Q3 2021 Noodles & Co Earnings Call
Good afternoon, and welcome to today's noodles <unk> Company third quarter 2021 earnings Conference call.
All participants are now in a listen only mode.
After the Speakers' remarks, there will be a question and answer session.
As a reminder, this call is being recorded.
I'd now like to introduce noodles, <unk> company's Chief Financial Officer Carlo Catch Your line is now open. Please go ahead.
Thank you and good afternoon, everyone welcome to our third quarter 2021 earnings call here with me. This afternoon, Dave banning Galvin, our Chief Executive Officer, I'd like to start by going over a few regulatory matters during our opening remarks and in response to your questions. We may make forward looking statements regarding future events or 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 Securities Litigation Reform Act such statements are only projections and actual events or results could materially 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 2020 fiscal year and subsequent filings with the SEC 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 of 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 2020 fiscal year and subsequent filings. We have made these documents contain and identify important factors that could cause actual results to differ materially.
Really from those contained in our projections or forward looking statements during.
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 direct comparable GAAP measure is available in our third quarter 2021 earnings release, and our supplemental information now I would like to turn it over to Dave Bellinghausen, Our Chief Executive Officer.
Thanks, Karl and good afternoon, everyone I'm excited to share with you today, our strong third quarter results and our progress toward achieving the accelerated growth objectives that we laid out earlier this year.
Our third quarter results were highlighted by 16, 3% comparable restaurant sales system wide, allowing us to achieve another company record for average unit volumes at $1.3 million.
In addition to strong sales performance, our restaurant level margin third quarter expanded 270 basis points versus the prior year to 18, 1%. Despite the impact of the current inflationary environment.
Both our average unit volume growth and our margin expansion have been aided by the success of our new restaurants with our restaurants opened from 2019 to 2021 continuing to perform above company averages for both sales and restaurant level margin.
Our success in the third quarter as a result of the three primary strategies that we've been executing to capitalize on the opportunity ahead of US. The first is the continued differentiation of our concept to appeal to a broad range of lifestyles convenience and dietary needs second further activating our brands, particularly through our digital assets marketing strategy.
And third accelerating our unit growth to take advantage of an operating model that we feel is ideally suited 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 in executing a disciplined strategy of culinary innovation that is on trend resonates with guests and build brand loyalty.
Last quarter, we highlighted the June launch of our CT alone, you're offering noting that for years stuffed pastas and our guests most requested dish.
Now four months passed its launch <unk> continues to exceed our lofty expectations and we're particularly pleased with the conversion that we're seeing from trial to loyalty and frequency for those who have tried it.
While our focus for the balance of the year from a menu perspective will be fully capitalizing on the additional toward aloni. Our teams have also maintained a robust pipeline of innovation for 2022 and beyond.
Next year, we anticipate a combination of enhancements to our already strong lineup of healthy alternatives as well as newswire some familiar favorites.
As we continue to differentiate the menu for today's environment I'd now like to discuss our second strategy focusing on further activating the brand, particularly through our digital capabilities and improved marketing effectiveness.
We have made significant progress with our digital capabilities and their impact on driving new guests new usage occasions, and increased frequency amongst the broad group of consumers.
Digital continues to account for 52% of our sales in the third quarter, even as in restaurant ordering returned to 70% pre COVID-19 letter low levels of.
Of course, one of the biggest tools for driving digital growth is our rewards program, which is rapidly approaching 4 million members. The insights that we have garnered from that program combined with increased capabilities to develop more personalized relevant communication has allowed us to attract new guests and noodles <unk> company as well as increased frequency of our existing test.
As we said we believe that we're still in the early innings of more effectively utilizing our digital assets and data to better engage with our guest and we expect this strategy to be a meaningful driver of sales growth for years to come.
Now I'd like to talk about our third strategy surrounding accelerating unit growth.
As I mentioned earlier, the restaurants opened in the last three years continue to perform better than any group of new restaurants from our history with average unit volumes and restaurant level margins above company averages.
We're particularly seeing strength in our new restaurants to contain our order have drive through windows, which we estimate on average increased sales approximately 10% to 20% relative to traditional restaurants.
We continue to expect at least 70% of new restaurants to incorporate the order have drive through windows as they improve convenience for our guests and are easy to execute for our operations teams.
While we are excited about our current pipeline three restaurants from a development perspective, we have experienced the same short term challenges that have been present throughout the industry.
We and our franchisees have seen delays in construction landlord building delivery and equipment availability over the last several months.
As a result, we have pushed three company openings and two franchise openings originally slated for 2021 into early 2022.
These openings will be incremental to our prior outlook on unit growth for 2022, and we now anticipate at least 8% system wide unit growth next year.
At the present, we would expect our 2022 openings to be somewhat back loaded given the delays which exist in today's environment. However, our overall pipeline remains robust as we execute our strategy to achieve at least 1500 units nationwide.
A significant contributor to our year growth will be our franchise community.
And we were excited to announce during the third quarter, the signing of a new franchise deal to introduce the brand in El Paso, Texas, and Las Cruces, New Mexico markets.
We're also pleased with the quality and trajectory of our conversations with additional prospective franchisees for both new territories as well as potential refranchising of select company markets.
While we do anticipate further franchising progress for the balance of this year.
We also recognize that our prospective franchise partners most of whom are established restaurant operators. Currently running additional brands are also laser focused on navigating the last topic I'd like to discuss today the restaurant staffing environment.
As we said before for each of our three strategies continued differentiation of our unique brand strengths activating the brand through our digital marketing channels and accelerating unit growth the importance of our team cannot be overstated.
Our team has done is simply amazing job rise due to the challenges of the last 18 months, even with the strength of our team and better than industry turnover metrics, we have not been immune to the well documented staffing difficulties seen throughout the country.
During the last half of Q3 these challenges combined with the impact of the Delta Covid.
It became more pronounced resulting in reduced store hours across the number of restaurants in our system.
Normalizing for staffing challenges our sales growth thus far in the fourth quarter remains on par with our record set in Q3, and we're taking a number of actions to address the current labor environment.
We have implemented meaningful increases our restaurant management compensation as well as instituted thank you and retention bonuses throughout our restaurant organization.
Additionally, we have eliminated many time consuming task of executed in our restaurants, some on a temporary basis and others that we believe make our restaurants more efficient both in the short and the long term.
From recruiting to retention to development, we have piloted are implemented in a wide variety of new approaches to aid in combat in the current staffing environment from sharing best practices amongst our operators to offer refined on retention bonuses for areas with particularly tough labor markets.
While we believe staffing will remain a significant challenge in the near term, including in the fourth quarter.
Based on trends from the last few weeks, we feel that the worst is behind us and I'm optimistic that our efforts will allow us to mitigate the impacts as well as make us even stronger in the long term.
I also am optimistic given the overall strength and commitment of our teams throughout the country. This commitment evidenced by the tangible progress we've made across all aspects of the business has allowed the company to successfully navigate an unprecedented environment. During the past 18 months and it gives me great confidence that we will successfully navigate the current environment as well.
And build off of the record setting sales results that we saw during the third quarter.
Now I'll turn it over to Carl to discuss in more depth our financial results. Thank.
Thank you David and good afternoon, everyone in terms of the financial highlights total revenue for the third quarter increased 18, 1% to $125 1 million compared to last year comparable restaurant sales increased 16, 3% system wide comprised of a 15, 3% increase at company owned.
Patients and a 21% increase at franchise restaurants.
Average unit volumes for the third quarter were $1, three 8 million, representing a 16% growth rate compared to 2020, and a 15, 9% growth rate compared to 2019.
As a reminder, average unit volume is adjusted for restaurants that have been temporarily closed but it is not adjusted for temporarily reduced hours within the restaurants as Dave mentioned total revenue during the third quarter was partially offset by both temporarily closed restaurants and reduced restaurant hours driven predominantly by <unk>.
Industry wide labor shortages.
These temporary closed days and reduced hours were more pronounced in the back half of the third quarter.
While it's difficult to measure the exact sales lost due to store closures during the quarter, we estimate the impact at approximately one 5% of AUC growth relative to 2019.
As Dave noted based on trends over the past two weeks. We belief has impact has peaked and are encouraged by the opportunities we've outlined from a talent acquisition and retention perspective.
On a restaurant contribution basis restaurant level margins were 18, 1% in the third quarter compared to 15, 4% last year.
Relative to the third quarter of 2019, which we believe to be a more relevant comparison contribution margin increased 100 basis points from 17, 1% driven by sales leverage on higher average unit volumes and labor efficiencies.
These benefits also fully outweighed the incremental cost associated with third party delivery, which remains a key driver and investment for our business and has held steady at 25% of total sales during the third quarter.
Reviewing margin drivers in a bit more detail for the third quarter cost of goods sold was 25, 1% of sales an increase of 30 basis points from last year, and 20 basis points better than the third quarter of 2019 on.
On our last call, we indicated that cost of goods sold the third quarter would be unfavorably impacted by commodity inflation and we are pleased to report that our results were better than anticipated.
Our ability to offset the current inflationary environment was driven by temporarily securing shorter term inventory at more favorable rates in the spot market driving efficiencies in our discounts and to 3% pricing we took on our core menu during the third quarter.
Speaking of pricing, our third quarter pricing was for the third quarter was approximately five 5%.
As you look forward into the fourth quarter, we are still operating with industry wide inflationary challenges and anticipate continued incremental cost.
Associated with securing supply for our restaurants, particularly within our protein mix in light of these headwinds we are taking an additional 2% price increase on our core menu, which will be affected by the tail end of the fourth quarter.
This increase will coincide with the lapping of price actions taken last year in fourth quarter, and we expect full fourth quarter pricing to be approximately seven 5%.
Given the expected timing of our price actions, we anticipate that commodity inflation will still have an unfavorable impact on our cost of goods sold by approximately 50 to 60 basis points in the fourth quarter relative to the third quarter.
A majority of this increase were based on the need to temporarily purchased chicken at rates higher than historical levels.
Labor costs for the third quarter were 38% of sales, which is essentially flat to last year and a 250 basis point improvement from 2019.
From a margin perspective, we saw a benefit in the quarter as a result of the temporary decreases in labor hours due to staffing challenges and reduced hours as Dave mentioned this margin benefit was offset by strategic investments in the third quarter and the retention of our team members primarily through a onetime appreciation bonuses.
<unk> also seen an increase in our average hourly rate driven predominantly by new hires on boarding at a higher rate in addition to overtime payouts.
We continue to track the benefits of our kitchen of the future initiatives in particular, the rollout of our steam or equipment is meeting our expectations to reduce approximately two additional labor hours per restaurant per day we.
We have completed over 75% of our steamer rollout thus far in 2021, and we expect up to 90% of steamers to be rolled out by the end of this year. We remain encouraged by the positive results demonstrated by improved Cook times reduced labor hours and better taste of food scores.
As we look ahead to the fourth quarter, we anticipate a similar labor cost percentage relative to the third quarter.
Other operating costs for the quarter was 17, 5% of sales compared to 18, 6% last year due primarily to sales leveraging operating costs were 280 basis points higher than 2019 due to an increase in third party delivery case as this channel remains a critical Avenue to drive brand awareness and new guests.
Delivery fees were five 3% of sales in the third quarter compared to five 5% in the third quarter of last year.
We expect third party delivery to remain an important driver of the business going forward and as such we expect our operating cost percentage in the fourth quarter to be at similar levels to the third quarter.
G&A for the quarter was $12 2 million compared to $10 $8 million last year due to increases in both stock based compensation and temporary pay reductions implemented during 2020.
As a percentage of total revenue G&A decreased 50 basis points compared to last year.
G&A includes a noncash stock based compensation of $1 2 million during the third quarter compared to 700000 last year.
We anticipate that stock based compensation will be approximately 1 million next quarter, and we anticipate that G&A dollars in the fourth quarter will be similar to our spend in the third quarter.
GAAP net income for the third quarter was $4 7 million or <unk> 10 per diluted share compared to a net loss of <unk> 1 million last year or zero cents per diluted share.
We also report net income on an adjusted basis, which adjust for the impact of impairments divestitures and closures on.
On an adjusted basis net income was $5 3 million or <unk> 12 per diluted share.
Compared to net income of <unk> 7 million or <unk> <unk> per diluted share last year.
It is important to note that our methodology for calculating adjusted net income no longer includes a tax adjustment related to the valuation allowance impact on our on our effective tax rate.
Accordingly, the adjusted net income reconciliation table in our third quarter earnings press release uses the same methodology for prior periods.
We expect our effective tax rate to remain low for at least the remainder of the year we.
We do not expect to be a cash taxpayer for the foreseeable future given our sizable NOL.
Switching to our outlook for the rest of the year. So far through October we have seen continued strength in our average unit volume growth compared to 2019 and expect volumes to remain strong throughout the fourth quarter.
Third we also anticipate continued uncertainty related to the extent and duration of the current staffing disruption and the potential impact on our operating hours.
As a result for the fourth quarter, we anticipate total revenues to range between 119 and $124 million.
From a unit development perspective, we remain encouraged by our robust real estate pipeline as we head into next year for 2021, we now anticipate seven to nine new restaurants system wide compared to our previous guidance of 10% to 15 as Dave noted the change in guidance is due to equipment availability and landlord delivery timing.
Which has pushed a handful of company and franchise locations into the early part of 2022.
These locations are simply a shift in timing and are considered incremental to our prior guidance of at least 7% unit growth on a system wide basis in 2022.
Such we now anticipate at least 8% system wide unit growth next year.
From a capital perspective in anticipation of several locations shifting into 2022, we expect full year capital expenditure of approximately 20% to $22 million compared to our original guidance of $20 million to $24 million.
Turning to the balance sheet at quarter end, we had cash and cash equivalents of $3 1 million and a total debt balance of approximately $23 7 million.
During the quarter, we made a full repayment on our revolver and anticipate maintaining a low cash balance going forward to optimize our cost of borrowings.
We anticipate that we will produce positive free cash flow through the remainder of 2021.
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.
Carl Tomorrow noodles, <unk> company, and we will release, our first social impact report highlighting our progress in benchmarks across food people planet and community.
Our team has much to be proud of and creating a culture of serving leaders committed to fostering a better world.
This commitment has allowed our team to navigate the uncertainty from COVID-19 to the economy to staffing challenges.
While we can't ignore the impact of the current staffing environment on our short term operations I'm confident that our team will rise to the challenge of commodity even stronger than before.
Noodles <unk> company's off premise digital and people strengths executed with a differentiated on trend menu perfectly suited for today's environment has the company positioned for significant growth over the years to come.
Our performance, thus far in 2021, including record setting <unk> in the second quarter, and then again in the third quarter, coupled with the strengthening operating and economic model also bolsters my confidence in the significant expansion opportunity ahead of us for both company and franchise development.
I am proud of what our team has accomplished and look forward to taking the next steps with noodles journey together with that Shannon. Please open the lines for Q&A.
Thank you to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from James Rutherford with Inc. Your line is open.
Okay.
Hey, Dave Hey, Karl Hope, you're both doing well.
Want to start out on the unit growth side I appreciate the color on the near term growth challenges I mean, clearly you are not the only one experiencing but the delays there, but just as we think about 2022, you mentioned the growth would be a little bit more back half loaded just want.
Good to hear your thoughts on what visibility you have into that growth or are you in a place where leases are pretty much signed and it's simply a matter of getting the construction done the equipment installed I mean, just help us think about what.
Level of visibility you have into that 8% growth for 2022.
Yes, James I think we feel very confident with what we're seeing from a visibility perspective first off those restaurants that did get pushed from 2021% to 2020% towards 2022. Those are all ready to go there is a critical piece of equipment that wasn't going to be able to make it in time for us to get the construction timeline done such that it would be.
Late 'twenty one so we said those would be in early 'twenty two.
So now you are just looking at the balance of the pipeline of what we had already said is kind of our target range and we're actually ahead of where we expect it to be from an overall LOI perspective.
They are in different processes in terms of construction leasing and lease signing an LOI, but were actually above where we would expect it to be so while we still do expect that there could be some delays in terms of when the buildings are actually delivered to us and we have all the equipment available.
Feel pretty strong with the both the quality and the quantity of the pipeline of what we see for 'twenty two and that includes from a franchise perspective.
Okay, perfect and then on the staffing dynamic I appreciate the comment that it was about a one 5% as the impact in the third quarter, if I heard correctly and it sounds like that the suggestion is.
Those challenges maybe have peaked and it's still uncertain, but maybe we're on the downward side of that.
Just thinking about the outlook that you provided Carl in terms of the $119 million to $124 million of sales can you just kind of level set us on what that sort of assumes for an AUC growth perspective versus.
Versus 2019 and is that I mean are you assuming a pretty significant step down in two year growth because I'm, just trying to kind of figure out what the implied impact there is a staffing if you could help there. Thank you.
Sure happy to so our sales guidance reflects a similar trend in <unk> growth relative to <unk> 19 that we reported in the third quarter in the third quarter. So continued strength there really when you look at the range on the high end of the range would reflect an improvement in staffing and the resulting temporary closure days and the low end of the range, we reflect a continuation of.
Current levels.
Through a good portion of the fourth quarter. So really that's the volatile piece that define the ranks.
That's super helpful. Perfect. Thank you.
Could slip just one more and then I'll turn it over from the menu price dynamic we've heard consistently from.
All the restaurants that we cover when you push on prices youre not seeing much resistance from the consumer I'm just curious.
Curious what you see on any traffic impacts from the price you've taken so far and kind of what gives you comfort on.
The next action, the 2% price you're taking in the fourth quarter.
Yes.
<unk> speaking I think we feel very strong James with the overall value proposition of Nielsen company, so over the years.
Been pretty rational pretty soft in terms of the amount of pricing we've taken as we've continued to evolve and improve the concept.
From a quality of food perspective, convenience speed et cetera, we feel our value proposition remains very strong as a reminder, most of the pricing does tend to fall in third party third party delivery, which we have seen continues to be.
On occasion, that's not as price sensitive that's where we've seen most heavily into from a pricing perspective. So the result of both historically not being.
To your point over the last several months on a pricing action we've taken.
James the only thing I'll add to that is the 3% pricing increase we took in August we took those.
Pre strategically at elastic areas of the core menu. So we were able to measure that specifically when you look at that from a mix basis and from a unit.
Dish velocity basis, and so we were able to sort of get our confidence that there hasnt been any impact of the price increase.
Perfect. Thanks very much.
Thank you. Our next question comes Jack Corrigan with Truth Securities. Your line is open.
Hey, guys. Thanks for taking the question and congrats on the continued momentum in your business here.
Impressive to see your two year same store sales trends accelerating despite all the staffing issues, but.
I wanted to ask more specifically about the trends you saw.
Seeing in same store sales throughout the quarter.
And if you guys could just if you could give October specifically our quarter to date, specifically I think that'd be really helpful.
Yes, I think from overall Cade protection start with Q3, so what we had seen Jack was momentum ADB growth.
Across the system.
Through July and the first part of August.
As you bifurcate restaurants in markets.
I have not had as much staffing challenges, we've been able to maintain that same level of trajectory that same growth momentum as we've gone into October the only difference youre seeing really is upon the restaurants that have had some staffing challenges. So the fundamental strength of the business remains.
Extremely strong.
Don't want to necessarily just pure October numbers, because there was some volatility as we think of how COVID-19 impacted.
Impact on us across the quarter, but when you look at the fundamental two year growth that still remains very consistent with what we had seen during third quarter.
Okay, Great that's really helpful and then.
If you think about the drivers in the quarter.
Looking at digital marketing or you know your food news with it towards alone.
And then the reopening of the dining rooms, I guess, how would you how would you rank order those are or any others you can think of.
Certainly its hard alone it's been a great day, and we still feel Theres a long runway ahead of us from Carlone and I think what's exciting is not just has it hit core guest.
One metric, we're seeing just across towards <unk>.
Ross the entire system.
As people get introduced to the brand to enter that rewards program.
The duration of time before their next visit continue to shrink.
So we're continuing to convert people who are trying the brand into more frequent loyal consumers at the same time, our core group continues to strengthen as they have more reasons to come to noodles <unk> company. So the combination of toward alone and how we're able to leverage that from a data and digital perspective is extremely encouraging as you're going to need.
100, a little bit more a couple of things that I'd point out that gives us continued confidence that digital retention.
Being north of 50%, even as we are getting in restaurant sales come back.
That seems to continue to be a very sticky retention and feel very strong about that and also seeing launch turn back positive from a same store sales perspective, that's been the day part most impacted for us as well as most of the industry.
<unk> had positive same store sales during the third quarter for the first time in quite a while so fundamental aspects of the business just everything seems to be moving in the right direction. We certainly got some noise here from a staffing perspective, but the fundamentals.
Very strong strengthened during Q3, and we've been able to maintain that through Q4.
Great that's great that's really helpful.
Just one quick one on on development can you can you break out what you expect for company versus franchise openings in 'twenty two.
Have shifted in.
It's a little different outlook.
We haven't disclosed the exact.
The exact number and there are some franchise potential cats were looking at that would potentially be doing refranchising as well so until we get a little closer in and that comes to pass we have historically that we expect that the growth is going to be predominantly company.
During 2022, we would expect that still to hold and then as we go into 2023 and 2024, especially.
When we look to be looking for about half of the unit growth to come from franchise and half from company.
Alright, great ill pass it along.
Thank you. Our next question comes from Tyler with Piper Sandler Your line is open.
Thank you good afternoon I wanted to ask first on the topline and AED. If we could look past the noise here at the 1.38 million.
If you could look past seasonality, some one time items and fully get the price that youre looking forward I'd sort of inflation what would be the start of a margin im thinking if the long term is $145 million of UV and a 20% I believe store level margin that's one point.
<unk> has to get you quite close to that.
Yes, we think that that is pretty darn accurate Nicola is a reminder of that.
<unk>.
Just to level set earlier this year.
It now accelerated growth objectives to get to a million $4 50 in AAV and 20% restaurant level margin by 2024, clearly the momentum in the business. Since we initially disclosed numbers give us pretty strong confidence that we'll be able to meet that objective and potentially surpass it.
The $1 38 does have some one time noise from an inflationary perspective as well as some of the compensation actions we took.
Would that 18, one have been 18, 5% to 19 and potentially in a more normalized environment, but I can say clearly as we look at the overall.
Long term path of 1 million 450, and 40% margin, we feel like that results fall straight in line with what we'd expect.
Okay, Great and then second and last question also trying to look through the noise.
Pipeline and these are clearly very unforeseen issues I mean typically in any pipeline.
You would have some question and I'm just thinking it's not an LOI or signed lease issue at all right. I mean, you had all your ducks in a row and then here's the new glitch. So if you think of the next year and the 8% development is the pipeline like 9% to 10% deep so we could have.
Another unforeseen glitch, because they seem to be appearing now more than we like.
Or are you kind of right at 8% on the nose in terms of the pipeline.
We're building a pipeline Nicole assuming that there is still volatility.
Whenever you build a pipeline you assume some level of <unk>.
Fallout for whatever particular reason, so we built that type of cushion into our overall projections.
It does to your point.
<unk> very good in terms of the lease negotiations and so forth we have seen some delays just over the last year as you've seen landlords.
But going through there.
Building delivery dates and what they expect their some of the same challenges that theyre looking at how we've approached it is as we target 8%, we certainly build a pipeline that's beyond that recognizing that there could be continued things out of our control.
Alright, thanks for the update and have a great night. Thank you.
Thank you.
Thank you. Our next question comes from Charles <unk> with BMO. Your line is open.
Hey, good afternoon. Thanks for taking the questions I guess first I just wanted to clarify.
The gap between the company comps and the franchise comps.
Are we supposed to understand that thats basically a function of the staffing challenges. It seems I know kind of the labs and things like that the numbers could be walk either more in there that's driving that divergence or is that really the biggest piece of that.
Yeah from a federal perspective, as a reminder, everybody we have about 15% of our restaurants are 77 units.
That our franchise they tend to be a bit more in college locations Andrew.
One thing we've seen both the company as well as franchise really strong same store sales growth as college campuses now versus what they were a year ago.
See some outsized growth.
Additionally from a franchise perspective, they kind of some of the staffing challenges in their particular markets bit earlier than we did on the company side. So they tend to be in markets that are quite having as much disruption from a staffing side. So as we look at the fundamental strength of the business and one thing that gives us great confidence as we do it's looking as that spread.
<unk> partners have kind of gone past some of these temporary disruptions, how well they've been able to maintain momentum over that timeframe.
Got it okay.
Makes sense and that's helpful.
Secondarily I wanted to dig in a little bit more on the turnover commentary and I know that.
The brand has had periods where turnover has been a challenge and more recently, it's been running in a much better place, but in an environment now where every brand in the restaurant space and even outside as kind of fighting for talent and taking actions to to try to get as much time as they can so what do you attribute.
Continuing to drive lower turnover, it's really impressive for the brand and I'm just curious of your insights about what what you think are the biggest drivers contributing to that.
I would say that in the <unk>.
Two and half years I've been with noodles <unk> company in the 20 years in the industry. The most common thrown assuming any analysis. Andrew is the success of a restaurant and it's driven more than anything by the tenure of that general manager.
We have done very laser focused.
Roche from a culture compensation incentive rewards just how we've approached that particular group. So the one thing that gives me so much confidence as we look forward as our tenure of managed versus is actually higher even even as we've gone through this process. So we've been able.
Well to maintain that core culture of strong future leaders.
And as you maintain that core leadership group it just permeates through the whole organization.
I would attribute more than anything I mean, I think our teams we separated leadership across the board from an operation side.
How we've built that bench strength.
The overall consistency from a store level manager perspective has been the most important part as we said we're not immune but I think we feel very good not just with how we're weathering this compared to others, but also how it looks from a foundation perspective, as we start building out significantly more restaurants.
Got it okay.
Got it Okay and then the last piece.
Here I, just wanted to and I apologize if I missed this or didn't understand fully but.
The comment that the worst is behind the company in terms of the staffing challenges or the margin pressures and what is it exactly that you mean by that are you actually seeing the percentages get better are you seeing the the hours improve a little bit I know, there's uncertainty, but I just wanted to understand exactly what you mean by the <unk>.
The company. Thank you yes.
Roche it two different ways. So the first part is every single day, our restaurant teams and.
Our team throughout the organization is looking at the number of restaurants that have been impacting that's had to reduce hours and we're seeing that number just continue to go down over the last couple of weeks. So it really started to get higher.
The tail end of Q3, and then into the first part of Q4 and then the last couple of weeks you are starting to see some really significant progress and then the underlying cause in terms of just the pure number of employees you have in house staff you are at the restaurant level. We are seeing significant progress in terms of the number of applications.
<unk> that are now turning into higher some.
Toys within the organization that has meaningfully improved really over the last three to four weeks, so thats kind of a leading indicator.
Then we started seeing a few weeks ago, three or four weeks ago that are now manifesting itself in fewer restaurants that are getting impacted by the disruption.
Got it okay. Thank you very much I'll pass it on.
Thank you as a reminder to ask a question at this time. Please press Star then one our next question comes from Todd Brooks with CL King and Associates. Your line is open.
Hey, Thanks, good afternoon guys.
Couple of questions for you one.
Karl can we talk about the the onetime bonuses paid in the third quarter, maybe what kind of basis point impact that had and.
Guess, how effective they where do you think it's something that needs to be repeated in future quarters are truly one time.
Sure. So you are right here in the third quarter, we implemented the thank you bonus.
Really this was largely offset.
By some of the staffing levels that we saw in the restaurant due to the reduction in hours. So we would characterize this as onetime in nature.
And something that we would not anticipate repeating having said that in the fourth quarter. Dave did also mention that we are planning some retention bonuses sign on bonus so that we're also anticipating.
Being offset by the lower staffing levels.
Okay. So is there a way.
Characterize it from a.
Without the bonus activity that gets us towards that.
18, 519% restaurant level operating margin that Dave was talking about in response to Nicole's question at these.
At these unit volumes.
Yes, I would say that.
We've talked about in the past Todd is that we like.
Our prime cost to be at 55% at these levels, so roughly 25% ish on Cogs, 30% on labor there is a lot of the noise in Q3 itself.
So as we look fundamentally at the business and how we then.
Lever.
From those starting points.
I feel very good that we're continuing.
On that path as you look at the labor environment from a long term perspective.
Obviously retention.
And having just being an employer of choice will remain extraordinarily critical.
So we're training your people hiring the right folks retaining them.
And then developing future leaders.
That will be a critical component as we look at wage inflation and maintaining that kind of 30% level and then levering off but.
At the same time, we also recognize that with wage inflation, we need to continue to look for western ex kitchen of the future. What are the next operation operational changes, we can make equipment changes we can make there.
That will allow us to be more efficient and effective the restaurant level.
So while we're not able to necessarily say, hey, <unk> would've been 18, 5% to 19 in Q3, excluding some of those one time events just because there were so many gives and takes throughout the given quarter. When you think of Covid incentives you name it COVID-19 vaccine incentives.
We think that as we get to that increase in volume and we're able to maintain that over a sustained time and then continue to build off of that that we are well on our way to that 20% target.
And Todd just to add some color.
Yes.
Todd just to add some context to what Dave mentioned about pulling forward some of the compensation increases or the wage inflation in the third quarter, we saw wage inflation just under 6%.
And as we look forward to the fourth quarter, we're anticipating mid to high single digits.
Okay, great. Thanks, Karl and then.
My final question I will pass it along.
Two parts one just on the on the franchising side.
Dave you pointed to the fact that listen a lot of these guys are multi multi unit multi brand and they're working on operating through the same challenges.
The rest of the spaces, but can you talk qualitatively about.
How the pipelines building, giving how much the results are improving over the course of the year and then you kind of touched on.
Not wanting to talk about the unit breakdown for growth for fiscal 'twenty, two because there could be some refranchising opportunities with potential new partners can you talk about those efforts what it takes to to decide to re franchise.
Corporate stores that have inflected in the return profile.
<unk> continues to improve.
What you would look for in return for making that decision.
Yes.
And the second one in terms of Refranchising.
What we typically look at is a market where if you can find.
A strong operator.
It has infrastructure has.
It has a pipeline of talent from our concepts that they operate.
Can likely grow that market faster than we could.
And they were able to capitalize on their experience clearly there is an asset light aspect of this of just balancing out the portfolio.
But from a overall perspective, we look at that growth opportunity and who do we think is best situated to grow that concept to grow our concept and as quickly as we think is appropriate.
Quantitatively, just how religions pipeline itself I'm very pleased with what we're seeing.
In particular as you referred to tie the Q2 results now as you look at Q3 results I think everything that we're seeing it's a franchisee they are very attractive to the cash on cash return of momentum in the business. How we're positioned the effectiveness of our new unit prototype.
So as we continue to get more and more.
We're straits underneath us from a fundamental business success and operating model. We just continue to build more from a flywheel perspective, if you will.
So yes, as we said.
Folks we're talking to.
They are working through some of the same supply chain disruption staffing disruption issues that we're dealing with from the company side and as the whole industry is dealing with but I feel like.
As you can expect some good things in the next three to six months in terms of momentum on the franchise side.
Okay, great. Thanks, Dave.
Thank you and I'm showing no further questions at this I'd like to now turn the call back over to Dave for any closing remarks.
No I just wanted to say I appreciate everybody's time. This afternoon and again, thank you to our team time and time again over the past 18 months.
Risen to unprecedented challenges and we're already seeing ourselves kind of starting to get on the right side of this current challenge and as we look into the balance sheet is in 'twenty, one and beyond couldn't be more excited and proud of where the team is and where we're going from from this point forward. So thank you again for your time have a wonderful evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
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