Q1 2021 Noodles & Co Earnings Call
[music].
Good afternoon, and welcome to today's noodles and company's first quarter 2021 earnings conference call all.
Participants are now in a listen only made after the presenters remarks there'll be a question and answer session. As a reminder, this call is being recorded.
And now introduce noodles and company's Chief Financial Officer, Karl on the Couch you may begin.
Thank you and good afternoon, everyone welcome to our first quarter 2021 earnings call here with me. This afternoon to David <unk>, Our Chief Executive Officer, I'd like to start by going over a few regulatory matters during our opening remarks and the response to your questions. We may make forward looking statements regarding future events.
And the future performance of our company.
Any such items, including details relating to our future performance 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.
And the Safe Harbor statement and this afternoons news release and the cautionary statement and the company's annual report on form 10-K for 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each.
And 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, oar in 2020 fiscal year and subsequent filings. We have made these documents contain and identify important factors that could cause actual results to differ materially.
And 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 performance prepared in accordance with GAAP and <unk>.
Reconciliation of these measures to the most directly comparable GAAP measure is available and our first quarter 2020 one earnings release, and our supplemental information now I would like to turn it over to Dave Burning House, and our Chief Executive Officer. Thanks.
Thanks, Karl and good afternoon, everyone. We're so excited to be here today to share with you our strong start to 2021 and provide an update on the progress we have made towards the accelerated growth objectives that we outlined in our prior earnings call and.
In summary, we're very pleased of our first quarter results.
Our financial performance improved sequentially throughout the quarter, allowing us the surpassed the comparable restaurant sales expectations that we laid out during the prior earnings call.
We're also pleased with our restaurant contribution margin expansion, which improved 290 basis points during the quarter relative to 2020. This also represented a 100 basis point improvement relative to Q1 of 2019, even as the company absorbed the significant increase and expenses related to delivery fees.
Perhaps more telling of the health of our business, where our average unit volumes, which increased six 1% of non company owned restaurants compared to 2019, and 12, 7% when compared to 2020.
And the momentum that we experienced during the first quarter has continued into Q2 with.
With all time record high company average unit volumes for the past four weeks of 135 million of nearly 13% increase versus the same timeframe and 2019.
Importantly, and our fiscal month of April digital accounted for 57% of sales, even as we recover the meaningful percentage of sales and restaurant.
While we recognize that there remains uncertainty surrounding COVID-19 and that the industry of likely benefited from recent government stimulus. We continue to feel very confident about our trajectory and remain convinced that we are an even stronger business coming out of the pandemic than we were a year ago entering.
As most of you are aware in late February and you laid out our accelerated growth objectives, which include annual system wide unit growth of at least 7% annually beginning in 2022 and quickly reaching 10% annually. After the 1500 units nationwide.
Average unit volumes of $1.450 million by 2024, and that same year restaurant level margin of 20%.
To meet those objectives, we remain focused on three main strategies.
The first of the continued differentiation of our concept to appeal to a broad range of lifestyles convenience and dietary needs.
Activating our brands, particularly through our digital assets and marketing strategy and.
And third accelerating unit growth to take advantage of and operating model that we feel is ideally situated for a post COVID-19 world.
I would like to start with our ongoing success and executing a disciplined strategy of culinary innovation and is on trend resonates with guests and build the brand love and loyalty.
Noodles and company remains the only national chain, so and global flavors for noodles, and pasta and our menu is perfectly suited to meet the needs of today's consumer.
As we've noted in the past our food travels extremely well and we've of considerable strength with the variety inherent in our menu as we offer favorites from kids to adults healthy to indulgent and flavors, both familiar and Neil.
During the first quarter, we introduced our low carb gluten free cauliflower gnocchi nationwide, we've been very pleased with the results. Thus far from this launch as the Milky has outperformed its results and test and reinforced noodles and company's ability to meet the very dietary preferences of our guests.
As you know beginning with the launches of gene noodles and 2018, we have made significant strides and delivering a great lineup of lower carb lower calorie alternatives and our mix of healthier items on our menu is now at 14% of gas and <unk>.
<unk> increase from just a few years ago.
We continue to believe there remains meaningful upside to our health of your platforms and are currently innovating around the improvements to our salad and vegetable meal offerings.
As we innovate around the healthier alternatives. We also continued to lean into the strength of our core menu as.
As we discussed last quarter, our current test of total loading has been our best performing test and the 17 years that I've been at noodles and company.
For years stuff pasta has been the most requested item from our guests and we're extremely excited to meet that request or on three cheese toward aloni with specialty ingredients like normalized onions, and a blend of ricotta mozzarella and parmesan cheeses.
During the past few months, we've been optimizing the offering operational procedures and marketing strategy report alone and we will be introducing at nationwide later in Q2.
As we continue to further differentiate the brand for today's environment I.
I would like to discuss our second strategy focusing on activating the brand, particularly through our digital capabilities and improved marketing effectiveness.
Our results, thus far and 2021 give us great confidence that we will be able to retain the digital sales growth that we have earned during the COVID-19 pandemic, even ask gas returns and restaurant dining.
We achieved record digital sales and March and we set a new record again during our April fiscal months, particularly impressive given the eight in April in restaurant sales were covered 60% of pre COVID-19 levels.
We're also elevating our digital properties, including the recent introduction of Google food ordering and select markets.
As we strengthen our digital assets, we're reaping the benefits of increased data and gastro insights from our rewards program.
Frequency amongst our rewards members is growing and we are seeing increases in both of our overall brand awareness as well as conversion from trial to repeat guests.
We still believe we are and the early innings of utilizing data and to create more personalized targeted engagement with our guests and we're excited of the opportunity to further harvest. These insights to optimize our marketing strategy on a path to a million and 450000 dollar of gene and buyers.
Next I'd like to touch on of our delivery strategy, which drove 39% of our sales and the first quarter of 2021.
While delivery as a percentage of total sales and beginning to decline absolute daily volumes from delivery remain steady through the first quarter and thus far and Q2.
We continue to see great upside and opportunity and the delivery occasion, particularly as it relates of introducing the brand to new guests and markets, where we may not have as much brand awareness.
Restaurants and markets that have seen a larger percentage of delivery than average continue to see outsized overall sales growth.
With our increase and delivery sales there of course remains of increased pressure to the P&L through delivery fees, we were able to mitigate much of that pressure through the balance of the P&L, particularly and labor and we expect that the impact of delivery fees on our overall margin will moderate as delivery normalizes of the percentage of sales.
On the whole, we see delivery and digital strength as a great opportunity to increase awareness and newer trade areas and less saturated markets, giving us even more confidence and our third strategy, which is to accelerate unit growth.
We continue to believe and other opportunities ultimately operate at least 1500 restaurants domestically supported by at least 7% system wide unit growth and 2022 and soon thereafter, reaching an annual growth rate of at least 10%.
Our restaurants opened in 2019, and 2020 remain the best performing classes and the history of the company with performance well above the company average both of the average unit volumes and and restaurant level margin supporting our target of at least 30% of cash on cash return from new units.
As we've discussed in the past many of these restaurants include order had drive thru pickup windows, which are instrumental and meeting the increased need for speed and convenience from today's consumer.
Our new restaurants also operating the lower store first footprint with the more efficiency and lay out perfectly suited for today's environment.
We continue to anticipate 10 to 15 openings system wide in 2021, not including two ghost kitchen restaurants that will open later in Q2.
These ghost kitchens will open and dense residential urban areas and give us great insight and the opportunity to build the brands and our low cost efficient manner that can be particularly effective and expanding our footprint for both company and Phil and franchise markets alike.
Over the last few months, we've made significant progress and accompanied pipeline for 2022, and we expect to meet or exceed our target of at least 70% of these units.
And with our order have drive thru pickup window.
From a franchisee perspective, we're pleased with the progress, we're making and building our new franchisee pipeline and.
Anticipate two to four franchise restaurant openings in 2021, including one South Carolina, the summer, which will Mark our first new franchise market and several years.
That said as we build the franchisee pipeline, we do expect company restaurants with the majority of openings. During the next few years with a target of at least 50% of our new year's being opened by franchisees beginning in 2024.
We believe the brands improved menu digital and off premise strength evidenced by the performance and economics of achieved by our most recent classes have noodles and company well positioned to attract prospective franchisees as well as achieve our company growth objectives, and we're extremely excited of the unit growth opportunity ahead of us.
For each of our three strategies continued differentiation of our unique brand strength at.
<unk> the brand through our digital and marketing channels and accelerating unit growth the importance of our team cannot be overstated.
Before I turn it over the call I would like to thank them for their efforts and dedication over the past 12 months.
Our metrics across all aspects of the organization continued to improve and I'm convinced that the significant common denominator has been our people oriented strategy.
Resulting of serving leadership culture that supports each other as well as our guest.
Our turnover continues to decline and the gap between our people metrics and the industry benchmarks continues to widen.
We've also built the dedicated robust pipeline of future leaders, who will be instrumental and helping us achieve our targeted goals for 2024.
I've never been prouder of our team are more excited of what the future will bring and with that I'd like to turn it over to Karl to walk through our financials.
Thank you, Dave and good afternoon, everyone in terms of the financial highlights total revenue during the first quarter increased nine 2% to $109 6 million comparable restaurant sales increased 10, 7% system wide comprised of of 10, 5% increase at company owned.
And the 11, 7% increase at franchise restaurants.
Compared to 2019, we recorded average unit volumes of one $1 7 million for the quarter, representing a six 1% growth rate average unit volume grew throughout the quarter, particularly in March for the first half of the month saw 5% growth rate relative to 2019 and the second half of the.
And 10%.
As Dave noted our momentum has continued into April where we are seeing company record average unit volume of $135 million month to date, representing a growth rate of nearly 13% compared to 2019.
Total revenue was partially reduced by a continuation of temporary COVID-19 related restaurant closure days for health and safety.
Closure days declined relative to the fourth quarter of 2020, but did show a slight increase at the end of March and into April co.
<unk> and siding with increases and COVID-19 cases theme at a national level.
On a restaurant contribution basis, our restaurant level margin or 13, 6% and the first quarter compared to 10, 7% last year, representing an increase of 290 basis points.
Relative to 2019, which we believed to be of more relevant comparison contribution margin increased 100 basis points, which is particularly encouraging given of 460 basis point increase and third party delivery fees versus the 2019.
The first quarter historically is the lower restaurant margin level quarter for the brand and we saw sequential improvement throughout the quarter, culminating and restaurant level margin above 18% during the final fiscal period of Q1 <unk>.
These levels are much more indicative of where we would expect restaurant level margin and the second quarter and throughout 2021, as we execute against our accelerated growth target of 20% contribution margin by 2024.
We're doing margin drivers and a bit more detail for the first quarter, our cost of goods sold and 25%, which represents a 50 basis point improvement from last year the <unk>.
Improvement was driven by our increased menu pricing and more efficient promotional strategies and we're also encouraged by minimal commodity cost inflation throughout the quarter.
In terms of the offsets our packaging costs remained elevated.
And as dining rooms open and some capacity at nearly all of our restaurants as off premise remains of high portion of our channel mix and meal sold to our dining guests continues to be packaged and could go containers.
Labor was 31 eight percentage of sales during the quarter of 290 basis point improvement from last year the.
The improvement was primarily driven by realized labor model efficiencies through our kitchen of the future initiatives.
Particularly of reduction in front of the house of ours.
We are pleased with our continued execution against our labor hours management and remain encouraged by turnover trends, which have resulted in lower training costs compared to last year.
As the plan in March we began the rollout of our steamer of equipment initiatives. We have completed 87 installed to date or 23% of the company's portfolio and continue to expect of full rollout by the end of the year.
Early results have been in line with our cash resulting in improved Cook times reduced labor hours and better case, the food scores and we expect to continue to benefit from labor savings as this initiative gets rolled out throughout the balance of the year.
Other operating costs for the quarter were 18, 8% of sales compared to 16, 9% last year due primarily to higher delivery fees and the quarter. As this channel remains of critical Avenue to drive brand awareness for new guests and ultimately convert can convert guests into brand loyalists.
And as mentioned before the growth of our third party fees were more than offset by efficiencies and labor and cost of goods sold.
And coupled with sales leverage and ultimately realized net margin expansion.
As David noted the guests return to in restaurant dining and we remain encouraged by the strength of our off premise and digital channels, which continued to increase on an absolute dollar basis sequentially through the first quarter and into April.
Consequently, while we anticipate that delivery piece as the percentage of sales will moderate as the overall volume increase we expect absolute delivery fees to remain fairly consistent over the next several months.
G&A for the quarter was $10 9 million compared to $10 6 million last year, excluding noncash stock compensation G&A for the quarter decreased modestly to $10 1 million compared to $10 2 million last year.
For the full year, we continue to anticipate and modest growth and G&A dollars as efficiencies gained through our organizational review during the COVID-19 pandemic are offset by our investment to support our unit growth strategy as well as the more normalized incentive compensation.
Our adjusted net loss, which excludes the impact of impairment divestitures and closure costs was <unk> 8 million four of two cent loss per diluted share.
<unk>, two and adjusted net loss of $3 9 million or and nine net loss per diluted share.
Switching now to the 2020 one outlook the <unk>.
<unk> had COVID-19 continues to make it difficult to provide our typical of 2021 guidance.
However, we are very encouraged by the average unit volume we saw during the first quarter and throughout April for the.
The second quarter of 2021, we anticipate total revenues between 120 and $125 million inclusive of the potential negative impact of temporary closure of gains related to COVID-19.
We are very pleased with our unit growth pipeline for this year and beyond we continue to anticipate 10 to 15, new restaurant openings systemwide in 2021, including eight to 11, New company restaurants. We also expect full year capital expenditures to be approximately $20 million to $24 million.
As we mentioned on the last earnings call. We did close the six restaurants during the quarter all of which were restaurants that continued to underperform, even as sales recovered across the system.
The majority of these restaurants were at or nearing the early and David and we feel they were not well positioned by virtue of either being and urban office oriented locations or overly resilient on the retail generators.
Following these closures and the completion of a thorough review of our unit portfolio, we remain confident and our real estate is well positioned for future consumer trends.
We expect minimal closures going forward.
With the review of the real estate portfolio as it relates to the COVID-19 impact behind us and as Dave mentioned, we are intensely focused on unit growth.
From a balance sheet perspective, we feel very good about our current liquidity position at quarter, and we had cash and cash equivalents of $3 1 million and of total debt balance of approximately $37 1 million or net debt of $34 million was $1 6 million below our net debt balance at the end of Q1 and 2020 as the.
And at an excellent job navigating the COVID-19 pandemic, while improving our liquidity position.
We anticipate that we will produce positive free cash flow throughout the remainder of 2021 and our ability to maintain strong liquidity throughout the pandemic has positioned us to meet our growth objectives and the gears to come with.
With that I would like to turn the call back over to David for final remarks.
Thanks, Carl Noodles and company is uniquely positioned to be of clear winner of the post COVID-19 environment, which we feel is reflected in our results thus far and 2021 the.
And the brand remains differentiated with the many of that is on trend and resonates with the wide variety of guests and occasions.
Our digital and off premise strengths are perfectly suited for today's consumer environment with continued upside as we increase our personalized engagement with our GAAP.
And there is a significant expansion of opportunity both for company and franchise development as we Havent operating and economic model of well suited sports strong return on investment.
The company is intensely focused on achieving our accelerated growth objectives and all of them.
I'd like to reiterate my thanks to our teams throughout the country I continue to be humbled with the opportunity to work with them and look forward to taking the next step of our journey together.
With that Amanda please open the lines for Q&A.
My pleasure to ask a question. Please press star followed by the number one on your telephone keypad that is star one to ask and audio question to withdraw your question press. The pound key we will know Paul stick and Paul that Q&A roster.
And your first question comes from Jake Bartlett with Trust.
I wanted to start with current sales trends and and try to understand.
And the acceleration Youre seeing and in April and I guess, how much of the current trend do you think it's due to a temporary lift from stimulus trucks versus pent up demand as the economy reopens and some of your own sales initiatives like the and Yogi.
And our survey I think acknowledge that many of us and the industry have seen that the industry has seen an increase.
In dining out due to the stimulus at the same time.
Sure things give me great confidence in terms of where we will head from here first we were receiving momentum even prior to the stimulus and.
And and even now the word few weeks beyond that we're not seeing any slowdown in momentum and brackets increasing of debt.
Third thing metrics across the board for US all of the leading indicators are extremely positive and so what.
Other it would be turnover and tenure at the restaurant level Cook times and guest satisfaction of all the operational people brand metrics look so great across the board. The we think even as you potentially have a little bit of of waning off of the benefit from stimulus of pent up demand needles and be a clear winner and finally this sales initiatives.
So with toward alone and coming in later this quarter. So while several of our other initiatives, particularly around digital and we feel the brand is extremely well positioned so difficult to assign the exact number and what the benefit of the stimulus and pent up demand has been we feel extremely confident that we'll be able to continue our outperformance.
Great Great and then.
I guess as you.
And you're still having the dining rooms open and it.
It seems like Youre seeing a sales mix shift back into the dining rooms, a little bit from digital even as digital is growing but is that having an impact on a higher average check.
And as that mix of shifting back.
We're seeing overall check continues to be roughly the same as what we saw during the initial parts of the COVID-19 pandemic, so certainly a little bit higher than expected.
And what we have historically said.
And we're Super excited about is the fact that those digital sales continue to break records, even as we recover 60% of the dine in sales. So I think it will still be a while before we understand what the long term check dynamics with the from the consumer.
What is encouraging is that we're seeing that the digital occasions has been very sticky.
Great and then just one last one of them.
On unit growth can you give any update on the progress youre, making with franchisees and building the pipeline there.
Yes, as we said with the franchisee opening restaurants, and South Carolina later this summer will be our first new franchise market and a few years actually.
And really excited with the momentum that our head of group.
Our head of franchise sales, John Ramsay, who we brought on a few months ago I gave some great candidates that are really excited with the performance of our most recent restaurants is one of the overall trajectory of the business. So it will take time.
As always we ensured that it's a pretty robust process in terms of ensuring its the right fit between ourselves as well as that franchisee, but we're very encouraged with the momentum that we're seeing particularly and the target markets that we have of which are primarily in the south and southwest.
Great. Thank you.
Yes.
And your next question comes from Nicole Miller with of Piper Sandler.
I think you said, 57% and the.
Quarter can you break that down the pieces of digital and in particular delivery direct versus indirect and the marketplace. Please.
Sure.
Carl.
Yes, sure so the 50.
The 7% for.
Yeah for the total digital if I break that down that number is actually more indicative of the fourth period. So what we saw into April.
And I did look at that we saw the third party mix is around just the level of over 25% with the direct delivery closer to 4%.
The remainder of their the total delivery around just over 30% and I think of the remainder is still our quick pickup and curbside debt net takes us to around 57%.
We're seeing the call is that delivery occasion still continues to be just over half of the digital sales and im seeing some progress in terms of moving people to direct delivery still of lot of upside there, but in general we're seeing kind of gross across all channels of digital from an absolute dollar perspective.
Okay, and then you had mentioned margin benefiting my.
My words, not yours, but less discounting.
And kind of an average discount back and the day and what is it today because it sounds like yourself and most other brands don't need the same.
Putting efforts in this environment.
From how we look at discounts and I know it differs a little bit depending on the restaurant concept and ultimately ends up hitting your cost of goods sold however, what we look at it as as a percentage of retail sales.
And what we are running right now and as kind of and that two 5% of 3%.
Sales and so think of it of the 70 to 80 basis point impact of cards back almost half of what we were a few years ago. So you're seeing this afternoon.
Decline and the amount of promotional activity and that we have and it's actually more snow and cold and it's just more targeted more effective much more efficient as we utilize that rewards program versus historically, where you weren't able to engage and personalized and targeted on the level.
That makes a lot of sense. Its very helpful. Last question and then.
The margin numbers are awesome. It sounds like you know, we can think about 18% as the run rate and terms of the pieces and labor in particular, you know when you had 100% of let's call. It pre pandemic sales did you have the staffing you need and probably more importantly, up 13% or you're running a little short and you need to do some hiring and make it up.
And should we be careful about the pieces like how we model the margin going forward or is labor.
Not a concern of net and that way of staffing.
Sure I'll, let Karl talking a bit about where we expect kind of the overall labor line item to go no question, we're seeing one of the most competitive labor environment that Ive seen and my 17 years of noodles and company.
At the same time, our people metrics, our culture, I think the nikola stronger than ever so our turnover is down significantly versus where we were a year ago management turnover and almost half of what it was a few years ago. So we feel like we've got a great pipeline and a culture that supports a lot of retention.
That said as we continue to have new units coming through the pipeline as we continue town.
The increases in our average unit volumes were certainly focused on ensuring that we continue to have the significant application flow to support those restaurants, we definitely feel more and more and better position. The most of the industry given given just the strength of that team below overall.
Overall as you have versus the pre COVID-19 pandemic.
Certainly I think the staffing environments, even more challenging than it was then but I think the brand itself is better positioned and that once before and specific to numbers that are north of that Carl.
Nicole and do you think about the Q1 margin level and of bridge to 18% and wherever you would expect of forward, it's really three factors and increasing importance. It starts with the sales leverage as the most important one and labor and then shift to our higher margin channel. So the sales leverage is going to impact all of the margin.
And line going down the labor, it's probably going to be the most impactful reason being and we took a lot of efficiencies and 2020 and we're expecting further in 2021 with the schemers and that's going to begin and get more eliminated as we start seeing net sales leverage.
Shine through so really that specific line item that youre going to see most of the improvement and and finally as we shift of higher margin channels. As we mentioned third party of remains to be an important channel for us.
And the third party fees are going to stick.
But as a percentage of sales and margin going to get a little bit tighter because we're going to see some sales leverage the offsetting them and we're shifting to more higher margin channels like diamond.
Thank you very much.
And again, if you would like to ask a question. Please press star followed by the number one on your telephone keypad that is sorry, I wonder if at all the other question.
The next question comes from Andy.
Morris with Jefferies.
Hey, guys has gone.
Excellent. Thank you Andy how are you.
Good thanks.
Just on the labor during the first quarter I thought it ran a little heavy at least versus my model. Obviously, it sounds like you've got a lot better and March was there anything going on early in the year ramping up with dining rooms, reopening or some incremental training.
You know with with the oaky.
Just the kind of put the overall quarter and perspective.
Yeah honestly, Andy I would not be nervous at all about what you saw from the Q1 perspective with labor. So if you go back historically with the middle of the company Q1, as Carl alluded to significantly lower volumes from the seasonality perspective, particularly January and February below overall effectiveness and efficiency of the team.
And as we reopen the dining rooms and increase the labor models to incorporate that part of the business. It's one of the best way the labor labor percentage as we brought probably in Q1 since I've been here. So what you'll see is just naturally as we move into a timeframe, where we will have better leverage on that volume.
And a labor will come down meaningfully.
And Andy the only thing I'll mention is as the bridge that to what we saw at the end of Q1 sort of closer to 18% total contribution margin a lot of that is going to come into the labor model. The labor line, specifically, that's where we see most of the leverage.
Got you and then can you give us an update on.
The reward numbers.
You know kind of where you are on the journey personalization and anything you.
You have.
Other fast casuals have done where maybe there is a digital only product or something like that that you're thinking about the activate.
More.
More of a rewards members.
Yeah. So one of they were excited on and as we are seeing increases both in the number of guests that are in the program, which is now above $3 6 million of about 20% above where we were a year ago.
But also we're seeing increases and the frequency of those gas as they just become more and more engaged and active with the brand specific to any type of active is actually think.
There is a good opportunity with our upcoming introductions that you might see and particularly.
Particularly good reason for you to be of rewards member of noodles and company. So it's something that we definitely think of the vehicle for us to continue to engage with our guests and give them great reasons to be loyalty of our brand and look for something I think of the next couple of weeks that may be.
Fulfills your proxy.
Sounds good guys. Thank you.
And there are no further questions I would now like to turn the call back over to the management team for any closing remarks.
And I swear I appreciate everybody's time, and you'll have some extremely busy earning season.
Very excited with where the noodles <unk> company brand is today and even more excited about where we're going and the future. So thanks again for your time and we look forward to catching up soon.
That does conclude today's call. Thank you for your participation you may now disconnect.