Noodles & Company Q2 2023 Earnings Call Transcript

There are 6 speakers on the call.

Operator

Afternoon, and welcome to today's Noodles and Company Second Quarter 2023 Earnings Conference Call. All participants are now in a listen only mode. After the presenters' remarks, there will be a question and answer session. As a reminder, this call is being recorded. I would now like to introduce Noodles and Company's Chief Financial Officer, Mike Hines.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to our Q2 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 for 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 in 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 Q2 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. In the 2nd quarter, Noodles and Company's revenue decreased 4.5% versus prior year to $125,200,000 and adjusted EBITDA decreased 17% to 9,300,000 As we discussed in our last earnings call, during the last portion of Q1 as well as the beginning of Q2, we began to see softness in our guest trends, particularly surrounding the lower income consumer. We believe our larger than historical price increases, which includes an additional 5% increase in the Q1 And therefore peaked at an overall 13% year over year in late Q1, ultimately led to a degradation in our overall value proposition, which manifested itself in a sudden and significant double digit decline in traffic during the first portion of Q2. As we noted during the most recent call, we pivoted quickly to more prominent value messaging during the Q2, including an effective 3% decrease And our menu pricing starting at the beginning of May. With this pivot, our traffic decline steadily improved From a negative 14% in April to a decline of 5.8% during July, the 1st month of Q3.

Speaker 2

Comparable restaurant sales, which was also impacted by lapping of price from 2022, fell 7.7% system wide in May before improving to a decline of 3.8% in July. Additionally, we're seeing an increase in our average unit volumes,

Speaker 3

Which were

Speaker 2

$1,350,000 during July, a 14% increase over the same period pre COVID. We feel our strengths with off premise and our suburban oriented footprint remain long term tailwinds. And as such, we feel we are well aligned to benefit from longer term macro and consumer trends. However, we do feel from a year over year perspective, they have put more pressure on our near term comparable sales trends. To put this in perspective, our comparable sales decline in the 2nd quarter at company restaurants was 5.9%.

Speaker 2

However, our dine indication, which represented 22% of sales in the 2nd quarter, Saw 14.2% increase in comparable sales growth. Similarly, while they represent a small percentage of our portfolio, On a year over year basis, our Collegiate and Urban restaurants outpaced our suburban locations. That said, Our overall challenges during the Q2 have caused us to react and focus on opportunities to improve our overall competitive positioning, As we clearly do not believe the results represent the potential of the Noodles and Company brand. We are focused on the 5 following initiatives to Drive our sales performance well above the current reset of revenue that we saw in the 2nd quarter. 1st, Price optimization with the balance of appropriate discounting and promotions second, advancement in our technology platform to increase guest engagement and analytics 3rd, the introduction of a highly recognizable consumer favorite into the fast casual world, chicken Parmesan.

Speaker 2

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. The first area that we've been actively addressing has been around value and Our Q2 shift toward communicating our low entry level price point and the introduction of a mac and cheese meal deal helped lead to an improvement in and stabilization of traffic trends. As we look ahead, we're in the process of completing third party research to enhance our overall pricing strategy, as well as how our menu is presented to guests, both online and in person. Our second area of focus to drive sales is improvements that we have made to our technology and data platforms.

Speaker 2

Nearly 50% of our guests experienced the brand in restaurant, including dine in and orders to go. We expect digital menu boards to be installed in 75% of company restaurants by the end of Q3. With our continued rollout of digital menu boards, we will be able to quickly incorporate any findings from the current pricing and extensive menu research Across the majority of our system for our in restaurant guests. We're already seeing the power of digital menu boards. As an example, when we introduced our mac and cheese meal deal in May, restaurants that have digital menu boards achieved sales of that deal 24% greater than those with physical menu boards.

Speaker 2

In July, we completed the implementation of our CDP or customer data platform, which will now allow our marketing team to have a more complete and thorough understanding of our guests and the ability to communicate with them in a more personalized and effective fashion. Similarly, we have made enhancements to our online and app ordering systems, including launching a new product recommendation engine driven by machine learning. During the testing period, we saw 50% increase in recommended items purchased from this engine. Additionally, we recently have enhanced The flow of our web checkout page, which has driven a 220 basis point increase in our web order conversion. Finally, as we think about digital activation, our rewards program continues to strengthen.

Speaker 2

Our rewards Ship grew 14% year over year during the Q2 to 4,800,000 members. And importantly, We saw 2% growth in frequency amongst our rewards members during the quarter versus prior year. As a reminder, over 50% of our sales come through digital channels and 25% of our sales can be attributed to rewards members. Consequently, we have a very strong technology foundation to build from. And with the further installation 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 at the potential to positively impact the business both in the short and long term.

Speaker 2

We're also aggressively looking at our culinary and menu strategy, including menu design to identify opportunities to assess and improve our positioning, while still capitalizing on our strengths. Noodles and Company continues to have a differentiated menu, bringing together made to order globally inspired dishes That meet a wide variety of tastes and preferences. Historically, we've had great success for much of our menu innovation, from being the 1st national chain to offer zucchini noodles To our popular tortelloni that was launched a couple of years ago. Our newest menu activation will be the launch of chicken Parmesan, a staple of Italian cuisine. We're very excited about Chicken Parmesan, given its broad appeal, guest familiarity And our opportunity to provide a casual dining favorite at a fast casual price point and speed.

Speaker 2

As we launched Chicken Parmesan, we're also in the process engaging with an industry leading third party culinary consulting firm to comprehensively assess and evaluate our current menu to ensure that every dish exceeds consumer expectations and is crafted to deliver exceptional taste and satisfaction in every bite. We anticipate this work to be completed by the end of the year with the results being integrated into our strategy over the course of 2024. Finally, Noodles and Company has unique strengths for the growing catering market. The variety inherent to our menu, which eliminates the Vito vote, Combined with how well our food travels for the catering occasion provides the opportunity to substantially grow this part of our business. Our catering program is easy for our restaurant teams to incorporate into their operations and with staffing and turnover now at levels better than pre COVID, We feel it's the appropriate time for our teams to be more focused on building catering sales.

Speaker 2

The company's catering represented 1.4% of sales during the second 40% growth from the Q2 of 2022, but we believe the opportunity is meaningfully larger. We've begun more aggressive promotion of our catering opportunity both inside and outside our restaurants to develop a business that we believe can be mid single digits as a percentage of sales over the long term. Notably, our top 10% of restaurants already drive nearly 4% of sales from catering. An appropriate catering menu and offerings will also be incorporated into the work of our culinary consultant for further growth opportunities. Similar to our guest engagement strategies, we feel our menu and catering program have strong foundations to build from.

Speaker 2

And I look forward to sharing our progress to optimize sales and profitability as a result of our initiatives. As we execute our 5 sales driving initiatives, we additionally have taken actions to improve our overall financial position. These actions have been centered around 3 key areas. 1st, continued but moderated new restaurant growth 2nd, the streamlining of certain administrative functions to reduce G and A costs. And third, the return of shareholder value, including share repurchases.

Speaker 2

One of our primary objectives going forward is to achieve positive free cash flow in 2024 Through the combination of revised unit growth, the completion of our customer data platform and digital menu board investments and the corporate restructuring effort to align our organization with our growth objectives. In support of our free cash flow objectives and considering continued delays in the development and permitting process As well as construction inflation, we are revising our targeted annual unit growth rate to 5% for the coming years, including 2023. We continue to be pleased with the performance of our new units, but believe this slower growth rate will allow us to achieve Long term sustainable growth and achieve positive free cash flow next year. Combined with the completion of our customer data platform And digital menu board investments. These actions are driving factors in our revised capital expenditures guidance of $45,000,000 to $50,000,000 for 2023, down from our prior guidance of $53,000,000 to $58,000,000 Additionally, earlier this Quarter, we reviewed our needs as an organization to meet our long term growth objectives.

Speaker 2

As a result of this review, We implemented a corporate restructure that we anticipate will yield nearly $2,000,000 of G and A savings annualized. These actions allow us to continue to invest in areas such as our digital experience and technology initiatives, while streamlining our administrative functions. Finally, today we announced that our Board of Directors has authorized a share repurchase program, giving the company the opportunity to purchase up to $5,000,000 of common stock as part of our strategy to increase long term shareholder value. Before I turn the call over to Mike, While we are disappointed in the results of the Q2, I want to reiterate my belief that the core of the Noodles brand is well positioned for success And there's significant upside potential over our current results. You've heard today our plans and strategies to address our current shortcomings, Build upon our strengths and deliver sustainable shareholder value.

Speaker 2

We are excited to provide you an update on our progress in the quarters to come. As we execute these strategies, I'm excited to welcome Mike Hines to the team as our Chief Financial Officer. Mike brings nearly 25 years of finance, Accounting and Investor Relations experience to the team and I look forward to working with Tim and for Mike to have a significant influence with our team and company to achieve our full potential.

Speaker 1

Thank you, Dave. It's great to be here. I'd like to thank the Noodles team for welcoming me into the business. I've only been with the company a few short weeks. I'm energized by the opportunity ahead of us and excited about what our team can achieve.

Speaker 1

Turning to results for the Q2. Total revenue decreased 4.5 percent to $125,200,000 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 Q2 decreased 5.5%, including a decrease of 5.9% at company owned restaurants and a decrease of 3.4% at franchise locations. Our recently completed July fiscal period Included a system wide comparable sales decline of 3.8%, including declines of 4.5% at company owned restaurants and 0.3% at franchise locations. Company average unit volumes in July were 1,350,000 14% above pre COVID July of 2019 AUVs.

Speaker 1

Company comparable traffic during the 2nd quarter declined 9.1%. As Dave mentioned, traffic was especially challenged during our April fiscal period With a decline of 14%, followed by sequential improvements to declines of 8.7% in May 5% in June. Pricing during the Q2 was 6.1%. Although given the lapping of pricing from 2022 As well as strategic actions taken in May, pricing year over year came down meaningfully throughout the quarter. We entered the quarter carrying 13% of price, but during the last half of the quarter, pricing decreased to 3.2%.

Speaker 1

We anticipate this level of price to carry forward through the Q3. For this current Q3, We anticipate total revenue of between $125,000,000 $130,000,000 and comparable restaurant sales to decline mid single digits. Turning to the P and L. For the Q2, restaurant level contribution margin was 14.8%, a 70 basis point decrease compared to last year. Our restaurant contribution margin included meaningful improvement in our cost of goods sold line, offset by deleverage across other areas of restaurant expense.

Speaker 1

COGS in the 2nd quarter was 25.1 percent of sales, a 2 70 basis point improvement from prior year. This improvement was the result of continued favorability in normalized commodity markets relative to last year as well as the impact of initiatives executed over the last 12 months. 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 Q2 were 32.4 percent of sales compared to 30.3% in the prior year. Wage inflation continues to moderate with year over year hourly inflation growth of 7.7% for the full quarter, But only 6.1% during the recently completed July fiscal period.

Speaker 1

While we continue to expect deleverage across the labor lines for the balance of the year. We expect that deleverage to moderate as wage inflation subsides and we implement initiatives from our recent menu and operations simplification efforts. Due to deleverage, Other operating costs and occupancy costs both rose 70 basis points over prior year to 18.5% and 9.3 percent of sales, respectively. G and A for the Q2 was $12,500,000 $300,000 less than prior year, due primarily to reduced cash incentive compensation. G and A also included non cash stock based compensation of approximately $1,500,000 during the Q2 in line with prior year.

Speaker 1

For the current Q3, we anticipate G and A expense of between $12,000,000 $13,000,000 including $250,000 of restructuring expense and approximately $1,500,000 of non cash stock based compensation. Inclusive of the impact of the restructuring Dave noted, We anticipate full year G and A to be between $50,000,000 $53,000,000 GAAP net loss for the 2nd quarter was $1,300,000 or a loss of $0.03 per diluted share compared to net income of $1,300,000 last year. Non GAAP diluted earnings per share was a loss of $0.02 compared to earnings of $0.05 last year. 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

As Dave mentioned, although the company has gained traction relative to our performance at the beginning of the second quarter, we have revised certain expectations given the current performance. For the full year 2023, we are providing guidance of $500,000,000 to $510,000,000 For the full year revenue, inclusive of negative low single digit comparable restaurant sales, we anticipate full year restaurant contribution margin Between 14.5% 15%, with our current guidance reflecting margin expansion of 60 to 110 basis points versus prior year. For the current Q3, we anticipate restaurant margin just north of 15%. We now expect adjusted EBITDA between $35,000,000 $40,000,000 with the upper end of our guidance reflecting EBITDA growth of over 20% versus 2022. Included in our full year guidance For 2023 are now between negative $0.11 and 0.

Speaker 1

For the Q3, we anticipate adjusted EPS between negative $0.03 and positive one sent. 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 3,100,000 And a total debt balance of approximately $64,700,000 We currently have nearly $60,000,000 of incremental liquidity available future borrowings under our amended credit facility. During the Q2, the company opened 6 new restaurants.

Speaker 1

And as discussed at the last earnings call, we closed 2 restaurants. In the Q3, we expect 3 to 4 new company openings And no company closures. For the full year, we now expect approximately 20 new restaurant openings system wide, including 1 to 2 franchise openings in the 4th quarter, representing 5% gross unit growth for the year. As we complete our one time investment in digital menu boards across the system, we expect to be able to support our ongoing 5% unit growth target, primarily through operating cash flow. With that, I would like to turn the call back over to Dave for final remarks.

Speaker 2

Thanks, Mike. Clearly, we face disruption in the momentum that we have been experiencing leading into the 2nd quarter. Although we made traction since the initial challenges that we saw during the early part of Q2, we are aggressively executing strategies to enhance our competitive positioning and financial performance. Again, from a sales perspective, these initiatives include price optimization, Improved guest engagement analytics, introduction of chicken Parmesan, a third party supported evaluation and assessment of our menu And a significant expansion of our catering program. Meanwhile, to improve our financial performance, We're leveraging our operational initiatives to improve productivity and to achieve our goal of positive free cash flow.

Speaker 2

We've already enacted the following: Continued but moderated new restaurant growth, streamlining our G and A infrastructure and the authorization of a share repurchase program. Fortunately, we have a strong foundation to build from. With a differentiated brand, robust digital and rewards program In the culinary and pricing flexibility that we will garner from the upcoming completion of our digital menu board rollout. Average unit volumes have stabilized and are growing and the cost environment remains favorable. We have great confidence in both our short term and long term strategies address opportunities we see both in our value proposition and our overall competitive positioning, and I look forward to sharing our progress in upcoming quarters.

Speaker 2

Thank you for your time today and please open the lines for Q and A.

Operator

Thank you. We will now conduct the question and answer session. Our first question comes from Jake Bartlett with Truist Securities. Please proceed.

Speaker 4

Great. Thank you so much for taking the question. Dave, I want to start with just the diagnosis of what's It's caused this really sharp deceleration. I know you've talked about the menu pricing that you took in February. As you've dug deep into this, Is there any other explanation whether it's service levels, customer satisfaction, Maybe it's delivery has been a headwind.

Speaker 4

Anything else that can just help us understand such a sharp Deceleration in the trend here with traffic?

Speaker 2

Yes, Jake, certainly we feel that pricing has been the dominant factor. We've not been alone in raising prices. We obviously know that. But we do feel that ultimately we were more aggressive with pricing than many of our peers. At Height, we're running 13% year over year pricing and nearly 20% 2 year pricing.

Speaker 2

While we've remained strong with rewards members, Higher income guests, we needed to and we're continuing to work to win back some of those more price sensitive guests. That says, you look at all of the other metrics to your point about what the diagnosis is, we feel very comfortable with the people metrics improving, Cook times operational metrics improving, but one thing we noted today is that we do think it is time for us to take a fresh look at our overall menu. We feel the menu has a strong foundation. Our internal analysis research gives us a lot of confidence in the potential of Parmesan as well as other optimization opportunities. But that said, we think it's an appropriate time for us to take a comprehensive Fresh look at the overall menu and culinary strategy because we know the upside AUV potential of this brand is much higher than where we are today.

Speaker 2

From a channel perspective, again, we've seen strength in dine in. We've actually seen a rebound in part of the delivery program as well. Some of the digital and the to go area is an area that again we think will be specifically benefited by digital menu boards. Those are some opportunities we have as well.

Speaker 4

Great. And just to follow-up

Speaker 2

on that, I just want to

Speaker 4

make sure I understand that the pricing commentary correctly in the 13% Increased year over year. How much of that was on the in store menu? I know 20% 2 year, 13% 1 year, but my impression that it was that a lot of the menu pricing you've taken has been on the delivery side. So just if you could isolate that to the in store Many of you that would be helpful.

Speaker 2

Yes, actually the 13% year over year really was across all channels. So during the course of COVID, when we did implement price increase and as you look at the 2 year, there was a significant amount that had to do with the delivery price Pretty new. But really over the last year or so, that price increase has been kind of across all channels, including in restaurant. To put just some more texture behind it. Yes, as a reminder, we implemented 8% of price in Q2 of 2022 And an additional 5% here in February of 2023.

Speaker 2

Those were across all channels, not just on the delivery side. As we lap the 8% price increase from last year, we didn't replace it. And as we introduced the 7 for 7 menu during our pivot, That effectively dropped our price another 2% or so. So our run rate as we sit today again is approximately 3%. So we've gained some good traction, winning guests back from a value perspective, but it's going to take some time and we continue to be focused on improving that value perception.

Speaker 4

Great. And then my last question is just on the cost side. And you've taken some pretty solid measures to decrease your G and A. I want to make sure that the level that you're cutting it to is the right kind of level to grow from in 'twenty four, just to kind of make sure we understand How G and A grows from here on out? And then also I didn't hear you mention, I know you kind of had been going back into the kitchen of the future sort of Efforts to try to find efficiencies, but is operating cost efficiency a big focus for you at the Store level in 2024 as well?

Speaker 2

Yes. So I'll start with the G and A expense items. As we said, we completed a G and A Kind of an overview of our entire structure, really wanted to ensure that as we continue to grow at a pretty solid rate, That we have the right level of resources to invest in areas such as unit growth, technology, digital enhancements. So we absolutely maintained the integrity of those aspects of our G and A structure. What we saw is that over the course of the last few years, As we've implemented new systems, new technologies, there were certain administrative functions that we felt we'd probably just gotten a little bit too heavy from.

Speaker 2

So we feel very comfortable that as you look at the core G and A rate, where it sits today, that that should be a good spot for Very modest, just more inflationary type increases as we go into the future. From a labor cost perspective, We have made great progress over the last several years. We have reduced roughly 10% to 15% of hours out of our system On a per restaurant per day basis, that continues with some of the work that we did last year from an operations menu simplification perspective. We are incorporating some of those initiatives here into the model just even as we sit today. We'll continue to look hard at that.

Speaker 2

Everything from How the management team is structured, are there efficiencies we can gain there, continued enhancements in technology, as well as just looking at equipment overall flow. So certainly, we've made great progress on labor. We'll continue to do so as we go forward. Also buttressed by the fact that we're now not Seeing the wage inflation rate that we have been seeing in prior quarters. Great.

Speaker 2

Thank you so much.

Operator

Thank you. Please stand by for our next question. Our next question comes from Joshua Long with Stephens Inc. Please proceed.

Speaker 3

Great. Thank you for taking my question. Mike, welcome aboard. Looking forward

Speaker 2

Dave, following up on some

Speaker 3

of the comments you made in terms of just the guess that you lost during the quarter, Makes sense that it might be that more economically sensitive guess, but just curious what you've been able to see in terms of That specifically and then as you think about going forward, can you talk about some of the digital systems or marketing messaging systems that you have in place to be able to go back and Target that guest? How do you as you start to see traffic start to improve, how do you know if it's that guest that you lost coming back in or maybe just your core guests coming a bit more frequently?

Speaker 2

Yes, sure. I think one of the exciting things has been a key message I think for us as we look forward, Josh, it's just the overall flexibility that we are going to have based on our technology investments from an in restaurant perspective with the digital menu boards, As well as with the customer data platform and just overall our ability to target guests. One thing that has been extremely encouraging is that when you think of flexibility, As we started to diagnose and see a value issue, we were able to first off touch those rewards members. Rewards members are people we're able to quickly and easily access. We're able to give them specific promotions or specific messaging, maybe not even tied to promotions.

Speaker 2

We saw as we talked about in the earlier remarks, we actually saw an increase in frequency from our rewards members 2% as well as overall growth in the program. So that gives us quite a bit more information, and we've been able to maintain and retain that guest Partially because we've been able to act quickly against them. Now you incorporate a CDP. So at CDP, our team has already made tremendous strides in being more Targeted with how we approach our guests. This allows us just to have a significantly more surgical approach To segmentation, to messaging, to just overall how we communicate with our teams and that really just went live a couple of weeks ago.

Speaker 2

So we're just starting to reap some of the low hanging fruit when it comes to that technology. Another aspect as we continue to evolve from a technology perspective, As we said, we're starting to use machine learning in terms of recommendation engines. The testing of that has been very successful. So we're implementing that as we speak. That should be another nice tailwind.

Speaker 2

So the overall infrastructure from a rewards program perspective As well as the technology that drives our digital programs continues to improve and become best in class. Now you layer on top

Speaker 4

of it digital menu

Speaker 2

boards. Digital menu boards for us, one reason why they're so, so powerful is that it just gives us Flexibility across nearly every aspect of the business, whether it's how the menu is laid out, the pricing structure, new culinary items, Messaging, traditionally we couldn't pivot or test very quickly because we always had to wait on the physical menu boards To kind of catch up to the digital assets. This even impacted some of our flexibility when it comes to things like pricing because we didn't want a disjointed experience. So we feel digital menu boards combined with all of the enhancements we've made from a technology and data perspective Really allows us we're frustrated with the reset from a revenue perspective, but as we go forward from here, We have extremely strong foundation, this is going to continue to strengthen.

Speaker 3

Very helpful. And when we think about that target for, I think you said 75% by end of year on digital Correct me if I'm wrong there, but just can you walk through just maybe high level bullet points? I think the question would be in our minds, it just Sounds amazing. Why don't we roll it out faster? Obviously, it never works that way.

Speaker 3

There's implications. You got to make sure we get it done right. Can you talk through what that Yes. The pushes and pulls are there in terms of rolling that out across the system and when you think you could be at 100%?

Speaker 2

Yes. So we'll We expect to be, Josh, at 75% by the end of Q3. So 75% by the end of Q3, expect to be in all company restaurants by the end of this year. As we implement digital menu boards, it's certainly to your point, it's not just simply Plug in the screen and there you go. We're upgrading all of the network within every single one of our restaurants Thank you, as well.

Speaker 2

So there's a network upgrade that happens a little bit of construction and then setting up and ensuring we have the right cabling, All the electrical components as well. As we do that, one thing that's exciting is we're already seeing good results, from leading indicator perspective, Check average, some of the messaging being really responded well to, but we haven't even started really to implement things like Price optimization, where we're really looking at the interplay of pricing throughout the menu. We haven't been able to test some of the aspects of that as well as menu layout Until really just in the upcoming quarters. So it's really expect some good step change from that perspective, moving quickly, But one also obviously ensure that we have the right network infrastructure, and the right systems and able to execute and really garner as much of the benefit as possible.

Speaker 3

That makes sense. I appreciate that. And then one last one for me. When we think about the new menu work and I mean, on one hand, You've done a lot of innovation over the years, and so maybe a good time to maybe stop, take inventory of what you have, what works. And I understand That the research is not complete yet, but expected to be done by the end of the year.

Speaker 3

Can you talk a little bit more about why now is the right time? What you expect to find? And then, if there may be any sort of early research in terms of what supports the idea of chicken parm, obviously sounds delicious and it's a favorite of mine. But Just curious if that's something you've tested in the past or any sort of overarching strategy you might be able to offer up in terms of kind of that next leg of culinary innovation?

Speaker 2

Yes. I mean, I'll first start with chicken parm. And one reason we absolutely love it is it's a staple of Italian cuisine. It's not something that you're able to really see in any format from a price fast casual perspective. So it will be really on the front edge there, so we're excited to bring it in the fast casual environment.

Speaker 2

It just right down the middle of fairway, Extreme breadth of appeal, great familiarity. Over the years, we typically try to, as you know, Josh, balance Kind of more familiar items such as the tortelloni that we launched a couple of years ago with a bit more innovative unique items such as linguine. This is kind of the natural sequencing of our overall culinary innovation to our chicken parm, which is something that We have seen with all of our research has as much potential as Tortelloni did, which was extremely successful. This is just the natural progression from that perspective. That says you look overall at the menu.

Speaker 2

The world has changed In the last several years, we all know that the shift towards more off premise, catering is now coming back. We want to ensure that we are not missing some potential big opportunities in terms of our menu and we're open to Understand we're working with 1 of the best out in the business, to really evaluate it and say what are we potentially missing from a guest perspective that could really meaningfully have legs. So the fact that we've gained a lot of traction in our overall traffic trends, but are still not comfortable with where we're at, we know we have tremendous upside. We think this is a really good time for us to step back now that there's more normal guest behavior, and identify where there's some opportunities.

Speaker 3

Appreciate it. Thank you.

Operator

Thank you. Our next question comes from Andy Barish with Jefferies. Please proceed.

Speaker 5

Hi, guys. And welcome, Mike. On just trying to contextualize The diamond sales increase with the off prem challenges, I mean, last quarter, You've kind of focused on the delivery channel, seeing the most weakness. I imagine just Given the numbers that has continued, but I'm not exactly sure kind of by how much Or kind of where that starts to flatten out?

Speaker 2

Yes, we've actually Eileen, interestingly enough, Andy, as we did pivots, in our overall value messaging, One of the areas that we looked at specifically is in digital is in delivery, and really put some focused Attention on that both from a marketing perspective and a bit on the promotion side, we've actually seen a nice rebound in the delivery business. So from a perspective of you think about the channels where people maybe are the least price sensitive, which would be when they're going out to eat, they're looking for a good OARS the part of that delivery occasion where they recognize they're paying a premium, but they ascribe a significant value to that. Those are areas we're actually seeing strengthening. Where we are seeing a little bit more weakness is kind of that off premise occasion Where somebody maybe the alternative would be bringing something at home that could be a little bit less expensive than our offerings. So one reason we're really again Focus on that value proposition as well as focusing on just improving our overall competitive positioning, including looking at the culinary aspect, Because delivery has come back a bit, dine in again is strengthening, it's that kind of to go area as well as The digital quick pickup, we're seeing a bit more softness.

Speaker 5

And just a quick follow-up there. Did you actually Take your menu premiums down on 3rd party delivery or are you just responding with promotional activity?

Speaker 2

That was more marketing as well as promotional activities. So marketing could also include how you're featured on a website as an example. So we did not reduce the pricing on the 3rd party delivery side.

Speaker 5

Yes. Okay. And then, yes, On the culinary, I mean, you've been working on actually kind of streamlining menu and kind of focusing. What is the consumer sort of telling you in this pivot Kind of looking at more variety potentially or wherever the culinary assessment is going to take you, What's kind of been the consumer feedback in your research?

Speaker 2

Yes, certainly internally of the research So we've already done Andy. We're seeing the opportunities that we talked about with chicken parm as well as some optimization of our existing dishes. So looking at really ensuring that they're able to travel, our food generally travels great, but there are certain areas that we feel we could optimize potentially with Additional increase in sauce or looking at the recipes of those items. So that's what our internal research is showing that we're already activating against. In terms of overall where there potentially are culinary holes, what should be the right size of the menu, are there areas right now where we should double down Maybe areas where we don't necessarily need a dish.

Speaker 2

Those are areas that we're really going to be very open as we're Working with that 3rd party consultant, to really evaluate the menu in its entirety, to ensure that every single dish is delivered Towards surpasses our guest expectations. So we're honestly pretty open. We have some good ideas for our internal research, but I want to be able to have somebody else take a fresh look at it.

Speaker 5

Got you. And then, I'm sorry if I missed it, but When does Chicken Parm launch and do you have a price point or a price point range that

Speaker 2

you're considering? It will be in the early fall is what we're targeting at the moment. From a price perspective, hoping to be around 10.95 So what we think is a very attractive price point for what should be a very popular dish. Okay. Got it.

Speaker 2

Thank you. Thanks, Andy.

Operator

Our next question is a follow-up from Joshua Long with Stephens Inc. Go ahead, Josh.

Speaker 3

Great. Thanks for taking my follow-up. Just wanted to throw one over to Mike. I realize It's been relatively recent that you joined. We're excited to have you.

Speaker 3

Curious if

Speaker 2

you could give a little bit

Speaker 3

of perspective just on early days, what you've seen and learned from The team, the structure that's in place, any sort of observations there? And then secondarily on the COGS side, I know you said you were locked in on But curious if you could give us a little bit of a peek into the rest of the basket and kind of how things are positioned as we've started to hear more about Inflation on the food side moderating from peers.

Speaker 1

Sure. Thanks, Josh. It's just been a couple of weeks as you know and really excited to join the team off to a good start with the team. As far as the support office here, it's an impressive group of people that are supporting the restaurants and I have been impressed with How energized and focused everybody is, leading and driving towards the initiatives that Dave talked about today. So Off to a great start and looking forward to getting more entrenched and getting involved with The initiatives Dave talked about.

Speaker 1

As far as COGS goes, you're right, we're locked in for the rest of the year. Chicken With chicken and a lot of our primary commodity basket items, one area we're looking at as we Start to talk to our suppliers about pricing for next year is we're seeing the same thing everybody is seeing around beef, Which that's very familiar to me and it's a familiar story about the beef roller coaster. And so we're seeing that go the wrong way in the market right now and We're talking to our suppliers and doing some things to try to get ahead of that. But outside of that, it's pretty early to talk about 2024. For the rest of the year, We are anticipating very consistent COGS as a percentage of sales for the balance of the year.

Speaker 3

Thank you.

Operator

Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now

Earnings Conference Call
Noodles & Company Q2 2023
00:00 / 00:00