Q2 2021 Noodles & Co Earnings Call
[music].
Good afternoon, and welcome to today's noodles and company second quarter 2021earnings conference call. All participants are now in a listen only now at all.
After depressing.
Centers from March there'll 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, Karl and shot Luke Hodge who lives.
And.
Thank you Bill and good afternoon, everyone.
Welcome to our second quarter 2021 earnings.
Here with me this afternoon, and Dave bending housing, our Chief Executive Officer.
To start by going over a few regulatory matters.
And your opening remarks and in response to your questions. We may make forward looking statements regarding future events for the future financial performance of the company any such of 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 material could differ materially from those projections due to a number of risks and uncertainties.
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 that set for the risks and uncertainties related to the company is forward.
Looking statements.
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 2020 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 measure is available and our second quarter 2021 earnings release, and our supplemental information now I would like to turn it over to David Anyhow, Our Chief Executive Officer.
Thanks, Karl and good afternoon, everyone I'm excited to share with you today details of our strong performance and the second quarter and the momentum that we see and the business for.
For the quarter, we reported total revenue of $125.6 million of 57% increase versus the prior year or.
Our performance was fueled by record level of company average unit volumes for the quarter of $135 million, which reflected a 12, 3% increase versus the second quarter of 2019.
I'm pleased to report that the strong performance has continued thus far and the third quarter as well, where we've seen sales acceleration and relative to 2019.
In addition to our strong sales performance our restaurant level margin during the second quarter was 18, 9% our highest quarterly restaurant level margin since Q4 of 2014 and of 180 basis point increase versus the same quarter of 2019.
With significantly stronger restaurant level volumes and profitability and a long runway of unit growth. We continue to be extremely excited with the opportunity ahead of us.
To capitalize on this opportunity we remain focused on 3 main strategies. The first is the continued differentiation of our concept to appeal to a broad range of lifestyles convenience and dietary needs.
Further activating our brands, particularly through our digital assets and marketing strategy and third accelerating our unit growth to take advantage of and operating model. We feel is ideally situated for a post COVID-19 world.
As we think about the differentiation of our brand I'd like to start with a discussion of our ongoing success and executing a disciplined strategy of culinary innovation, that's on trend resonates with guests and build brand loyalty.
Noodles and company remains the only national chain offering global flavors through 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, we execute and elevated approach of culinary and we have a considerable strength with a variety of inherent in our menu as well for favorites from kids to adults healthy to indulgent and flavors, both familiar and new.
While menu innovation or on healthier alternatives has been a key priority for us exemplified by the launch of Cauliflower Gnocchi earlier. This year, we also leaned into the strength of our core menu <unk>.
During the second quarter, we launched our total loan offering which has already achieved menu mix higher than any prior launch of noodles and company.
For years and pasta has been the most requested items from our guest and we're extremely excited to meet that request through our 3 cheese tortellini with specialty ingredients like car moist audience and a blend of record at mozzarella and terms on cheeses and while.
It's still too early to determine the ultimate sales driving impact of total learning will have on the business. We have been very pleased with the initial results were seeing particularly on the frequency of our core guest.
As we continue to differentiate the brand for today's environment I would like to discuss our second strategy focusing on further activating the brand, particularly through our digital capabilities and improved marketing effectiveness.
Noodles and company's ability to meet and surpass guest expectations for a variety of occasions has allowed us to recapture over 70% of pre COVID-19 in restaurant sales during recent weeks, while retaining over 90% of our digital sales.
Consequently, even within restaurant sales returning digital sales continue to account for 56% of sales during the second quarter.
While we've made great progress we continue to believe that we're still in the early innings of more effectively utilizing our digital assets and data to better engage with our guests and develop deeper relationships and insights into their behavior.
1 of our best tools to engage with our guests as our noodles rewards program, which has grown to $3.8 million members, which compares favorably relative to the industry when normalizing for restaurant count we.
We saw significant growth and our rewards program during the second quarter aided by our toward alone and launch, which we introduced for the first 2 weeks as an exclusive rewards member offering.
This allowed us to garner a significant increase and reward sign ups at launch as well as differentiate the value of the company is rewards program relative to the industry.
As we bring and increased number of new guests into the brand. We continue to leverage insights for our loyalty program to help drive frequency and brand loyalty or.
Our communication continues to become more personalized and our utilization of tailored offers to drive specific buying behaviors has resulted in a meaningful increase in frequency amongst our core guest.
Ultimately, we feel the strength of the brand along with our continued focus on targeted and personalized marketing has created a powerful combination to engage guests at all points and the customer journey.
These marketing capabilities are particularly important as we consider our third strategy, which is to accelerate unit growth.
We continue to believe and our opportunity to ultimately operate at least 500 restaurants domestically supported by at least 7%. So some of our unit growth and 2022 and soon thereafter, reaching an annual growth rate of at least 10%.
During the second quarter, we opened 3 restaurants systemwide to company and 1 franchise location.
I would like to share a bit of insight into 2 of these locations as I think they represent the breadth and the depth of the noodles and company growth potential.
1 of the company locations that opened during the second quarter was our first ghost kitchen.
This location opened and a dense residential part of Chicago and is already providing great insight and to the opportunity to build the brand and our low cost and efficient manner.
Just as importantly, this ghost kitchen is allowing us to sharpen our digital marketing for and urban delivery focused landscape.
And Moreover, due to its small footprint, we're learning ways to be more efficient throughout all of our labor and food operations.
We are encouraged by the momentum we're seeing and this location and look forward to our second ghost kitchen, which we anticipate opening and San Jose later this year.
The second opening I'd like to focus on is actually of franchised location and the more rural setting and North Dakota.
Due to construction delays this restaurant opened with sales transactions solely coming through our order had drive through window.
Despite this limitation this restaurant and has been posting annualized <unk> of $1.6 million since opening for.
Further evidence of the power of our on premise capabilities and general and our drive through Windows in particular.
While the return we are seeing and restaurant sales for the overall system does indicate that in restaurant dining will continue to be an important aspect of the overall dining experience. These types of successes give us even more confidence and our ability to accelerate growth with a flexible lower square footage for off premise oriented operating model.
While we expect the balance of 2021 openings will be a bit back loaded the pipeline for new restaurant development for 2022, and beyond looks very strong, but from a company and franchise perspective.
We also continue to expect that at least 70% of these locations will feature of our order had drive through windows.
The performance of newer units combined with a more productive economic model from top to bottom and complemented by franchise growth and new territories will be of powerful engine for unit growth and earnings growth for several years to come.
As we've said before for each of our 3 strategies continued differentiation of our unique brand strength.
Activating the brand for our digital and marketing channels and accelerating unit growth the importance of our team cannot be overstated.
As we all know hospitality workers and general and restaurant workers in particular.
And have been some of the true heroes of the past year and a half.
I could not be more proud of our team.
During the second quarter. This team proved once again that you can have a culture dedicated to caring for each other and caring for your fellow human beings, while at the same time, delivering incredible growth and financial results.
Our industry, leading benefits for mental health to adoption of assistance to enhance maternity leave have provided value and assurance for team members and and an uncertain world.
Our best in class training and development programs from the use of cutting edge technology to consistent and restaurants standard validation to formal development programs demonstrate our commitment to team members that when they joined noodles and company they of the opportunity to grow career.
And finally, our steadfast commitment to simply providing a great experience for team members and guests alike from enhanced food and safety protocols to greeting each other with a smile have allowed us to become even stronger than ever and positioning the brand to be of clear winner in the years to come.
I'm incredibly excited for the balance of 2021 and beyond at noodles and company and with that I'd like to turn it over to Karl to walk through our financials from Q2.
Thank you, Dave and good afternoon, everyone in.
In terms of the financial highlights total revenue for the second quarter increased 57% to $125.6 million compared to last year comparable.
Restaurant sales versus 2020 increased 56, 8% systemwide comprised of a 55, 7% increase at company owned locations and at 63, 8% increase at franchise restaurants.
Average unit volume for the second quarter were $135 million, representing a 12, 3% growth rate compared to the pre COVID-19 and second quarter of 2019.
As Dave noted we have been encouraged by the continued momentum into July where we have seen our sales trajectory accelerate relative to 2019.
Total revenue was partially offset by temporary COVID-19 related restaurant closure days.
These closure days improved significantly throughout the quarter and have remained at lower levels through the third quarter to date I will note. However that uncertainty still exists with the potential impact of the COVID-19 Delta variant and we will of course prioritize the health and safety of our guests and employees we.
We continue to follow requirements by local jurisdictions with regards to social distancing and mask wearing.
On a restaurant contribution basis, our restaurant level margins were 18, 9% and the second quarter compared to 6.7% last year.
Relative to the second quarter of 2019, which we believe to be more relevant comparison contribution margin increased 180 basis points from 17, 1%.
We are proud of our achievements and contribution margin, particularly around labor efficiencies and managing our food costs, which have now fully offset the expense related to third party delivery fees.
Our performance gives us further confidence and our ability to meet or surpass our accelerated growth objective of of 20% companywide contribution margin by 2024.
For viewing margin drivers and a bit more detail for the second quarter. Our cost of goods sold was 24, 9%, which represents a 10 basis point improvement from last year and at 70 basis point improvement from 2019.
The improvement was due primarily to menu pricing and efficiently managing our promotions in addition to lower contracted food costs.
During the quarter, we saw minimum financial minimal financial impact as it relates to commodity inflation and had been particularly encouraged at our ability to navigate a challenging supplier environment.
Having said that as we head into the third quarter, we are not alone and navigating industry wide inflationary pressures and overall staffing shortages with our food vendors and other suppliers.
In light of these headwinds.
We are taking an additional 3% pricing increase to our core menu beginning next week.
At an average per person spend of just over $10 noodles continues to provide a tremendous value proposition to our loyal guests, which affords us the pricing power to offset these future costs.
Our anticipated, 3% pricing increase would take our year to date pricing to 5.5%.
We expect to offset the expected commodity inflation, we are forecasting for the back half of the year.
Keep in mind, this offset will be on a dollar basis, and we would expect to see and impact to our normalized cost of goods sold margin by an additional 60 to 80 basis points.
We'll continue to track the financial impact closely and make changes to our business as appropriate.
Labor costs for the quarter were 29, 8% of sales of 410 basis point improvement from last year and at 290 basis point improvement from 2019, our performance was primarily driven by realized of labor model efficiencies through our kitchen of the future initiatives, particularly of reduction in front of house hours.
In addition to sales leverage.
These drivers more than offset an increase and restaurant level incentive based compensation given our sales outperformance this quarter.
Overall, 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.
A further driver of labor efficiency continues to be the rollout of our steam or equipment.
Which we are targeting a reduction of approximately 2 labor hours per restaurant per day.
We have completed of 162 installs to date, which represents 43% of the company and we expect over 90% of steamers to be rolled out by 2021, assuming no further supply chain disruption.
And we remain encouraged by the positive results demonstrated by improved Cook times reduced labor hours and better tasting food scores.
Operating costs for the quarter were 17% of sales compared to 19, 7% last year due primarily to sales leverage.
Operating costs were 280 basis points higher and 2019 due to an increase and third party delivery fees. As this channel remains of critical Avenue to drive brand awareness for new guests and ultimately convert guests into brand loyalists.
Our guests are returning to in restaurant orders and Diamond, which has now increased to 73% of pre COVID-19 levels.
Even with the growth, we're seeing and the in restaurant channel. We remain encouraged by the strength of our off premise and digital business, which has performed consistently on an absolute dollar basis through the second quarter and into July.
As a result, we expect other operating costs to be in the mid 17% area for the second half of the year and as absolute delivery fees are expected to remain somewhat flat going forward, even as the growth of in restaurant ordering has evolved our overall digital mix.
G&A for the quarter was $13 million compared to $10 million last year as.
As a percent of total revenue G&A decreased 220 basis points compared to last year at.
The growth and G&A dollars was driven by investments to support our growth strategy and addition to a more normalized compensation structure, including an increase and bonus accruals relative to 2020.
G&A includes noncash stock based compensation of $1.6 million during the second quarter compared to $1.1 million last year.
We anticipate that stock based compensation going forward will be approximately $1 million per quarter.
GAAP net income for the second quarter with $5.7 million or <unk> 12 per diluted share.
Impaired to a net loss of $13.5 million last year or <unk> 30 per diluted share.
We also reported net income on an adjusted basis, which normalizes for a statutory tax rates because of our effective tax rate is impacted by a valuation allowance on deferred taxes.
Additionally, our adjusted net income normalizes for the impact of impairment divestitures and closures.
On an adjusted basis, our net income was $4.6 million or <unk> 10 per diluted share compared to a net loss of $8.1 million or <unk> 18 per diluted share.
Going forward, we estimate that our statutory tax rate used in our adjustment to net income will be between 25% and 27%.
And as a reminder, at year end 2020, we had approximately of $150 million of federal Nols and federal tax credits at.
As such no federal tax payments are expected in the near term on a cash basis.
Switching to the 2021 outlook, we remain very encouraged by our sales performance through July for the third quarter of 2021, we anticipate total revenue of around $122 million to $126 million, which would assume a similar trend and average unit volume that we saw on the second quarter and compared to <unk>.
2019.
From a unit development perspective, our real estate and construction teams continue to do an excellent job of building our pipeline for the remainder of the year and beyond.
We continue to anticipate 10 to 15, new restaurant openings system wide in 2021, including 8% to 11, New company restaurants, although we anticipate at some of our 2021, new restaurant openings could push at the earlier part of 2022, driven in part by landlord delays we remain optimistic.
Mystic at about our 2022 pipeline and which we expect at least 7% unit growth on a system wide basis quickly accelerated to 10% thereafter.
From a capital perspective, we continue to expect full year capital expenditures of approximately 20% to $24 million.
Turning to the balance sheet, we feel very good about our current liquidity position at quarter end, we had cash and cash equivalents of $17.3 million and of total debt balance of approximately $37.3 million. Our net debt of $19.9 million was $14.3 million below our net debt balance at the end.
At fiscal 2020.
We anticipate that we will produce positive free cash flow through the remainder of 2021 and our ability to maintain strong liquidity will provide ample room to meet our growth objectives.
With that I would like to turn the call back over to Dave for final remarks, Thanks, Karl and while there remain challenges and uncertainties and the current environment, particularly regarding the impact of the Delta Covid variant or performance of the past several months and in particular, our off premise digital and menu strength, just bolsters, our confidence and noodles and <unk>.
Company has ability to navigate and thrive in any environment.
The brand remains differentiated with a menu that is on trend and resonates with a wide variety of guests and need states.
Our digital and off premise strengths are perfectly suited for today's consumer environment and continue to improve as we establish deeper engagement with our guests.
And our operating and economic model continues to strengthen as we capitalize on the significant expansion opportunity for company and franchise development I'd like to reiterate my thanks to our teams throughout the country. Their tireless efforts have allowed the company to set new internal records and the short term, but more importantly, create and incredibly powerful culture.
And <unk> and economic model to drive outsized growth for the years to come with.
With that Lee please open the lines for Q&A.
And I can leave thank you at this time, if you would like to ask a question. Please press star 1 on your telephone keypad.
Again to ask a question simply press star 1 on your telephone keypad.
And your first question comes from the line of Jake Bartlett from <unk> Securities. Your line is now open.
Great. Thanks for taking my question and congratulations on the on the momentum of the business.
My question was about on the same store sales.
And how they trended throughout the second quarter and and maybe if you can get more specific on what kind of momentum you're seeing in July.
It's our debt I think your April same store sales were up 13% versus 19, it looks like it might have decelerated from that but if you can just give us the cadence throughout the quarter.
And maybe more specific on the trend in July and then I think that last comment on towards the end of the script was that you expect similar trends and in the third quarter versus the second quarter. Yet you also made the comment that momentum has accelerated in July and maybe you can think of square that for us yes.
Yeah, absolutely I mean, I think we're excited to report that actually we saw momentum increasing from a 2 year growth perspective, as we exited Q2 as well as thus far during the third quarter from an average unit volume perspective, 1 reason why we're still talking about that $1.305 is from a seasonality perspective you do.
Have 2 holidays that fall into the third quarter. The fourth of July as well as labor day on those tend to be seasonally a little bit lower for us. So we actually do expect to see some momentum from an overall growth relative to 19.
Average unit volumes might be a little bit consistent or increase of debt, but we're very excited and overall with the momentum that we saw both as we exited in June as well as through thus far in July and then ultimately into the beginning part of August.
Great.
And then also if you could if you could talk about.
And just what do you expect to be the primary drivers of same store sales and the back half of the year.
The stuff pasta was a big hit.
And more that we should expect from the food news.
Perspective, and then whether there's any kind of more specific marketing plans you have on what should you should give us confidence that you can accelerate from from where we are today.
Yes, I think just the momentum that we're seeing extreme and the last few weeks gives us a good amount of confidence Jake but total loan adjusted and started really just launched nationally in June. So you didn't really get to see the momentum impacted Q2 results very much. So as we look at the momentum we've kind of gained and exiting Q2 and going into Q3.
Toward alone, we're seeing particular, Jake lot of increase in frequency from our core debt Super early so it's hard to really put the finger on exactly what that impact could be but we're very bullish on what the overall opportunity is with toward aloni mathematically the price increase.
Carl mentioned, we'll be layering on 3% of price here.
Later on this month, so that should have a nice benefit as we look through the balance of the year from a sales perspective, and actually still of lot of runway overall on digital and marketing and totality I mean, we're seeing some great results from all of our metrics, whether it be engagement with our gas from a social media perspective to E Mail open rates.
And overall engagement with the brand.
We still feel like we're just getting started and youll continue to see us make the brand even more visible than it is today.
So between some mechanics around the price increase but also still at significant amount of runway from both of toward alone and perspective as well as marketing.
We feel very confident with where we're going to see at the back half of the year take 1 point on this and yes.
Sure Doug if I could just add 1 point on the day part trend, we've seen outperformance and dinner through the past several quarters, we are beginning to see outperformance and lunch as well we're narrowing the gap lunch was was that there was a wider variance versus 2019, and we are beginning to see that business come back. So that's and additional revenue driver we can look for.
Great. That's helpful. And then and then last question just so I just wanted to clarify the comments on margins for the back half of the year.
The comment on Cogs being down as a percentage of sales of about 60 to 80 basis points was was that versus the first half of the year or is that kind of versus of 19, just wanted to make sure I understand that and then.
You did give us what you expect for the other restaurant operating expenses.
I think the missing piece here is labor and but what do you expect to go on labor for the remainder of the year in terms of leverage or deleverage or will that price increase.
And fully offset the.
<unk> of inflation or how should we think about labor for the for the remainder of the year.
And.
A couple of things so on the cost of goods sold side. The 60 to 80 basis point is a comparison to the first half. So when we think about the normalized level of cost of goods sold at around 25%, we could see that from 60 to 80 basis points higher in the back half.
Due to some of the expenses were offsetting and again that would be offset from a dollar perspective from our 3% price increase but you will see the impact on the margin side in terms of labor labor.
On a driver of labor has been on the debt.
Sales leverage side, so we're going to continue to see that flow through down on our labor margin. We're feeling very encouraged by this and keep in mind I did mention that the second quarter. There was a partial offset by.
Incentive compensation relative to our outperformance and the second quarter.
That's just 1 area of that going at back into the second half going into the second half.
We would expect to see us.
As a potential opportunity.
And with respect to margin.
Great I appreciate it thank you.
Thank you. Our next question comes from the line of.
Nicole Miller from Piper Sandler Your line is now open.
Thank you can we go back and revisit so.
And I guess dine and to go versus digital.
So I think retention was 70% and 90%.
Does that compare I think.
And last quarter I did it in dollar amount to tell you the truth. So I'm wondering what the base is like so when we wanted to factor tied at a 135 million AAV and dollars and how to think about the base.
For the digital non digital and kind of reconcile that.
Got it got off your average.
Sure so for the <unk>.
The breakout of.
The digital and in person at digital mix for the quarter was 56% total digital and that would represent about 750000 on total <unk> and the in person was about 44% and mix of the total that would represent about 600000 total day to day for a total of $1.35.
And.
Okay, Perfect and then we come back in from the retention of what.
The base was so that's helpful. Thank you.
On the Ghost kitchen, and I don't think Ive asked when you look at future development, how many ghost kitchen stores.
Are there and is there anything we need to understand from a capex.
Requirement, our unit level economic model point of differentiation that we should take into consideration.
Yes, still ultimately Nicole very early and as we look at the overall.
Earnings growth algorithm for noodles and company, we're not relying on the ghost kitchens to be a meaningful contributor to that overall accretion while we do like about the ghost kitchens, you can generally get in.
And to a new site for less than $100000. What you missed certainly is that you don't have as wide of an audience of draw promise primarily of delivery only.
Of type of building.
It's still early enough that we don't want to put a target on how many we think they could be we'll know a little bit more as we opened the second 1 and San Jose later this year, what we do level not at though is we're learning so much about how do you be more efficient with labor with food, how do you market and a very targeted way.
And of more urban fashion, so it's still a bit early it is not necessarily part of our overall algorithm, but we're pretty excited with what we're seeing and the last few weeks and particular in terms of momentum.
And then just last question I wasn't from stores.
And I guess recently and.
This team I think is pretty promising.
Labor hours per unit per day, I think if ive done some math properly conceived like 30 seconds of ticket time.
Is that the point I mean does at unlock throughput.
Does it help with labor and hiring.
And I guess that would be the operational like.
Employee point of view.
Second part would be from the consumer point of view and can also imagine like people coming back and being really willing to kind of sit and linger, but maybe this can speed up the off premise for those that can continue to consume that way. Thank you.
Yes, absolutely we feel at the core operating model Nicole already.
And hence most of the guests and each states in terms of speed and throughput and so forth. However, given the increased volumes given.
Further opportunity and urban settings, whether it be non traditional still want to make sure of that the concept gets faster, where we can't and.
So the steamers for those that don't know what it allows us to do is for those dishes that our salt tonnage, which is majority of our dishes allows you to bring them up to temperature quicker through the utilization of the steamer before you put it into the software. So you still get on that same quality of that same taste and texture and people know and love noodles and company.
And just comes of their quicker on the benefit is as you as you noted Nicole the math is about right in terms of about a 32nd improvement of Cook times. It does take less labor to go to go through it and by virtue of being faster the food is actually hotter.
So you actually get a better experience from a guest perspective, Additionally, and particularly appreciate this given the current labor environment, our approach to cooking and everything being made to order.
And is much more complex than a lot of other concepts and we have done and I think at very strong job from our team of.
And simplifying that and making the consistency of the hallmark of our brand with this allows you to do with the steamers is instead of potentially of 17 year old 18 year olds.
Who is there on the <unk> line, having to learn what <unk> means for having to learn for learn to see when the liquid bubbles that type of methodology, we don't sacrifice any other at when we go through a steamer but of steamer allows us to be 100%.
<unk> you don't end up having the human judgment that can ultimately lead to training challenges and can lead to and consistency. So 1 reason we loved the.
The reason we love this tumors so much very high ROI from a labor savings perspective.
So labor savings is a big piece of it but theres throughput theres temperature of food. There is training there is consistency. It really is 1 of the best of your says I've seen and my years of noodles and company that really hits everything you would want from a team member perspective of financial perspective, as long as the guest perspective.
Thank you.
Thank you again at this time, if you would like to ask a question simply press star 1 on your telephone keypad again to ask a question. Please press star 1 on your telephone keypad.
Next question comes from book of.
Andrew Charles <unk> from BMO capital markets hit on it.
Thanks.
Great. Thank you and good afternoon.
My first question I wanted to ask about the 20%.
Restaurant margin target and I apologize if on parts of parsing your words too closely but.
Thank you said theyre getting there sooner or meeting or beating that level and now so it sounds like youre getting a little bit more optimistic about the pathway and the potential of the margins. There. So I'm just curious what.
About kind of the margin method is that youre getting more optimistic on maybe which line items. What it is specifically that you're seeing that's driving that increased optimism.
I think more than anything and Carl should weigh in as well Andrew has just the sales and the average unit volume increases we're seeing so as a reminder for everybody at <unk>.
And the February earnings call, we laid out of accelerated growth objectives.
To meet of $1.4, 50, and average unit volumes of 20% restaurant level margin and then.
And 7% of unit growth and 2020 to quickly go into 10% and 2023 and beyond and.
As we see today versus what we saw on February clearly a significant amount of momentum.
And that momentum has occurred on the average unit volume side, we're seeing the flow through that you would want.
And need and the margin level as well so as we look at 2020 for it's still early and still and uncertain environment. So we're not going to revisit necessarily those long term targets, yet Andrew but we're seeing that that average unit volume going to 1 million $3.50 and.
And what we see is continued expansion opportunity there and the short term medium term and and long term with the associated flow through.
That gives us a ton of confidence and the overall.
Meeting and surpassing and of those numbers. Additionally, we're continuing to do continuous improvement when it comes to looking at kitchen design and looking at operations procedures looking at how we bring crude into our restaurants. There is still opportunity beyond just sales leverage for us to continue to improve that economic model.
So really on all fronts, we feel like the momentum we've seen between February and where we're at today gives us confidence and not only as I mentioned the share percentage of restaurants, we already have that are at a 1 billion for 50 or are at.
20% restaurant level margin.
It's a significant portion of the population of already so we absolutely know that we can do those.
Okay. That's helpful and then.
And on the.
The pricing and the food inflation, so what level of food inflation are you expecting on on the back half of the year.
And maybe if you can compare that to the front half of the year of the second quarter. However, you want to do that and then.
Why is 3% price the right level, where would that put you for the back half versus where you've been I think you gave of year to date number and it sounds like maybe you're open to more pricing I don't know if at this year or beyond maybe to recover the full extent of the margin.
For <unk>. So if you could just help put some color on that that'd be helpful.
Yes, let me touch on a little bit more of a price and Chris and then Carl can weigh in on the overall inflation numbers. So 5.5% what we're running today.
Inclusive of once we have 3% price incorporated keep in mind and vast majority of the price that we've seen thus far this year has actually been and third party.
So that's where we've got about a 17% price premium for those that are going through a third party. We don't necessarily have plans to revisit pricing and sort of have further price increases.
And the balance of this year, Andrew but we do feel that we have left we have some dry powder left and we still have sebree and Mt pricing flexibility, if we needed to flex at but we don't expect we don't necessarily expect Theres no plans to do so anytime in the near future.
And on the on the inflationary side I would start off by saying we are at very strong network of suppliers, we've been working with them very closely.
Primarily to ensure that our restaurants are able to meet that meet the demand of our guests, but there is no doubt and inflationary pressures and challenges and the industry. Despite these factors we feel very good about our supplier relationships our ability to manage these costs.
And to maintain supply and a restaurant so more specifically on the inflationary pressures, we're seeing it and our business on protein and on to go containers for.
For the most part we're maintaining our contracts with our suppliers.
We have them in place for the remainder of the year in some cases, we've had to move away from a particular producer of supplier, but we've been able to secure the supply.
Yes from an overall inflation perspective, we expect the high point of will actually be Andrew and Q3.
So that's where you can protest to see 4% to 5% overall inflation, but we would expect it to hopefully moderate from that point forward.
Okay, great and if I could maybe squeeze 1 more and just on the <unk>.
Development pipeline and how far out argue now on just I'm just curious about the visibility and then.
If you could just.
Kind of describe how the conversations with the franchisees and how that program is going and do you want to accelerate that piece of the development pipeline.
Sure on the company pipeline.
We're very happy with where we're seeing the pipeline develops right now we're working through primarily deals for 2022 and work and kind of on the back half of the year deals for 2022, but feel very comfortable and will be at least at that 7% overall unit growth from the franchise side pretty excited with what we're seeing both from our existing.
<unk>, who have just thrive through the last several months and they are very excited with the economic model of the drive through window, as I mentioned and that restaurant and my non which as a franchise or in North Dakota, which is of franchise location.
So we're seeing good momentum from our existing franchisees, who are looking for deals from the new franchisee perspective very strong pipeline.
We're very selective.
And we want partners and it will be with us and grow with us for decades really so it's a pretty diligent process, but I think youll see some good news on that as we go through the rest of this year in terms of building out some of those new ABS.
Okay. Thank you very much.
Thank you next.
Our next question comes from the allowance.
For from CL, King and Associates. Your line is now open.
Hey, Thank you good afternoon, everyone just a few leftover questions here.
On the unit side, there was a comment and I may have misinterpreted earlier on the call just talking about the development calendar looking at bit backend loaded as at the 21 calendar or is that how the 'twenty 2 calendar is shaping up and what should we should think about for cadence of openings from 2002.
Sure so.
It is referring to 2021.
I would I would estimate that at the same time chart that some of the challenges that we're currently seeing from an actual control of the timeline and to put some perspective behind this and we're finding great sites. We're finding great deals that we feel very comfortable underwriting that are going to be great noodles and company's.
Restaurants for 20 plus years. So the pipeline itself is getting for very quickly and we feel good about that what we are seeing thats a little bit unique versus prior years is that the inflation that youre seeing and lumber the availability of steel and other.
Raw materials, we are seeing the timeline for when we approve of deal and start.
Working on the lease to when we actually get delivered the site that has been longer than what we've traditionally seen so that has caused and a few instances here in 2021 that pipeline to be a little bit back loaded 2002, the way the part of our chips of today it looks like it would be more balanced but pragmatic.
Honestly I think there is still a bit of time before we get to a more normal develop developer cycle. If you will sort of be a bit cautiously optimistic as we talk about the balance of from a timing perspective of 2022.
Okay, great. Thanks, David Thats helpful. And then start to look out to 'twenty 2.
And you talked about 70% of of units, having the pickup window, but what are you doing as far as footprint with that class of this.
And that progression from 2006 hundred square feet down to.
For 2000, and kind of cost of construction and why do you think of the returns of that debt opening class of year will be based on maybe on <unk>.
More efficient box.
Sure. So if you think of 2019 and.
Up to the restaurants that we built and thus far this year, Todd we're hitting that 30% restaurant level margin our purpose of on cash on cash return and I apologize.
Even less development cost that didn't necessarily incorporate.
Some of the savings opportunities that we've identified the lower square footage of et cetera. So it's been kind of to your point of some of the phased movement towards our ultimate prototypes at.
And we maintain the same type of volumes and restaurant level margin for future classes, which we absolutely intend to do we expect to be doing net off of a reasonably smaller development cost. So instead of data and for 2 to $900000 that we average from 2019 up until the first restaurant our first your restaurants this year.
We would expect that to get into the mid the mid 7 hundreds.
And you see the cash on cash return capabilities, there, we feel very comfortable with it.
Those are sites that would be 2000 square feet on the.
Drive through window itself since we're not doing true ordering through there its digital order had impact on development of cost is de Minimis. So we're feeling very excited about the overall cash on cash return profile of that new class, which will be smaller square footage more off premise oriented.
And incorporate a lot of the savings opportunities the Carl and the team and have found from the construction side.
That's great that's great and then 1 final 1 for me I know Karl when you were talking about.
For some of the inflationary pressures and talking about hiring pressures up to supply chain and I Wonder if your day of could talk about staffing levels at noodles and tie it to kind of the culture that you've been building out of the additional benefits that you've laid and the better retention. How are you feeling staffing wise relative to this continued.
Spike in demand that youre seeing at the restaurant level.
Yes.
The reason Todd and I'm glad you asked that question that I've been with this industry as long as I have.
Is the impact that restaurants have.
On not just our guests, but our team members I think over the last year and of Haas through Covid restaurants are really showing how important they are to the fabric of society and how many important banks happened over a meal simmer.
Similarly at the restaurant level itself.
You can have a great career at.
And you start with noodles <unk> company and just from the restaurant industry in general and.
And our initiatives over the last few years really it's been it's been for a long time around paying fairly first and foremost.
We're at a point, where our typical team member at assistant of Texas of around $15 on.
On average.
Putting groundbreaking benefits in terms of enhanced return of at least certainly to see your name of mental health.
As well as just having a culture of people that care for each other and.
And realize that standards and coaching and development and accountability as part of personal growth.
Got a heck of a team right now and we share with it on.
Prior calls and as continues today, our retention and our turnover metrics relative to the industry is something we're extremely proud of 1 of the metrics. We're most proud of over the last couple of years, it's allowed us to navigate this hiring environment much better than we feel many others probably have had.
And of what they've had to deal with.
And we did see of a hop in turnover kind of of the early part of Q2 is starting to come down. So we feel that the worst of the staffing challenges are definitely behind us. The team is still laser focused laser focused on providing just and excellent environment and making sure that everybody is at.
Really focused on hiring the right people training and coaching developing them through their career at noodles and company.
So we've navigated pretty well there is still a tough environment to play but.
Very happy that we've seen very very little disruption.
And on our restaurants relative to some of our competitors.
That's great.
At that same situation, where youre still looking to hire thousands of people to meet that demand and.
You've got the peanuts or you want at Youre, retaining them and really no operational hiccups from staffing them.
Yes, it's the restaurant space, so youre going to have a natural level of of transients and the and the industry itself. So youre always hiring.
And we're very happy with the applicant flow that we're seeing and Fortunately we didn't start this.
Staffing challenge or price of <unk>, we started from a better position.
And I think we would have otherwise due to that culture, and our training and development. So yes.
Yes, we are still hiring.
All the time.
And we still are very very focused on it but I think we're in better shape and then.
Many of you then we could have been.
Okay, great. Thanks, Dave.
Thank you.
Yes.
Question is a follow up question from Jake Bartlett from touring of Securities. Your line is now open.
Great. Thanks for taking the follow up I, just wanted to make sure I understood the dynamics of menu pricing and at the food cost inflation.
I think so if you are adding about 3% price and I think just from the commentary you're roughly 2.5% before so for the full quarter I think you'd be roughly look for 4.5% on pricing on for the third quarter.
If we expect deleverage of 60 to 80 basis points. My math is that food cost inflation would be up near the kind of at 7% 8%.
Of range.
And so that doesn't I don't think Jive with David your comment about 4 and 5% to 5%. So just yet and just run through again from what you're specifically expect for pricing and the third and hopefully in the fourth quarter would be helpful. Maybe assuming no additional pricing just so we understand what's rolling off and what you keep and.
And then really just specifically what you expect for for.
Food cost inflation in the third and fourth quarter.
Yes, the other aspect of Cogs, which isn't necessarily incorporate into that inflation number is actually that to go packaging and just the share the share amount of at given that we're at.
Still of of off premise dominated society as well as we continue to serve.
At our in our restaurants and for and restaurant dining in to go packaging. So that's the other element that I wouldnt necessarily captures raw inflation on that we are seeing some of the question of those areas as well so thats part of the GAAP.
If you can kind of just.
Clarify on some of the pricing side of the equation.
For the pricing and we've taken about 2.5% year to date.
And the additional 3% would take us at 5.5% year to date total pricing, we're taking the 3% next.
Next week, so we're going to see that impact for the rest of the third quarter.
And nothing rolls off and the fourth.
No plan for the fourth quarter pricing increase right now there'll be there'll be a little bit of off actually in early December on the delivery. So as a reminder, we went from 10% and third party delivery price premium $2, 15% last December so that will roll off.
So thats roughly of percent of price.
Got it and then the last quick question is the mix of your in App and online of White label delivery versus third parties and and.
And I think that should should price if that is increasing and should be helping that other restaurant operating expense line, but it doesn't seem to be at at least expectation is not in the back half of the year, but how is that going in terms of kind of migrate and consumers to your channels versus third party.
We still see opportunity there.
It's not moving as quickly as we would like to see at move.
We'd like to third parties in terms of at certainly brought a lot of people into the brand and saw a lot of people have been introduced the Nielsen company, particularly on some of our less penetrated markets, but we still have a lot of a lot of movement that can be done in terms of bringing the percentage of delivery that's through our native channel. It still is.
And that kind of 12%, 13% range, it's kind of modestly seeing some benefit as we did toward alone because we did create some exclusivity with rewards program. We brought more people into our own channels. We are starting to see some movement here and the last couple of months, but J.
Jay to your point, we consider that a good upside opportunity as we continue to engage that guest and a little bit better way to get them to move towards RNA per channels.
Great. Thanks, a lot I appreciate it.
Thank you I am showing no further question and at this time I would like to turn the conference back to David.
<unk> for any closing remark.
And I appreciate everybody's time today and still of lot of uncertainty throughout the world, but I think noodles and company's performance, particularly in the last 3 months, but even throughout the last 15 to 18 months, we have so much confidence and our ability to navigate this environment and continue to thrive.
And you said was as we said earlier with record level of average unit volumes margins and our best place since 2014, and a significant EBITDA growth opportunity ahead of us.
Just extremely excited for 2021, the balance of at as well as beyond so appreciate your time and everybody stay safe.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation in that disconnect.
Okay.
Great.
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