Noodles & Company Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Noodles and Company's Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Mike Hines, CFO. Mike, you have the floor.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to our Q3 2023 earnings call. Here with me this afternoon is Dave Benninghausen, our Chief Executive Officer. I'd like to start by going over a few regulatory matters. During our remarks, we may make forward looking statements regarding future events or the future financial performance of the company.

Speaker 1

Any such items should be considered forward looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are only projections and actual events or results could differ materially from those projections Due to a number of risks and uncertainties, including those referred to in this afternoon's news release and the cautionary statement and the company's annual report on Form 10 ks for its 2022 fiscal year and subsequent filings with the SEC. During the call, we will discuss non GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our Q3 2023 earnings release.

Speaker 1

To the extent that the company provides guidance, it does so only on a non GAAP basis and does not provide reconciliations of forward looking non GAAP measures, specifically forecasted adjusted EBITDA, adjusted EPS and contribution margin. Quantitative reconciling information for these measures is Unavailable without unreasonable efforts. The corresponding GAAP measures are not accessible on a forward looking basis and such information is likely to be significant to an investor. Now, I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.

Speaker 2

Thanks, Mike, and good afternoon, everyone. During the Q3, Noodles and Company gained meaningful traction improving our financial performance, culminating in adjusted EBITDA of $11,700,000 nearly 20% above the Q3 of 2022. This growth can primarily be attributed to restaurant level margin improvement of 200 basis points relative to prior year to 16.4%. Compared to the Q2 of 2023, adjusted EBITDA grew 26% and restaurant level margin improved 160 basis points. During the Q3, we were able to take advantage of continued favorability in the expense environment, the benefit of labor efficiency initiatives and realized savings from our focused G and A restructuring that occurred earlier this year.

Speaker 2

After a challenging second quarter, I'm encouraged by the progress that we made in margin expansion and EBITDA growth. From a top line perspective, Total revenue decreased 1.2% in the 3rd quarter versus prior year to $127,900,000 driven by a 3.7% decline in system wide comparable restaurant sales. Thus far in Q4, sales are trending similarly to Q3 with a modest deceleration in comparable restaurant sales by the acceleration in 2 year growth. As we discussed at our last earnings call, we are focused on 5 initiatives to drive our sales performance through the balance of the year and beyond. 1st, price optimization with the balance of appropriate discounting and promotions 2nd, advancement in our technology platforms to increase Chicken Parmesan 4th, a complete evaluation and assessment of our culinary offerings, including our approach to our menu layout, Utilizing a leading industry third party consulting firm and 5th, a significant expansion of our catering program.

Speaker 2

The first area that we've been actively addressing has been around value and optimizing our pricing strategy. Clearly, in today's environment, value is increasingly important And we believe we have an opportunity to address the price of our proteins, which are added to their dish by 80% of our guests. During the Q3, we began testing pricing strategies to address this opportunity as well as partnering with 3rd party research firms To better understand the elasticity of our pricing, both at a dish and trade area level. We are encouraged by the initial results of this work and anticipate both broadening our test as well as introducing more surgical pricing tiers within our menu and across trade areas in future months. Our second area of focus is the improvements that we have made to our technology and data platforms.

Speaker 2

Nearly 50% of our guests experienced the brand And restaurant, including dine in and orders to go. In 2023, we've been installing digital menu boards across all of our company restaurants, which will allow us to quickly incorporate insights from our current pricing and extensive menu research across the system. Digital menu boards have now been installed in over 75% of company restaurants and we anticipate being fully rolled out by the end of the year. As an example of the benefit of digital menu boards, our primary messaging has been around chicken Parmesan and rice crispy add ons to digital board restaurants. And in those units, in restaurant sales of those items were meaningfully higher than those restaurants without digital boards.

Speaker 2

While the in restaurant guest experience improves with the implementation of digital menu boards, we also continue to meaningfully enhance our ability to engage with guests Through a better understanding of their behavior with our recently implemented customer data platform as well as through our rewards program. We're excited to announce that Noodles Rewards just recently welcomed its 5 millionth member. As an example, we have now introduced nationwide the Product recommendation engine on our website and app driven by machine learning. This has led to a 45% increase in the likelihood of a digital gas Adding a recommended item and ultimately an approximate 1% lift in average check on our digital platforms. We have a very strong technology foundation to build from.

Speaker 2

And with the completion of digital menu boards, increased learnings from our customer data platform and third party work around optimizing our menu pricing and layout, I'm excited the potential to positively impact the business both in the short and long term. Another example of the strength can be seen with our 3rd focus area, leveraging our recent introduction of Chicken Parmesan. As we introduced Chicken Parmesan, we were able to tailor messaging and imagery to guests that had previously added chicken to their entree. This more personalized approach led to a meaningful increase in message engagement as well as increased trial of chicken Parmesan for those guests when compared to guests who did not receive specific messaging. We're very pleased with the guest response thus far from Chicken Parmesan.

Speaker 2

Since launch, it has consistently been one of our top three selling dishes as one of our highest Taste of Foods scores And we saw 33% increase in rewards program sign ups during the 2 week rewards exclusive period prior to full launch. Encouragingly, we have seen the dish appeal primarily to young and lower income cohorts, which are the most price sensitive in today's environment. We are only 2 months into the launch of Chicken Parmesan and given its broad appeal and attractive price point, we believe we continue to have significant runway for the product to We believe the introduction of Chicken Parmesan is an integral step in advancing our menu, which will be further transformed by our 4th focus area, a comprehensive review to enhance and optimize our current menu, supported by an industry leading third party culinary consulting firm. While we're still relatively early in this partnership, We're very excited at the progress and potential from their areas of focus and look forward to integrating their work into our operating model and menu strategy over the course of 2024. One of the areas of our menu we're optimizing is our 5th focus area, our catering program.

Speaker 2

During the Q3, catering grew 35% over prior year and we continue to believe the opportunity is much larger. The variety inherent in our menu, which eliminates the Vito boat, combined with how well our food holds for the catering occasion, Provides the opportunity to substantially grow this part of our business. As we enter the holiday season, we feel well positioned to further expand the program And I look forward to sharing in future updates our progress in catering as well as our other sales driving initiatives. Clearly, building sales remains a top priority. That said, as we discussed on our last call, we're focused on strengthening our financial performance in its entirety.

Speaker 2

I'm pleased with the progress we made in the Q3 leading to significant margin and EBITDA expansion. I will now turn over to Mike to discuss our results and expectations in more detail. Thank you, Dave. In the Q3, our total revenue decreased

Speaker 1

1.2% To $127,900,000 compared to last year, driven by a decline in comparable sales, partially offset by revenue from new restaurants. System wide comparable restaurant sales during the Q3 decreased 3.7%, including a decrease of 4.3% at company owned restaurants and a decrease of 1.2% at franchise locations. Company average unit volumes in the 3rd quarter We're $1,340,000 Company comparable traffic during the Q3 declined 6.7%. Pricing during the Q3 was 3.9%. We anticipate a similar amount of price to carry forward through the Q4.

Speaker 1

Turning to the P and L for the Q3, restaurant level contribution margin was 16.4%, A 200 basis point increase compared to last year. Our restaurant contribution margin continued to benefit from significant year over year improvement in our cost Cost in the Q3 was 25.1 percent of sales, a 290 basis point improvement from prior year. This improvement was primarily due to continued favorability in commodity markets compared to last year, which led to food deflation of 5.7 We continue to expect overall low single digit food deflation for 2023 led by chicken, which is contracted for the full year. Labor costs for the Q3 were 31.3% of sales compared to 30.8 percent in the prior year. Wage inflation continues to moderate with year over year hourly rate growth of 5.5% for the full quarter.

Speaker 1

September was our lowest hourly inflation of the year at 3.9% growth year over year. As a percentage of sales, 3rd quarter labor costs were lower than the 1st and second quarters, primarily due to the impact of labor productivity initiatives. Labor productivity initiatives in the 3rd quarter also contributed 70 basis points to restaurant contribution margins when compared to 2022. Due to the leverage, occupancy costs increased 40 basis points over prior year to 9.2%. Other restaurant operating costs increased slightly in the 3rd quarter to 18% compared to 17.9% in 2022.

Speaker 1

G and A for the 3rd quarter Was $11,900,000 compared to $11,600,000 in the prior year. G and A included non cash Stock based compensation of approximately $694,000 during the Q3 compared to $751,000 in the prior year. We anticipate full year G and A to be between $50,000,000 $52,000,000 GAAP net income for the Q3 was 700,000 or $0.02 per diluted share compared to net income of $795,000 last year. Non GAAP diluted earnings per share was flat to prior year at $0.04 Please refer to our earnings release for reconciliations of non GAAP measures. Turning to the full year, I would like to provide an update to the 2023 guidance.

Speaker 1

For 2023, we anticipate full year revenue $502,000,000 to $506,000,000 inclusive of negative low single digit comparable restaurant sales. For this current Q4, we anticipate total revenue of between $123,000,000 $127,000,000 and comparable restaurant sales to decline mid single digits. We anticipate full year restaurant contribution Margin of approximately 15% with our current guidance reflecting margin expansion of 100 basis points versus prior year. For the current Q4, we anticipate restaurant margin between 15% 16%. Building on our 3rd quarter performance, We expect adjusted EBITDA of between $36,000,000 $40,000,000 Included in our full year guidance is expected adjusted EBITDA for the 4th quarter of $8,000,000 to $12,000,000 Our adjusted EPS expectations for 2023 are now between negative 0 point 0 $8 0.

Speaker 1

For the Q4, we anticipate adjusted EPS between negative $0.05 and positive $0.03 For further information regarding our 2023 expectations, please see the business outlook section of our press release. Turning to the balance sheet at quarter end, we had cash and cash equivalents of $2,500,000 and a total debt balance of 65,400,000 We currently have over $50,000,000 of incremental liquidity available for future borrowings under our amended credit facility. Additionally, during the Q3, the company retired over 1,700,000 shares at an average price of $2.86 per share effectively completing the $5,000,000 share repurchase authorization that was announced on our prior earnings call. In the Q3, the company opened 4 new restaurants. For the full year, we continue to expect approximately 20 new restaurant openings system wide, including one franchise opening in the 4th quarter, representing 5% gross unit growth in company owned restaurants for the year.

Speaker 1

With that, I'd like to turn the call back over to Dave for final remarks.

Speaker 2

Thanks, Mike. We are pleased with the traction that Noodles and Company made during the Q3 with meaningful expansion both in restaurant level margin and adjusted EBITDA, as well as improvement in top line performance relative to the prior quarter. But we are far from satisfied. While building on our financial performance in Q3, We continue to aggressively execute on our sales driving initiatives for the balance of the year and beyond, including Price optimization, improved guest engagement analytics, leveraging our recent introduction of Chicken Parmesan, A comprehensive third party supported enhancement and optimization of our menu and brand messaging for 2024 and a significant expansion of our catering program. These initiatives will build upon our strong foundation With a differentiated brand, robust digital and rewards program and the culinary and pricing flexibility that we will garner from the impending completion of our digital menu board rollout.

Speaker 2

I look forward to sharing our progress in upcoming quarters. Thank you for your time today and please open the lines for Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Tyler Pross with Stephens. Tyler, please go ahead with your

Speaker 3

Congrats on the great quarter. Just the 3rd party pricing optimization efforts are Especially encouraging and I was going to see if you could talk more about the learnings from possibly over extending on price earlier in the year and what could be different this time around? And then I have one follow-up.

Speaker 2

Sure, Tyler. I appreciate that. And ultimately, as we said in the last earnings call, we do believe that we were too aggressive with Price in totality, during 2022 as well as early 2023. That said, we do feel there's some opportunity for modest price

Speaker 1

By just

Speaker 2

becoming more surgical with our pricing strategy, we feel there's great optimization opportunities from a trade area tiering perspective, Specific menu items and importantly that interplay between the entree level and protein prices. The digital menu boards, The 3rd party conjoint pricing study that we're working on, they're all going to they're all in process right now. They'll help us optimize The price as we go forward, at Sensen, we will be taking our time. We want to make sure that we test it appropriately, complete the research to optimize price for the long term.

Speaker 3

Great. Thank you for that. And if we could just get an update on what you're seeing at the brand level from different income cohorts, Any trends of trade down or mix management will be very helpful. And that's it for me.

Speaker 2

Yes. We're not seeing much difference, Tyler, What we had seen during the tail end of Q2 as well as Q3, what I will say one aspect that is encouraging is as we normalize Different trade areas based on their economics and demographics. Chicken Parmesan in particular, has an index almost 30% higher In trade areas that are younger and a bit lower income

Speaker 1

than those that are a

Speaker 2

bit older and higher income. So I think we are starting to really effectively address Some of those challenges we have with the lower income cohorts with the introduction of Chicken Farm.

Speaker 3

Great. That's it for me. Thank you.

Operator

Please standby for our next question. Our next question comes from Andrew Barish with Jefferies. Andrew, please go ahead with your question.

Speaker 4

Hey, guys. Good afternoon. Just wondering on October for the industry was better and your 4th quarter guide Kind of in a similar range as 3Q, I mean is that mostly comparisons just given the big lap You have coming up with over 10% in the company owned same store sales last year?

Speaker 2

Yes. And just to level set, as a reminder, Andy, you just mentioned it. We had a very strong Q4 of last year with same store sales above 10%, And it was higher during the first half of Q4 of last year. That's when you look at the overall cadence, there's obviously a lot of Moving pieces and what's kind of considered normal seasonality. As we said on the call, thus far in Q4, what we're Seeing as an acceleration in our 2 year same store sales growth, as we face that more challenging comparison, while 1 year same store sales It has modestly decelerated.

Speaker 2

From an average unit volume perspective, which we think is a very appropriate look at the health of the business, It's behaving as we expected. We've seen some stabilization in average unit volumes. Clearly, we're not satisfied, But we're pleased at how the economic model performed at those volumes in Q3. As you look at the cadence of where our volumes are today, we're at 1,330,000 Quarter to date, that's on par with full Q3. It's actually a little bit of a step up from where we were during the September fiscal period.

Speaker 2

So overall, we feel that the trajectory, especially given those comparisons, is pretty steady and healthy.

Speaker 4

Got it. And then, can you just update us kind of timing on Some of the menu work as you look out to 24 and how do Working with your 3rd party consultants, how do you balance kind of the simplification and Operational improvements you've made over the last couple of years with wanting to do more stuff on the menu, which potentially could add some complexity back on.

Speaker 2

Sure. No, it's a great question. So the firm we're working with is called the Culinary Edge. We've been very impressed and pleased with their work. Together, we're looking at Three different areas, Andy.

Speaker 2

How the menu is architectured, the offerings themselves and then how to enhance The culinary operations, I think that's when you'll really see us look at the operating model and say how can we potentially actually find some efficiencies, while at the same time investing Some areas to make our menu even more compelling and resonate better and be more contemporary. The first area that you're going to address is around the menu architecture. Collectively, we feel with Culinary Edge that there's opportunities to make the menu less overwhelming, To emphasize our position as the new authority and to optimize price, we're already in test with certain aspects of that area. I think you can expect to see us broaden the test and implement that in relatively short order. And then following that will be some of the new menu introductions

Speaker 5

As well as

Speaker 2

ultimately looking at some of the culinary procedures. Got it.

Speaker 4

Very helpful. And then are you willing to Share what chicken farm mixed in the month of September?

Speaker 2

It's not something that we share. We do share though that it is the 3rd highest item in sales, it's been very consistent, with being the 3rd highest in terms of sales volume. And from a Taste of Food Score perspective, With our internal metrics, it's actually the number one performing dish on our menu. So very pleased with what we're seeing from a mix perspective and just an overall performance Of chicken parley.

Operator

Okay. Thank you very much. Please hold for our next question. Our next question comes from Jake Bartlett with Truist. Jake, please go ahead with your question.

Speaker 5

Great. Thanks for the question. Mine was building on Andy's question just about the timing. Regarding the menu board, it seems like that's It's going to allow you to do a lot with adding some surgical value and kind of the tiered pricing in different markets. But Is that something that you can turn on before it's fully rolled out?

Speaker 5

Or I mean, is the main impact, the primary impact of those digital menu boards To come, is that really much more of a Q1 2024

Speaker 2

story? Yes. So where we're at today actually is we're by the end of this week, Jake, we'll be at 85% of our restaurants that are company owned having the digital menu boards. So we're actually already starting to Develop some of the work with the Culinary Edge on how we can potentially redesign that layout menu. You're going to expect us to turn that on in certain markets actually at the very beginning of next year.

Speaker 2

As we test and validate the performance from that, we'll certainly Expand beyond that to the rest of the country. That said, we have already been able to use the roster of restaurants that had been that had already had digital menu boards To start testing certain things and an example of that would be we started to test what if you had a net neutral price structure, But it was such that the base price was maybe modestly higher than what it was in the past, but the protein price lower. And so we're seeing some great learnings from that that we're able to marry with the larger work. So we're already in Process with some of the testing that will inform learnings that we'll be able to implement early in Q1.

Speaker 5

Okay. And just a question on value perceptions in the impact. And obviously, when you took the large price increase in, I think, February was, Traffic went negative pretty or further negative pretty quickly. I guess my anticipation was that would kind of Somewhat work itself out over time, that time would kind of help there as consumers just got used to it. Is that something that you're it doesn't feel like you're Seeing really that.

Speaker 5

And so the question is, are you seeing value perceptions just starting to kind of recover Just with time or you think that really for you to see a meaningful improvement in traffic, it's going to really require all the measures you're undertaking?

Speaker 2

No, it's a great question. And what we see is we did see improvement relative from Q2 to Q3. And we think a component of that Is the ability for us to quickly pivot and address some of the value opportunities. That said, We do believe that this is the time for us to look at overall transforming the menu, the layout structure and the pricing structure To really optimize it for the long term. So over the course of time, I think you'll just continue to see an accretive nature to the benefit of that, Especially as we kind of transform some aspects of the menu and are able to be more compelling for maybe that last guest, that guest that we potentially lost, That we're still having a bit of challenges bringing back.

Speaker 5

Okay. And then was it last year at this time you first gave us your view on 2020 for COGS, you had I think you've been looking at locking down your chicken supply and price. Anything you can tell us about expectations in 2024 and what kind of visibility you have on the commodity inflation side?

Speaker 1

Hi, Jake. This is Mike and your memory is correct. This is the time when we're talking to our suppliers and trying to Lock as much of our price as we can for 2024. Where we are in the process right now, it's a little early to give 24 guidance on where we expect inflation or deflation to be, but our goal is to lock a substantial portion of our basket at prices that are Very close to or even I'll just say close to 'twenty three levels.

Speaker 2

Yes. I think one thing that's encouraging is our Here, Jake, it's probably beneficial. Certainly, you're seeing beef and steak, which is not a significant portion of our menu Basket, that's been one of the more challenging markets, so that's not as impactful for us. And then chicken, which was the largest and has been the largest driver Of our COGS improvement, our initial conversations as we contract that ingredient also, we're pretty pleased with how those are progressing.

Speaker 5

Great. And then last question is the visibility on 2024 development. Maybe just remind me of what your thinking is on the pace kind of in rough terms in 2024? And then how many Your signed leases do you have? What's your progress so far in terms of 2024 development?

Speaker 2

Yes, we're happy with the new restaurant performance. We continue to be pleased with those as well as feel that there's big unit growth opportunity ahead of us. Currently, where we're at, Jake, we do expect 2024 growth will look pretty similar to 2023 from a numeric perspective. Franchise potentially playing a bit of a bigger part than it did last year. As we look at where we're at from a development pipeline, Currently, I mean, obviously, it's still a fluid environment.

Speaker 2

We expect it to be a little bit more evenly balanced than what we've seen in prior years. And all those restaurants there we have enough restaurants hit that pipeline, they're already under lease. It's more so just the timing you can't control Around landlord delivery and aspects like that, but all of those sites are accounted for in the pipeline. Great.

Speaker 5

Thank you so much.

Operator

This concludes the question and answer session. I would now like to turn the call back over to Dave Bennyhausen for closing remarks.

Speaker 2

Thank you, Stacy, we know it's yet another busy earnings season, so appreciate everybody's time today and please have a safe and relaxing holiday.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Noodles & Company Q3 2023
00:00 / 00:00