same-store sales of 1.4%.

Moving down to shop P&L, shop-level margin for the quarter was 19.5% of company-operated sales. Shop-level margin for the year was 19.7%, an improvement of 30 basis points from the prior-year period.

Our cost of goods sold as a percentage of company-operated sales was 27.3% in the fourth quarter, an improvement of 100 basis points versus the prior year, driven by the combined impact of pricing and commodities that moved favorably throughout the year. For the year, cost of goods sold was 27.4%, an improvement of 110 basis points as compared to last year and favorable to our prior guidance.

For the quarter, labor was 29.1%, which was an increase of about 30 basis points from the prior year. For the full year, labor was also 29.1%, which is an increase of 40 basis points compared to last year and at the low end of our prior guidance.

Increases were primarily driven by wage inflation, partially offset by price increases and improved productivity. Occupancy expense was 13.2% in the fourth quarter, an increase of 50 basis points as compared to the prior-year period due to lease renewals, higher real estate taxes and higher common area maintenance.

For the year, occupancy expense was 13% of sales, which was an increase of 40 basis points compared to the prior year. Operating expenses were 11% in the fourth quarter, an increase of 70 basis points compared to the prior-year period.

The increase was driven by a tough comparison against a very favorable environment in the fourth quarter of 2015. For the year, operating expenses as a percent of sales was 10.8%, an increase of 10 basis points compared to the prior-year.

Our operating expenses include items like repairs and maintenance, credit card fees, insurance, utilities, supplies, and therefore, a variability from quarter-to-quarter. We remain focused on finding opportunities to drive productivity across our shop-level other expenses to offset cost pressures.

Our general and administrative expenses were approximately $9.6 million in the fourth quarter or 9.4% of total revenue, which is an improvement of 70 basis points as compared to the prior-year period. For the full year, our G&A expenses were approximately $40.4 million or 9.9% of total revenue, an improvement of 10 basis points compared to the prior year.

Our quarter and full-year G&A includes the impact of a reversal of a portion of our incentive compensation accrual of approximately $1.6 million in accordance with our pay-for-performance philosophy. This was partially offset by a legal expense accrual of $1.3 million related to the settlement of an employee litigation matter that was disclosed earlier this year.

Excluding the impact of this litigation matter and incentive compensation accrual adjustment, G&A for the year would have been at the low end of our prior guidance at $40.7 million or 10% of total revenue, which is flat to prior year. Our adjusted EBITDA was $13.4 million in the quarter, which is an increase of 24% from the prior-year period.

For the year, adjusted EBITDA was $48 million, which is an increase of 15% from the prior year. Our adjusted net income for the fourth quarter was $3.8 million, an increase of 65% from $2.3 million in the prior year and our adjusted net income per diluted share was $0.15, an increase of approximately 88% from the prior-year period.

For the year, we delivered adjusted net income of $11.9 million, an increase of 44% from the prior-year period. Adjusted net income per diluted share was $0.45, an increase of 55% from the prior-year period.

Please note that the $0.45 includes the impact of our incentive compensation accrual reduction, which is approximately a $0.04 impact. Also note that our effective tax rate was 34.5% for the full-year which was well below our guidance driven by the recognition of certain federal tax credits during the fourth quarter.

The impact of these two items was about $0.05 and therefore we delivered about $0.40 when these benefits are excluded, which is above our full-year guidance of $0.36 to $0.38 per adjusted share. Regarding our share repurchase program in the fourth quarter, we repurchased approximately 145,000 shares of Potbelly common stock in the open market for a total of $1.9 million.

During the fiscal year 2016, we repurchased 1.7 million shares for approximately $22.3 million. At the end of the fourth quarter, we had $27.7 million available from our board authorized program for repurchases which will continue as we move forward.

Our capital expenditures came in at approximately $37.8 million, which was within our lowered guidance for the year. And our balance sheet remains very strong with a cash balance at the end of the year of $23.4 million and we have zero debt.

Turning now to our outlook for the full-year fiscal 2017. Similar to last year, we're expecting inflationary headwinds in 2017 primarily as it relates to our labor costs.

Consequently, we've taken pricing of approximately 2.5% in January to offset these expected headwinds, which will bring our total price impact to about 3% for the full year. These increases were strategically implemented across the menu and across our footprint, which also brought certain menu items more in line regionally.

As Aylwin mentioned earlier, we have seen a continuation of the negative traffic trends from the end of the fourth quarter of 2016 into the first quarter of 2017. As we look out to the balance of 2017, we do not contemplate an improvement in the challenged macro-environment in our plan.

So, we expect to deliver flat company-operated same-store sales growth in 2017. We expect relatively modest levels of goods inflation, accelerating slightly as we progress through the year, given expectations around our timing of inflation and our pricing.

We anticipate cost of goods sold in the range of 26.5% to 27.5% for 2017, and our food cost basket is over 60% locked. We expect labor as a percentage of sales to trend around 30%.

Our guidance assumes continued wage pressure from minimum wage increases implemented last year as well as expected minimum wage increases in 2017 in major markets, in part offset by the price that we have taken. We will continue to manage our labor expense through continued efforts and investments to improve our labor productivity.

We expect our G&A expense to be in the range of $44.5 million to $45.5 million and for the year, we expect adjusted net income growth of flat to plus 5% given our expectations were flat company-operated same-store sales and expected labor inflation offset by our pricing, productivity and sales growth initiatives. We expect adjusted net income per diluted share in the range of $0.45 to $0.47 and we expect an effective tax rate in the range of 36% to 38%.

As I discussed earlier, our adjusted earnings in 2016 included about $0.05 benefit from the reversal of our incentive compensation accrual and from the lower than expected tax rate. When you adjust for these two factors in line with our normal run rate, the implied adjusted net income growth is low-to-high teens for 2017.

As a reminder, our full year fiscal 2017 is a 53-week year and our guidance includes an extra week in our fourth quarter. For context, the impact of the 53rd week is estimated to contribute approximately $7 million of revenue and $700,000 of adjusted EBITDA.

We do not expect a meaningful impact to our bottom line. On shop development, we expect to open 30 to 40 company-operated shops and 15 to 20 franchise shops for a total of 45 to 60 total new shops which we expect to be backend-weighted but to a lesser degree as compared to 2016.

We expect to spend between $37 million and $39 million on capital expenditures in 2017. Although, we do not provide quarterly guidance, I want to provide you with some color on certain puts and takes as you think about the cadence of our quarterly performance.

The first quarter is lapping the strongest same-store sales quarter of 2016 and we're seeing traffic trends that have continued from the end of last year. We expect comparisons to ease as we progress through the year.

In addition, we expect inflation impacts to increase during the year, assuming (18:54) that our pricing from August of 2016 rolls off. We expect G&A expense to be higher in the fourth quarter driven by the reversal of the incentive compensation accrual in the fourth quarter of 2016.

On the unit development front, again I want to reiterate that we expect our shop development in 2017 to be back-end weighted albeit to a lesser extent than our heavily backend-weighted cadence in 2016. So with that, I'm going to turn it back over to Aylwin for summary remarks.

Aylwin?

So in closing, 2016 to me was a positive year relative to the overall results of the company. Now, we were disappointed and thanks to our sales growth, those can be explained partially by the headwinds as faced by the whole industry.

That said, we had double-digit new shop growth, had strong margins growth and excellent profit growth. To beat our EPS expectations, we have a strong balance sheet and strong cash flow.

We are forecasting 2017 on conservative fashion, which is prudent. We're excited about the launch of the app and a customer engagement program.

We believe the long-term, short-term of this business and the fundamentals are bright. On one last note, as we noted in our press release, we're in the process of trying to retain our iconic Midway Airport location.

This is very important location for us and while we are currently advocating to city (20:15) officials to retain the shop, we can give no assurances that we will succeed. Our 2017 outlook provided by Mike does not give any effect to any adverse impact on our financial results caused by the loss of the Midway shop, which is about 2% of our business.

With that, I'll open it up for questions.

You guys sounded so excited that there might not be any questions, so now I feel disappointing. So, I guess a couple of questions; first, I was unclear on what your price benefit is in the first quarter.

I know you took 2.5%, but I think you had some rollover? And then Aylwin, if you could talk about the menu innovation, kind of how you reset going into 2017, is it a matter of frequency, is it a matter of being more on points?

Just help us understand that?

Okay. Sharon, I'll start.

It's Mike. How are you?

Good.

Good. The pricing, so yeah the 2.5% at the beginning of January, we have about a point or so rolling from the pricing that we took in August.

So, for the first kind of seven-plus months of the year, you can expect to be in the 3.5% range in total, and if there is nothing that replaces that, it would be about 3% or so on a full-year basis.

Great. And then on the menu innovation?

Yeah. So last year, we made attempts to do line extension, and combinations of things that we've done in the past.

And it's diminishing returns when you come to some of that stuff second and third time, so we were disappointed with the calendar. So, the learning is that if we're going to continue down the menu innovation path, it needs to be bold, it needs to be customers that want adventure, it needs to be right in the middle of our flywheel in terms of the type of proteins we're offering, and innovation around the broadest appeal product.

And we do believe we have something like that this year, and the latest one will start in March, and we're looking forward to it. And so that's a broader more innovation, real points of difference between what we're currently serving, but proteins that have the widest appeal.

Yeah. Thank you.

Hi, good afternoon. I have a clarification question on the recent same-store traffic trends or same-store sales trends.

I guess you mentioned trends flowed towards the end of the quarter, could you give us a sense of how big the slowdown was in traffic in December and what that implies for what you're running in the first quarter?

Sure. Yeah, the traffic number for the quarter was about a negative 4%, okay.

So, and with that, the December was the worst of the three. In fact, October and November were about in the same territory, but December was worse than that.

And it's the December month that really has continued on into January. So, a little bit worse than the minus 4% for the full quarter.

Got it. And do you think as you enter this year, it seems like the weather comparisons were very challenging in December.

But maybe that hasn't continued so far this year. So, is there something else going on underneath the surface that that might be weighing on the trends in your...

Well, toughest comparison to last year. So, last year's first quarter was the best same-store sales we had.

So, as we mentioned, we think that changes for us. And it's been very uneven.

We've had some weather the last few weeks. But generally in Chicago, it's been great, been pretty mild.

We got some weather down in Texas, West Coast has been really good for us. So, I think we'll know more at the end of the quarter than we do now.

These Monday holidays really kill you. One thing that happened we benefited from having Christmas the last week of the year, but then the quarter was hurt by having New Years the first week of the year.

So, it's been very disjointed, been very unfluid (25:31), but we're searching for answers. But right now, we're just riding the trend and we think it will turn for us later in the year.

Understood. And...

We're being prudent with the guidance because that's what we should be, but work like the (25:51) obviously would be better.

Got it. Yeah, makes sense.

And then on the mix component, I think Aylwin you mentioned that that might have either stopping a tailwind or perhaps turned into a headwind in the most recent quarter? How do you think that plays out as you look at the menu innovation pipeline for this year?

Is that going to be...?

Well, it needs to be better quite frankly. Last year in the quarter it was 0.7%, this year it's 0.3%.

So that difference meant that this year's was not as robust for the full year. So the talent needs to be better.

So we're putting a lot of pressure on the team, a lot of pressure on our digital marketing, our merchandising. So we at least drive mix with the talent.

If not, then it's just a very expensive exercise if you're not driving mix, at least mix and hopefully then traffic.

Got it. And then one more for me.

Can you talk about how the Potbelly program will be structured? What types of benefits will consumers get with that?

And how do you plan to leverage that?

So, we have been convinced by our customers and by certain people like yourself that it's something that we need it, so we're going full bore. We're running the costs quite frankly through the P&L.

It's fairly expensive to do. The goal is to have algorithm that doesn't just reward your most loyal customers, but it's meant to provide information, it's meant to provide a free product based on the usage.

You can earn points based on the usage, we're going to offer free sandwich to get people to download the app and use it for the first time. And then there's like three levels of rewards.

And at the very highest level, you get a lot of special treatment. And so, it's big part of the app.

It's kind of best-in-class of what folks in the industry have. And we think, the app itself, the ease of using it, the benefits that we have to that, that quite frankly was best-in-class that we looked at.

And then having a Perks program, I don't allow them to call it rewards program, but that's what most people call it. We think those two things combined should help us drive the business this year.

It's taken a year to develop. It gets implemented this quarter.

So, we're very excited about it.

Thank you very much.

Great. Thank you for taking my question.

I wanted to see if you might be able to talk about the moderation in unit development in terms of, maybe just some conservatism and can protect your own business and focus on running great shops. And then also just maybe what the environment for quality sites is looking like, and how you think about that evolving over the course of the year?

And if that maybe – at what point in the year that informs your decision to maybe potentially slowdown 2018 growth as well?

Yeah. So, all along we're about creating value and managing risk.

Given a lot of the disruption in the marketplace, you got a number of folks announcing closures. We just thought it was prudent to plan this year with a CapEx that's very similar to last year.

We have a wide range of company units 30 to 40 and what we've told ourselves, we've told our board is that, the first half of the year is pretty well locked. We'll take a look at where we are at the middle of the year and either we'll stay on the same path which means 40 or we would decelerate because the market conditions dictate it.

Coupled with that is that, we'll add more franchise units this year which is helpful toward our goal of trying to get to 25%. So I think that's the beauty of what you have.

You've got a management team that's looking to add value, manage risk, keeping this optionality open to the widest. If the market gets worse, we're at 30%.

If the market stays the same or accelerate, we can go to 40%. And so that's – the combination is 45% to 60%.

And obviously, our franchisees feel good about the brand, and majority, I'll say half of the ones that we're scheduled to open this year, would be pretty close to the first half of the year with the franchisees. So that's the deal.

That's helpful. I appreciate that extra color.

In thinking about Potbelly Perks, how should we think about kind of the incentive component being built into the guidance and how that flows through? You mentioned that it was maybe a little expensive.

There's some investment alongside of that. Just trying to think about how that impacts or informs the guidance that you offered on the COGS line or maybe if some of those incentives might flow through that other operating expense line?

Yes. It's in the guidance.

So we've covered it in our plan, we've covered it in the guidance, and some is COGS, some is G&A, but it's within what we've talked about.

All right. Thank you.

In terms of maybe shifting away from the menu line extension or revisiting the menu innovation side of it. Do you anticipate also adjusting either marketing spend or kind of a material change in the approach to marketing this year to balance that innovation side off versus 2016?

Well, we're going to still do innovation this year, and we think we have some really good products in the pipeline. I'm just saying we're very disappointed – we're very excited about 2015.

We're very disappointed. I say very, but we were disappointed in 2016.

And if you're going to have a menu innovation strategy, it has to drive the business or it's very expensive. And so if it doesn't work for us this year, we would really look at taking a different approach and making the corresponding cost adjustment.

We're still very committed to digital marketing. Quite frankly, I think we have to become better storytellers.

So we're going to embark to do that. One of the great things we have for us this year is the 40th birthday and we plan on using that as a way to reintroduce the brand to the world and have a multi-month celebration that we'll talk about in the future, but we're very excited about talking about the brand, celebrating the birthday, and making a big deal about that around storytelling, and obviously, even digital marketing to help drive a lot of the messaging.

Understood. Thank you for the time.

Yes. Good afternoon.

I wanted you ask a follow-up question regarding the Potbelly Perks program. Typically what we've seen from the competitors is that the food expenses tend to increase by a certain amount relative to prior year.

Is that built into your guidance?

Yes, yes. Absolutely.

All right. Thanks.

Hey, guys. A few from me.

Just, first, I know you talked about adding a few catering kitchens this year. Can you maybe update us how many do you have now?

And are those sort of concentrated in the urban markets? Just maybe where your presence is right now?

So we have four that we would count as catering kitchens, pure catering kitchens. And the goal over time is to almost have nearly one in every market we do business in.

So this year we said we'd do several and open those. It's a way to help us continue to grow that catering business, which is a large segment of the population.

It allows you to get the large orders that restaurant-based catering can't quite touch. We've had very good experience with the catering kitchens we have, and we just want to extend that across the U.S.

These will be kind of industrial areas, no retail, no frontline retail, and it's essentially production and delivery.

Got it. And then just on the mobile app and website, can you just talk about, are you using an external vendor for that?

And then if you're making investments on the technology side, have they happened or should we expect them to happen? I guess just any sort of CapEx or G&A spend associated with that.

I guess what would the timing be?

Yeah. We're working hard to become a digital company.

We announced this two years ago, and so within the confines of our CapEx is the necessary investments we're making in technology. Some of that is additional tools for the shops, for the labor model last year, this year the selection tool.

We're upgrading the online environment, switches and things like that in the shops because if you're going to be digital, your wireless has to work without, you know. So the app is part of the customer facing part of that.

And it is within the CapEx we've announced. All of the development was using external vendors that had done this before, it's quite a chore because all things have to go through your POS vendor and that's MCR.

So that network lasted a year and quite frankly it was a bit longer than we anticipated but within a couple of weeks we'll be launching the app and the new mobile site.

Got it. And then just in terms of, there is the Trump question that everyone asks, but maybe a different question is, I know you guys have a lot of exposure to the D.C.

market and we look at Knapp-Track data early in 2017 and there was a bit of a pickup in D.C. around the inauguration of the women's marches.

And did you guys experience that and maybe if not, why not, and just any sense of regionally maybe what's happened so far?

So the bellwether of inaugurations was the first Obama and that was tremendous for businesses in D.C. including ours.

Everything else pales to that. So the inauguration of Trump was very disappointing.

But to your point what helped out that weekend across America was all the women's marches. So not only, and wherever they occurred, we had shops, it was a great weekend, and so that helped.

Long-term, we feel good. We put a ton of time and we put a ton of pressure to improve our operations and results in D.C.

The senior team for example has been there three times in the last 18 months underground working with the local team and we're happy with the progress. And it's an important market to us, we continue to grow there.

And we think, we run our business well. It will grow in sales and profits.

Got it. And then maybe just one last one from me.

Just Mike, I know you talked about the tax rate, and what were the tax credits this year? And I guess, why don't they continue into 2017 maybe what was specific to 2016?

Yeah. Actually, the credits that we received in 2016, we've received in the past as well.

Those are the worker opportunity tax credits, or WOTC credits. And they will continue in 2017.

It's just that we had a particularly strong year in 2016 that we didn't want to plan on reoccurring in 2017.

Got it. Okay.

Thank you. Appreciate it.

Hi, most of my questions have been asked and answered. So, just a quick modeling one.

So your fourth quarter COGS ran a little bit north of 27%. It sounded like on your commentary, if anything, that sort of that ramps into the end of the year versus at the beginning of the year.

Maybe some incremental costs associated with the value programs. I'm just kind of wondering, how you get to 27% for the midpoint of the range.

I would have thought you sort of started with 27.3% from the fourth quarter and if anything modeled that coming up through the coming year? Thanks.

Thanks, and great question. Yeah.

So the combination of the pricing impact, as well as what we see in the first half of the year in terms of some deflationary items and some of their more significant items, for example, proteins, lead us to the range that that you've just described. So we feel pretty good about that in the way in which we'll start the year.

So, sort of think of it as a percent of sales basis, sort of maybe comes down a little bit from the fourth quarter and then ramps up from there through the year?

Yeah. That's exactly right I'd say, ramp up I might say, slightly accelerate, just to use those words, because I think that while we have our better benefit I'll say in the first half of the year, the coupling with our pricing movements throughout the year, it would increase a bit throughout the year, but not in a dramatic fashion.

Okay, great. Thank you very much.

Hi, just a quick follow-up on the franchise side. When you look at that acceleration this year, can you talk about whether you think that continues into 2018 and then kind of the mix you have of new versus existing franchises and if we'll see some new markets as well open on the franchise base of 2017?

Yes, yes, yes. I'm sorry Sharon, but we got a good base that continue to grow because they have multi-shop agreements.

We've signed multiple new shop agreements, so those will come on-stream, so the combination will also help and then obviously the of big kahuna is California that we're working on. So, we expect over time the franchise growth and that franchise revenue to continue to grow.

I guess one follow-up, have you considered selling any of the company-owned locations or refranchising those?

We talk about this stuff all the time, it's got to fit within our overall strategy, and it's got to be with the right partners on a grander plan. So we'll do the right thing to enhance the growth of the business.

Okay. Thank you.

To your franchise development, how much of that is going to be international and can you tell us your store that you opened up in Canada this past year?

What was the second part of the question, Steve?

So the follow up of the international development, I know you had opened up your first store in Canada, I want to ask about your plans there in particular?

Right. Actually interesting, today we just opened up our second shop in Toronto.

So we now have two in Canada, and there is a few more to go as part of that agreement. One there right now is still just the one shop.

That was a multi-shop deal and still looking for that second shop. And then where we have the base, the international shops is in the Middle East and that you shouldn't expect to grow at all.

We're still looking for a big Asia deal that hopefully we'll be able to announce sometime this year.

Thank you.

So I want to thank you for your interest and thanks for great questions. Listen, I think 2016 was a positive year, disappointed in the sales growth, I guess that the headwinds impacted us.

Our job is to do everything possible to supersede that. I think the talent of the company of managing flow through, driving margins and beating our profit targets is something we're very committed to because we really work hard on it.

We have a prudent forecast for 2017. We will work like the devil to beat that, but it's the right thing to do given where we stand today.

We're very optimistic about some of the investments we're making, the app, the rewards program, if ours is just as good as some of the competition, it should help drive the business. We continue to make investments in improving the effectiveness and efficiency of the shop, so our GMs can spend more time serving customers and one of the big ones internally is just going from the mandatory 50-hour work week to 45-hour.

We think that's really beneficial. The only way you can make that happen is that we've taken actually actual work out of the shops and so again that should help with the positive energy of our number one leader, as well as then allow them to focus on their neighborhood, their customers and their employees.

So thank you very much. Appreciate your time and get out and buy some sandwiches.