Q2 2020 Noodles & Co Earnings Call
[music].
Good afternoon, and walking because they don't think company second quarter 2020 earnings conference call.
All participants are now in listen only mode.
Actually the presenters remarks, there will be a question answer session.
As a reminder, this call is being recorded.
Now introduce noodles, <unk> company's Chief financial Officer, Ken cubic.
Thank you and good afternoon, everyone welcome to our second quarter 2020 earnings call here with me. This afternoon as Dave bending holes in our Chief Executive Officer.
I'd like to start by going over a few regulatory matters. During her opening remarks and in response to your questions. We wait we may make forward looking statements regarding future events for the future financial performance of the company any such items, including details relating to our future performance should be considered forward looking statements within the meaning of the private security.
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.
The Safe Harbor statement in this afternoon's news release and the cautionary statement in the company's annual report on form 10-K for its 2019 fiscal year and subsequent filings with the FCC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company's forward looking statements.
I refer you to the documents the company files from time to time with the Securities and Exchange Commission specifically the company's annual report on form 10-K for its 2019 fiscal year and subsequent filings we have made.
These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.
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 second quarter 2020.
Earnings release, and our supplemental information now I'd like to turn it over to Dave Boennighausen, Our Chief Executive Officer.
Thanks, Ken and good afternoon, everyone. Since we last spoke of course the country. The restaurant industry have continued to face unique challenges it all walks of American life.
Im a method proud of our team members and our partners further unwavering commitment to providing delicious meals prepared safely quickly and consistently at our restaurants across the country.
Our team members and partners have risen to the challenge presented during the last few months.
And as a result, I am confident the noodles <unk> company is positioned to be one of the strongest performers in the restaurant space for the balance of 2020 and for years to come.
I'd like to spend our time to a focusing on the three primary reasons, we feel the middle of the company's future is particularly bright.
First the trusted brand equity we have gained over the past few months to our approach to ensuring a safe and healthy environment for our team members and for our guests.
Second the brands positioning and the initiatives that have led to our sales recovery since the onset of the coal that pandemic.
And finally, our strong unit performance and our increased confidence in the company's ability to accelerate unit growth with a prototype that's perfectly situated for the needs of today's consumer.
Of course, our first priority remains ensuring a safe environment for our teams and guest particularly as we reopened our restaurants for on premise dining.
During the crisis needle the company has been an industry leader in terms of implementing health and safety protocols, including being one of the first to shift to an off premise only model back in March supplement it with enhanced cleaning and Q a procedures in all of our restaurants.
This commitment has continued as we now reopened dining rooms with the recent implementation of face mask requirements for all team members and gas to company restaurants, and generally just taking a conservative approach to the reopening of dining rooms based on the colder trends that we see any particular market.
It's worth pointing out that the guest satisfaction scores have improved meaningfully over the past few months, particularly in those order methods, where gas interact directly with the brand in the order process.
We feel this improvement reflects that our approach us help gain the trust of gas and thats going to be really influential as we grow in the years to come.
This leading approach to health and safety has been complemented with an incredibly strong digital business that allows guests who enjoyed contact list transactions, both at our restaurants and in the comfort or their own homes.
The company really did not begin offering on premise dining in earnest until just recently in most of our locations.
As of yesterday, 92% of company locations offer limited in restaurant dining or patio seating.
This is up from just 40% as of the end of June which really most of that increasing occur increased occurring just in the last several days.
Our ability to achieve solid sales growth over the last few months, particularly with limited dine in is evidenced the brand strength in both digital and off premise.
This strength leads to our second focus of today, which is a discussion of our recent sales trajectory and the financial performance from Q2.
As we announced earlier today, our comparable restaurant sales during the second quarter were down 30.1% a company owned restaurants, while our average unit volumes normalizing for temporary restaurant closures declined 25.8% year over year.
Restaurant level margins in the second quarter were 6.7% and adjusted diluted loss per share was 18 cents.
However, as you look at their monthly cadence of comparable restaurant sales a company owned restaurants sales declined 47% during our fiscal fourth period improved to 29% decline in the fifth fiscal period, and then improved to a 17.7% declined during the final period of Q2.
Thus far during the third quarter, our comparable restaurant sales a company owned restaurants continue to significantly improve not to an 8.8% declined during the fiscal 17 period.
Meanwhile, average unit volumes, which again normalized for temporary closures, including our closure of all company restaurants. During the fourth of July weekend saw only a decline of 0.5% versus prior year as we show further progress and returning to precluded sales levels.
Average unit volumes increased to 1.18 million during the last two weeks of the July fiscal period and average unit volumes have continued to increase into the first week of August.
The fact that our average unit volumes are now nearly in line with the prior year results is a testament to the brands particular strength in meeting the changing consumer needs that have occurred over the past few years, we're really accelerated during the cold pandemic.
First let's talk about the brands particular residents for the off premise occasion.
Even prior to the onset of the pull that pandemic off premise sales have grown to 60%.
As our concept possesses the speed of service value and the variety necessary to meet the consumer need for convenience. Additionally, our food travels extremely well relative to many competitors and we resonate with younger demographics and families who have gravitated towards off premise occasions.
Of course capitalizing on this competitive advantage has required strong digital program, which has been bolstered by investments made over the last few years, our digital infrastructure and in our rewards program.
Additionally, since the cobot pandemic began the company's made several significant enhancements to our digital and off premise offerings, including the national expansion of our partnership with two brief the implementation of curbside delivery at the vast majority of our restaurants and the ability to order delivery directly from our website now.
Our digital strength has been a tremendous driver of our improving sales trends over the past several weeks, culminating in digital growth during the June fiscal period of 155% over last year in pure dollars and accounting for 67% of overall sales.
With many of our restaurants opening for in restaurant dining really just in the past several days is too early to determine exactly how much of our digital sales increase will be retained.
However, during our most recent July fiscal period, even as dining rooms began to open digital sales continue to represent almost two thirds of all revenue.
Our initial results as we reopened dining rooms do support our thesis that much of the digital sales gain during the call that pandemic have come from increased trial and market share gains as guests have either newly discovered the brand or they discover new ways to use us.
I want to share two data points that gives me great confidence in this thesis.
First is the strength of our afternoon and dinner business during the last fiscal period sales from two PM to close represented nearly 70% of our overall sales volume and comparable sales. During this timeframe were up 5%.
While our lunch business remains down it's improved meaningfully since the onset of the pandemic and it's only going to strengthen as on premise dine in resumes and further on as cash returned offices during the workday.
Another data point is that we have seen particular strength in markets with less brand awareness, where adoption of our digital platforms have spurts strong sales as an example, northern California and Phoenix achieved a is the growth of 7.6% during the July fiscal period was 64% of their sales coming from digital.
Options.
Our digital growth has been fully buoyed by a continually strengthening rewards program, which has now grown the 3.3 million members.
During the cobot pandemic, we've seen record number of daily sign ups with an average 46% increase relative to pre cobot levels.
What we've been able to target specific messages and promotions based on certain guest behavior. We really believe we are still very early in unlocking the ability to utilize great guest data to better engage with our guest.
We expect our rewards program to be a meaningful driver of ASV growth during the balance of 2020 and beyond.
While we have improved access engaging with the brand over the past few years and during the pandemic Weve. Additionally, continue to innovate around our core menu to meet changing consumer needs.
During the second quarter, we introduced perfect goals, which are available online and they offer pre customize curated versions of our popular dishes to meet Quito, Paleo gluten sensitive and vegetarian diet.
We've also innovated around our popular Mac and cheese lineup, introducing a new Hampshire year, Mac and cheese as well as introducing kid friendly animal models shapes into our kids menu.
As we previously discussed due to call did we had delayed testing new menu items over the past few months, but we continue to make progress and building our pipeline and a returning to testing new menu items again.
One example of this will be califano.
Which will be entering in market test next Wednesday August 12.
Turning off the great success of ours, Acadian cauliflower noodle launches of the past couple of years, we're particularly excited to get this addition front of our guest the cauliflower and LTV several dietary needs of today's consumer.
Including being gluten free will significantly reduce carbohydrates and calories relative to traditional we pasta all with the great taste that people expect renewals and company.
Of course these initiatives were not have had nearly the impact of work for a tremendous team executing the brands everyday inside our restaurants.
For the past few years and even more so in the past few months, we've invested in building our people and our culture as a competitive strength.
Since the onset of the coded pandemic, we've committed to our team through the activation of our foundation and the introduction of emergency paid sick leave to support team members impacted by the Pandemics. We've also provided bonuses to our field level employees during Q2, and we closed our company restaurants. The fourth of July weekend as a thank you for their incredible work.
Over the past few months.
Most recently, we have taken several actions to enhance the focus on inclusion and diversity throughout the organization to fulfill our mission trolleys nursing inspire every team member guests and community we serve.
As many restaurants tours will tell you.
Few things are is correlated with success as management tenure.
Our current average restaurant general manager has been with the company for almost five and a half years. This is an improvement of 15 months from our average tenure just two years ago as our retention has improved dramatically.
This bodes extremely well for our ability to maintain our momentum and successfully execute our growth strategy, which leads to the third reason that we think noodles and company is positioned to be a winner in the current environment that is our potential to meaningfully accelerate unit growth.
As we've said in prior calls our most recent openings have been particularly strong and that continued during the second quarter. The six restaurants that opened in 2019 or 2020 achieved average unit volumes, 14% above the company average and also achieved an impressive restaurant level margin of 19.4%.
Many of these restaurants include the order ahead drive through pickup Windows, a feature that we will target and at least 70% of new units in the future pipeline.
While during the uncertainty at the onset of pandemic, we intentionally delayed our unit growth. The success of these recent openings, our overall sales recovery and the strength of our cash position as well as the supportive and amended senior credit facility gives us increased confidence in our ability to accelerate unit growth in 2021 and beyond.
We do anticipate that there's going to be meaningful disruption in the real estate environment for restaurants in the coming years.
And we're excited about the opportunity for us to take advantage of that disruption with a more efficient off premise oriented footprint.
During the fiscal seventh period, we had 50 company restaurants with annualized volume above million $1 million coming solely from digital transactions.
As you can imagine that provides us greater confidence not just in a reduced square footage in general, but additionally in the potential to test extremely cost effective buildouts that only incorporate off premise and or digital sales.
This efficiency of build that will additionally, be supported by ongoing efforts to improve labor efficiency in our operating model.
While we have delayed certain elements of our kitchen of the future initiative, we anticipate expanding the most promising aspects of that test such as the introductions of steamers to improve the throughput and efficiency of our Cook line during the fourth quarter and into 2021.
While it is still too early to determine exactly how many restaurants will target for 2021 and beyond we're very confident that our economic and operating model will be attractive look for company unit growth as well as more aggressive franchise growth.
I again, we'd like to thank our teams for their tremendous effort over the past few years and in particular since the onset of the coated pandemic.
The trust gain through our commitment to safety before and during the cobot pandemic the strength of the concept on our recent sales initiatives and the unit runway ahead of us have all position new as a company to have a prosperous future and their efforts is what has made that possible I'd now like to turn it over to Ken to share some highlights on our financial results during the second quarter.
Sure.
Thanks, Dave ill start with a brief overview of our second quarter results and then I'll finish with an update on our financial position in response to the crisis, we reduce all non essential spending at both the restaurant and the corporate levels at the restaurant level. This included eliminating are postponing nonessential spending and modifying our operating model to maximize.
Efficiency at lower sales levels.
Early on in the crisis, we introduced a new labour deployment model to reduce labor hours, when restaurants fell below certain sales levels, while maintaining the safety of our guests and team members and continue to offer to the level of service that our guests have come to count on it noodles.
Despite sales deleverage thanks to the operational excellence of our team members in the restaurants labor was 33.9% of sales only a 120 basis point increase compared to the prior year quarter.
As you can imagine managing cost of goods sold in this environment has been a daily challenges. We are proud of the work of our supply chain team and the execution of our team members in our restaurants.
Our focus on improving our operating model over the past eight quarters, including enhancing our disciplined on Cogs put us in a position of strength as we enter the crisis.
During the quarter the benefit from pricing of approximately 4% and the benefit from contract renegotiations that resulted in favorable commodity pricing more than offset the headwinds from increased waste and the shift to all off premise packaging.
All in all Cogs was 25% of sales in the quarter 60 basis point improvement from the prior year quarter.
Other operating expenses were 19.7% of sales and as Dave mentioned, we were one of the first concepts to shift to an all off premise offering in early March.
Third party delivery during the quarter with 30% of sales compared to 6.6% of sales in last year's quarter and delivery fees were 6.4% of sales.
As Dave mentioned restaurant level margin for the quarter was 6.7% and similar to our comparable sales trend improved throughout the quarter with double digit margins during the last two fiscal periods of the quarter.
Overall, given the challenging environment, we were pleased with the progressively improving restaurant level margins this quarter and even more importantly, we believe that we will emerge from the cobot pandemic with a stronger economic model.
Turning to our financial position, our focus has been maintaining a strong liquidity position as well as optimizing our operating model during the crisis.
At the same time, we've continued to execute on our strategies during the second quarter, we generated $6.7 million of operating cash flows.
While there were some timing benefits during the quarter as we look forward. We believe we will continue to generate positive operating cash flows at current sales levels.
We ended the quarter with $62.1 million of cash on hand, and despite the impact of cobot, we improved our debt position net debt position by $3.3 million during the quarter and we estimate that we will have more than adequate liquidity to support our strategic growth objectives throughout 2000 22021.
During the third quarter upcoming third quarter in order to lower cash interest expense, we plan on paying down a significant portion of our revolving credit facility with excess cash.
Lastly, given the uncertainty of the impact in duration of the cobot pandemic, we will not be issuing guidance for fiscal 2020 at this time.
That said, Dave and I continue to be optimistic that in the long term the strength of our recent initiatives and the improvements made via economic model over the past several quarters will allow us to ultimately emerge even stronger competitively.
And with that I'll turn it back over to Dave.
Thanks, Ken.
The cobot 19 pandemic.
It's caused the disruption in our business greater than anything I've seen in my 16 years, the noodles and company.
What's been heartbreaking to see the impacted the crisis has had on the restaurant industry as well as the impact of virtually everyone in our country.
I am encouraged with the future will bring particularly for noodles and company.
I do believe that when all said and done our strong business will only become stronger.
Earlier I noted three reasons for my particular confidence in Nielsen companies potential.
First the trust and brand equity we have gained over the past few months through our approach to ensuring a safe and healthy environment for our team members and guest.
Second the brands positioning and initiatives that have led to our sales recovery, but also position us well to outperform the industry during the balance of 2020 and beyond.
And finally, our strong new unit performance in our increased confidence in the company's ability to accelerate unit growth with a model that is perfectly situated for the needs of today's consumer.
I am more excited than ever for the future of metals and company.
I'd now like to turn it over to Michel to open the lines for QNX.
Ladies and gentlemen, good question. When these effects Star then one on your telephone so as to why your question at the pound.
Please standby why we compile the Q and a lot.
Our first question comes from Jake Bartlett of two of your line is open.
Great. Thanks for taking the questions.
My first.
He is on the experience on with with stores that have dining on reopened in longer experience with the 40% as being a few of them.
I think June on but what kind of what kind of boost to sales and has that produced and then also what is doing to margin decided on we'll have a materially different margin profile. Once you get full before operations running or have you been able to retain some of these efficiencies.
Yes, I appreciate the question Jay can you as we mentioned earlier, it's really been only in the past few days that most of our restaurants began offering on premise dining so it's a bit too early to tell.
But those data points I shared earlier in particular, how strong the dinner business has become gives me a great deal of confidence that now as you are starting to see the lunch business come back even further that's an area, where we'll see some pickup as we go through the balance of of this quarter as well as through the balance of 2020.
It is a touch early to understand exactly how much Donald that will be incremental but we certainly believe the solid percentage will be ahmed from a margin perspective, I think we feel very comfortable that the way our teams have modified the labor model, there's pretty minimal investment in terms of ensuring that that execution is really strong.
They are already going through with pretty significant enhanced Cuba, and clean procedures that really adding that element of the dining room.
It's been a for the most part able to be absorbed in that model.
Okay, and then a book keeping question can you remind us or tell us and congrats on the in the release, but how many stores or skilled temporarily closed on how much that has been a drag on the on July seems were sales that you reported as well as the second quarter.
Yes, it's only a handful of restaurants that are still close Jake what we do see as we take a very conservative approach in general.
So as you look at temporary closures in totality.
The impact is really very similar to the difference that you see between average unit volumes and same store sales.
Particularly in those last two weeks.
As we did not have the closures for fourth of July weaken.
Okay. So.
It sounded like that there is roughly a.
It pretty significant delta between the average weekly sales that you're talking with our average unit volumes in the same store sales so.
Up to what 3% to 5% or somewhere around mark for normalized basis, it's been roughly 3% to 4%.
Of our sales that can impact from the same store sales perspective.
Due to temporary closures.
Okay and that so it's okay. So that net so that still holds for July.
Correct.
Okay, and then can you mentioned on the margins.
Moving to restaurant level margins grew double digits.
Im not sure what I wasn't clear what what period that that covered was ending.
In June and July or was that the last two weeks that you're talking about that was may and June soapy, five and six the last two core most of the quarter.
Okay and I.
No not add to that Jake that we feel really comfortable it's obviously very preliminary in terms of the seventh period being complete but we feel very comfortable were able to hang onto a lot of efficiencies we saw that back half of Q.
Q2.
Okay. So may.
Restaurant level margins were double digits as well as June and I would assume just given that the much better comps in June it would be much higher or still in maybe you can maybe could frame out kind of the progression there.
Yes, so margins and Ken concern that weigh in as well, we're actually negative during the very first period. After the April fiscal period of the second quarter down mid single digits.
As you went forward.
Strength really across the board with exception of you did have some of the onetime expenses in particular, the thank you bonuses that went to our restaurant level teams occurred during.
That's the piece six period, and then P. seven we did have the loss of leverage from.
The two days of closure normalizing for those events, we feel very comfortable and kind of a continued upward trajectory between the last three months.
Okay. Thank you very much I appreciate it.
Our next question comes from Nicole Miller of Piper Sandler Your line is open.
Thank you good afternoon, hi, everybody thanks to the update.
Three questions. If it is okay I can be brief with them, but I appreciate the comments around the real estate disruption and more efficient footprint. What do you mean by that and is there potentially drive during your future.
Well, we already have civil we've been talking about when we discussed the order ahead.
Dr. Peter pickup Windows, Nicole we have been incorporating into that into most of our new restaurants already as well as a few retrofits. These behaved very similar to those of you that are familiar with Chipote lands at the exact same concept in terms of you order ahead typically digitally and then it's a drive through in terms of going to pickup that pickup.
That order, we actually opened just the most recent opening was just yesterday in Minnesota, and we opened with a pickup window there drive your pickup window and the average transaction was only one minute. So we see great potential in that we've already been down been down the road from designed in a perfection of some of the.
Some of the operational aspects of it but I think gives us particular excitement, though nicole so the drive through is already in progress is when you look at the overall spectrum of where we could potentially take that footprint. We certainly see kind of the traditional noodles accompany footprint, which would now still be smaller square footage would incur.
Sure Great those pickup drive through Windows.
Then to the gamut of what if you have restaurants that are purely.
Off premise, whether it be just digital only whether it be just the drive through pickup window.
We feel that there is a spectrum of.
Real estate opportunities that as we look for five months ago, we maybe didnt realize we had quite as many opportunities as we now do think we have in terms of some of the trade areas and how we can service gas in in a wide variety of manners.
Excellent reminder, and thanks for the additional thoughts.
I'm curious I've been talking like alcohol sales and I believe you have some permits.
Tom is not all the stores is that an opportunity that aligns with your brand.
Probably not we still retain some of the permits from when we last had beer and wine, which was probably four years ago.
Ultimately, we feel as you look at the strength of our business for convenience in particular.
Beer and wine sales are just not nearly the opportunity that we see and other aspects of the menu.
Alright fair enough and then the last one.
Wanting to just one more question on margin.
Understanding April may improvement at comps improve when we think about Q and I've got I believe there is some leverage I would think on the labor line.
Thank you would be in margin territory quarter to date above the prior year is there any.
Yes.
Aaron that assumption.
I think it but where our target is nicole to in a post coded world or during cold at world as things normalize, which realistically is more so the fourth quarter and then into 2021.
10, our objective is to get volumes at or above where they were pre co bidder into 2019 as well as margin expansion.
The margin side similar to many other concepts delivery being such a large percentage of our business at the 30% as Ken mentioned during the second quarter.
That is the biggest headwind.
That we have to overcome in order to maintain or increase margins relative to prior year that said, we can leverage a lot of labor model, which certainly changes in an environment, where most of your sales are coming digitally. We've also seen a lot of areas, where we streamline the business just in general.
Over the last few months and we have several initiatives down the pike in terms of in particular, the kitchen and some of the equipment and those processes. So the long story short would be we do expect to as margins normalize that we'll be able to maintain margins on an apples to apples basis relative to prior year and potentially expand it.
Certainly there's a lot of uncertainties.
And Additionally, we'll use Q3 as a bit of than a learning quarter. If you will particularly on the delivery side, because we do have significant control over on early certain control over the delivery margins. The fees that you pay the fees that the gas pay the pricing that you do in certain areas, we'll be testing very.
Yes approaches to that and you'll see us do that during Q3 Q4 as when we expect it will be a much more normal environment.
Excellent Thanks again for the update.
Our next question comes from Andrew Strauss, Steve BMO. Your line is open.
Hey, good afternoon.
I have a couple of questions. My first one is on.
The unit growth for understanding that that it's maybe too early to talk about.
2021, but can you talk about number one what what your pipeline looks like right now number two kind of what's the timeline would be on when we might start to see the smaller footprint stores and if kind of leaning into that changes at all kind of the new market versus infill mix. Since we think about that going forward as may.
It opens up some new trade areas like you talked about.
Yes, I'll address that last one first actually which is I think thats, where the most exciting aspects of this Andrew is that we see.
For brand like ourselves, which is so unique and has no direct competitors.
From a new market perspective, and an urban perspective, it's sometimes difficult to gain traction we actually feel there'll be a lot more opportunities for us to look at that new markets more urban thats something not from more until the tail end of 21 and potentially 22, but there's certainly a lot of opportunity there the pipeline itself as I said.
We opened our second restaurant of 2020 Im just yesterday it opened with a great day, we will have a couple more that opened this year next year, it's a bit early to give us as specific target. What we can say that we will continue to build up the pipeline our original target pre co that we talked about returning to a 7%.
Unit growth rate with a combination of company and franchise openings.
We've maintained most of the existing pipeline that we already had working.
So we're not going to reach that 7% unit growth target for the full 2021 year. However, we thing in the latter portion of the year, you'll start seeing us get to annualize figures that will match that number.
[music] apart as I think there is a third aspect of your question that I'm missing.
When we would see a smaller footprint stores, but if we have our it's already we have already been moving in that direction and getting restaurants that again the portfolio averages 2600 square feet. We've been building restaurants closer to 2000 square feet. We already have prototypes designed we have trade areas.
So we've identified so we would expect that in the middle of 2021, maybe a little bit later on but certainly next year, you will see a smaller square a much smaller square footage that's much more off premise oriented.
Operating those drive through Windows et cetera.
Okay, great on the my last question.
During this I know, it's too early to kind of say, where the digital mix is going to fall Im just wondering if there's anything that youre going to incrementally to retain those digital customers and if you could talk.
Im going to check dynamics right now our top across the space, but if you could maybe talk about frequency of the digital guys to maybe any other nuances that you see between that guest in your traditional.
Store ordering yes.
Yes.
We're still early enough in the.
In the systems as a reminder, we launched the rewards program in October November of last year, but I think getting the larger tuna love to breakout frequency, we're not quite there yet we are seeing from the rights that we have that we are getting increase in frequency.
However, I think what's most exciting is what we talked about earlier on in the call in that so many gast during the past few months have learned about our brand tried our brand gotten to love our brand or found a different way to use us than ever before we see a significant percentage of the gas that are signing up for that rewards program.
That are new to the brand in its entirety that gives us a lot of confidence and when you see the market performance.
The Bay area in Northern California of Phoenix, where we don't have a lot of brand awareness, yet how they're outperforming how that overall dinner day part in total for the company is performing gives us a lot of confidence that theres a lot of stickiness to that digital transaction.
What we will too.
Your question about any changes is I think you'll continue to see us testing how to drive more and more people towards the direct delivery experience through our native digital channels that allows us to have just a better experience for the gas they're able to participate in the rewards program certainly there's margin benefits to that as well.
Well, so you'll see us price has some more things along those lines.
And then otherwise from a digital perspective to maintain to maintain that you will continue to see enhancements and improvements whether it's the use the ability of the functionality of the app.
Curb side, where we have strong program now we believe there's going to be an even stronger program will be able to rollout later this year, we absolutely believe that that digital percentage, while it will likely decline from percentage of sales basis. The pure dollar figure, we think theres theres great capabilities for us actually maintain that in a post cobot world.
Thank you very much congratulations on the momentum.
Thank you Andrew.
Our next question comes to Andy Barish of Jefferies. Your line is open.
Hey, guys I'm wondering if you can.
Give us a sense I mean.
In that delivery fee and other operating expense line I think you offered free delivery.
Just maybe what you're doing marketing wise.
And how that looks going forward so.
Thats six for 6.4% is that a.
Kind of inflated number at this point.
I'd say, it's modestly inflated as we're seeing some progress Andy in terms of.
Moving people over to those direct channels, which come with it a lower fee from a free delivery perspective, I would not say that we were overly aggressive in fact, we actually feel like we have the ability to be more aggressive than we've been in the past because free delivery. We did have him for a portion of the quarter, but not.
Not for the full quarter. So we'll continue to push on that interestingly as dining rooms have reopened has restrictions have loosened across most states relative to where they were at the onset of the pandemic, we're not seeing any decline in the overall volume on a daily basis from delivery Theres clearly significant amount of demand there.
Our food really does function extremely well for the delivery occasion.
This quarter is probably going to have a little bit more investment in testing in terms of how do you optimize facts now from an overall marketing dollar figure we would expect to be pretty consistent in Q3 in Q4 with what we hadn't Q2, and maybe Ken can elaborate a little bit more on what we saw there.
Oh I am market, just a marketing was 1.2% in Q2, and I would echo daves sentiment that we'd expect that to be comparable in the third and fourth quarter.
And then just dovetailing on that what will be the the marketing focus in the back half and how.
On some of your new product offerings.
Perfect Falls and.
Doodles and colleagues Pluto outlook, those products been mix, saying or family meal.
Build or drop off just given the dynamics of opening dining rooms and things like that.
Yes, we think as you see opening dining rooms.
Come back to the perfect. Both will actually gained momentum we've been pleased with the initial launch there and we think that it's such a great offering for healthy lifestyles that that we expect continued to gain nice momentum, we're not necessarily disclosing the mix shifts on it but were we feel very good with where those are family bowls I think what we've identified.
Hi during.
Our family meals I should say during these three months is one of the things that gas really gravitate towards our brand as the ability to customize.
Get something for everybody.
So as we look at those family meals, we'll probably see US do is evolve them, Andy and so they might have a little bit of a different kind of format and offering them versus what they are today.
From the overall marketing objectives, certainly building that rewards program is going to be the largest thing that we'll be looking at because we just see great correlation between that.
And our overall sales trajectory.
Thanks, guys.
Thanks Eddie.
Our next question comes from Todd broke a C.L. King and associates.
That's helpful.
Hey, good afternoon guys.
Uh huh.
Couple of quick questions one during the heart of the pandemic did you guys streamline the menu offering.
Much and whether learnings out of that that as you.
Rollback, the dining rooms reopened that we may not go back to the full menu than we ever more efficient offering that that you're comfortable with.
Ultimately, we see in kind of two phase as Todd said, we didn't do a bit of streamlining not a significant amount believe reduce some of the areas that.
Either felt there could be some supply chain disruptions that ultimately Fortunately didnt come to pass. Additionally, we remove some that were more difficult to execute operationally.
Overall, we see as kind of two phase approach, where we will keep some of those smaller kind of tertiary items will we won't be bringing those necessarily back.
But we do think that this environment gives concepts the ability to showcase the variety in their menu in particular noodles and company through digital channels. So you can see the variety that comes with things like the perfect goals without introducing more complexity into the room.
Restaurants, so you will see us over time.
Likely reduce the pure number of entrees on our menu, but from a gas perspective actually show, even a tremendous more variety, we'll probably get even more credit than we do today. So I think we'll be able to balance that innovation of exciting things with call. It far Nokia with also some streamlining to ensure that the operational.
And supply chain sides maintain intact.
Okay, Great and do you think Theres a go forward benefit from the streamline menu from a cost standpoint. Another performance was good in Q2.
Not really I mean, ultimately there there is a little bit of benefit that we saw there.
But if we don't we didnt necessarily see it as a great opportunity for us to reduce Cogs is more so focused on the operational aspects and how do we how do we ensure that the gaskets the same experienced but our operations teams can execute at high level.
Okay, Great My second on final question if you.
Take your commentary would you guys seem excited about learnings and what it means for new unit economics on and chomping at the pit to kind of start opening stores again I.
I know you talked about a certain balance that you're trying to achieve Andrew unit openings between corporate and franchise locations.
If you look at kind of the franchisee reality coming out of the back end the pandemic.
Do you expect to.
More corporate load the new unit mix.
In fiscal 21, and then let franchisees start to carry the load a little bit more.
In fiscal 2002 or is it a relatively unchanged mix from what you had going into the pen.
I think let me address that first specifically 2021, and 2022, which I think your instincts are right. Todd in terms that we would expect 2021 might be a bit more company dominated than of longer term.
Growth equation that said our franchise community, which we're very proud of and very pleased with their performance they've shown a great amount of interest and potentially also being some of the test vehicles for some of the lower square footage profile. So.
There are indications that we might be able to have a good solid mix of company and franchise growth.
When it comes to the overall environment and how the dust settles. If you really look at two pieces to your question. What is the overall real estate landscape. We already think the dust is starting to settle there in terms of identifying and seeing opportunities.
That may be weren't there in a pre covert perspective franchise might take a little bit longer for that to ultimately the dust to settle.
But you will see us over the next several months become more aggressive in terms of.
Identifying sales opportunities identified growth opportunities from the franchise site, but to your point.
Those that don't necessarily come out the ground until the 2022 fiscal year.
Okay, great. Thanks.
Again to ask a question. Please press Star then one.
Our next question comes from Jake Bartlett of two it your line is open.
Great. Thanks for taking the follow up some I had two on and one was on the scheme or is that kind of the more more abbreviated or modified version of the kitchen in the future can you.
Maybe remind us or state again.
The pace you expect those to be rolled out.
What portion I know were originally I think the savings kind of could have been in the area of nine to 20 million on an annualized basis for the full program. If you can give us any idea what what this could mean for margins and also what it could cost on on or per store basis.
Yes, we think it's ultimately.
Premature to talk to what the overall labor savings that we expect to see some of the numbers that Jack referenced.
As a reminder, each hour of labor for US has worked equivalent to about a million $8 million to $2 million of annualized EBITDA, so the ability to reduce.
Three hours to five hours to 10 hours over an extended amount of time can have significant impact on our overall economic model with the steamers the great part about the seamless Jake is relatively easy to install very low capital investment.
We think.
Several thousand a restaurant, but it's not it's not north of its not north of 20, it's it's much lower than that.
And relatively easy for the teams to execute however, we do need to do our standard test process and the stage gate process by which we use test for testing will implement that starting in Q4 to expand the steam or test and then go from there throughout 2021 so.
Bottom line as we think it is good upside to the overall margin story, particularly in 2021 and beyond its bit premature for us to kind of go into what we expect the ultimate savings and even the ultimate.
Capital investment will be.
Got it and then last question.
And your and your.
Amended credit facility.
There were some more restrictive capex on no limitations that includes 12 million in 20 and.
The mats of 24 million in 2021.
Help us I don't think it's been broken out these explicitly before but what kind of corporate on Capex is what your annual maintenance Capex would be im just trying to see what's left over so I can kind of have a little bit of.
Barriers here to figure out how much you could accelerate unit growth.
Yes, so ultimately when we typically said theyre good rule of thumb in terms of per restaurant kind of ongoing expense is roughly 18 $20000 or restaurant.
So that gives you briefly $70 million in capital expense for that for.
2021, we feel very comfortable though that as you look at the credit facility will be able to meet those performance targets.
To release that extra $12 million of capital, we do feel very comfortable that we'll have a smaller square footage more effective footprint from a cost perspective.
So when all said and done is that number of new restaurants.
Probably we're targeting some or at least 10 that we feel we can build in 2021.
Thank you so much.
There are no further questions I'd like to turn the call back over to Dave for any closing remarks.
No. We again appreciate Everybodys time today, we know that the world is more exhausting an ever changing than ever.
I can tell you that this team.
And our team in the field, we're extremely proud of the work that's been done over the last few months and probably more excited and energized that ever.
Where the spread can be so thank you very much appreciate the time.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great. Thanks.
Okay.
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