Q4 2021 Noodles & Co Earnings Call
Good afternoon, and welcome to today's noodles and company's fourth quarter 2021 earnings conference call.
All participants are now in a listen only mode. After that presentation presenters remarks, there will be a question and answer session.
As a reminder, this call is being recorded.
I would now like to introduce noodles, <unk> company's Chief Financial Officer, Carl Lukach.
Thank you and good afternoon, everyone welcome to our fourth quarter 2021 earnings call.
Me this afternoon are.
Our Chief Executive Officer.
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 related to our future performance should be considered forward looking statements within the meaning of the.
Net Securities Litigation Reform Act, such statements are only projections and actual events or results could material could differ materially from those projections during a number of risks and uncertainties.
Safe Harbor statement in this afternoon's news release and call.
And your statement in the company's annual report on Form 10-K for its 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.
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 material differently 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 in our fourth quarter 2021 earnings release, and our supplemental information.
Now I would like to turn it over to Dave betting houses, our Chief Executive Officer. Thanks, Carl Good afternoon, everyone 2021 was an important year for us.
And we made significant progress against our growth objectives.
Getting the project with the brand for today's consumer as well as setting the stage for accelerated unit growth, which is now underway.
Our fiscal year revenue increased three 7% compared to 2020, so over $475 million comparable restaurant sales increased two 1% system wide and deep.
<unk> sales increased 20% accounting for 57% of total sales.
Restaurant margin for fiscal 2021 increased 400 basis points to 15, 9%, culminating in 233% increase in adjusted EBITDA to $38 $1 million for the year.
As we look back at 2021, one important aspect is the underlying the momentum that we've seen throughout the system.
Evidenced by the record EPS of $1 $3 million.
Keep in Q3 prior to the staffing of Delta varying challenges of the fourth quarter.
Even with the impact of Delta and staffing challenges for the full year average unit volumes reached an all time high of $1 3 billion.
Representing approximately 22% growth over 2020.
An increase of over 11% versus pre pandemic 2009.
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We saw strength throughout the country with particular momentum in less penetrated markets, where we were able to accelerate brand awareness through targeted digital efforts.
As ADB grew in 2041, we're also proud of the efficiencies gained throughout our labor model.
Particularly with the implementation of steamers that will be completed nationally this quarter.
The gains from these efficiency initiatives will manifest themselves throughout 2022 both.
Both to reduce labor hours as well as improvements in throughput in tough times.
Critical as we face increased demand both in existing and new locations.
Finally during 2021 of our newest vintages of restaurants performed at our highest level in company history.
Validating our strategy to accelerate growth with a proven model.
It's 30% plus cash on cash returns.
Turning to our regional results during the fourth quarter, while the underlying business remained strong.
The company was significantly impacted by both staffing staffing challenges as well as the surge of adult and children's area, which was concentrated in our most penetrated markets for Rocky Mountain West and the upper Midwest.
This resulted in a meaningful amount of temporary closures or reductions in operating hours, which we estimate impacted revenue by approximately $8 million for the <unk>.
Fourth quarter.
The Delta there is impact on the full quarter's financials were additionally, compounded by onetime cost nationwide related to investments in staffing and continued volatility within our supply chain.
It is important to note this impact was particularly profound or late October and through the month of November .
Notably as staffing improves and the delta variance inside the business quickly regain momentum as evidenced by our strengthening comparable restaurant sales throughout the quarter.
From a physical period perspective, systemwide comparable sales grew six 8% October increased to 11, 49% in November and then again to 14, 7% during the month of December .
As the calendar turned to 2022 clearly the surgeon Homochrome cases has impacted the beginning of the year, but again, we're pleased with how performance has improved our cases have subsided subsided.
During our January fiscal period.
Sales increased two 7% at company owned locations and 4% system wide.
Results have accelerated in recent weeks with comparable sales in our February period, increasing seven 5% company owned locations and eight 7% system wide as of yesterday February 22nd.
These results give us confidence that the brand will again prove its resilience and accelerated both sales and margin expansion quickly is on cost pressures subside.
This belief is also bolstered by the brand's strong value proposition with the majority of this is having ettrick points seven.
$7, we feel this pricing power gives us the ability to map additional pricing during the second quarter.
Beyond to mitigate anticipated margin pressures.
As we looked at the year ahead, we continue to believe that our three primary strategies will have a profound impact on our ability to become a premier growth story restaurant base.
These strategies are being first the continued differentiation of our concepts to appeal to a broad range of lifestyles, <unk> dietary needs, which will be best exemplified by a particularly exciting new culinary launch in the second quarter.
Second further activating our brands, particularly to our digital assets and marketing strategy, which ultimately will result in the launch of a new brand building platform that will rollout in the coming months.
Third accelerating already to take advantage of an operating model. We feel is ideally suited for today's environment, driven by our targeted 8% unit growth in 2022 and accelerated to 10% next year.
Let me provide a brief update on each of these starting with our culinary strategy continued differentiation of the brand.
The company remains the only national fast casual restaurant, bringing fresh tasting flavors within noodles and pasta based menu are.
Our fresh flavorful and made to order approach sets the brand apart in a variety of the fact, our food travels so well mix perfectly suited for meeting consumer needs around convenience.
Offering our guests real cooking, so they don't have to whenever and wherever they want.
In 2021, we showcased the strength of our menu through continued innovation, particularly with the introduction of toward ammonia in June which continues to be the best performing new menu items are history.
We still feel that there is a lot of runway for turnkey offering and are particularly pleased with the increase in frequency that we're seeing most of the trials.
Yes.
Our ability to optimize our menu innovation between healthy offerings in new spend on familiar favorites has been a hallmark of our brand and that will continue in 2022.
Last week, we launched two new salads refresh into categories, perhaps about coming warmer months, while simplifying our operational execution.
And throughout the year, we will additionally, completed testing on our new menu items for 2023 and beyond.
However, culinary innovation, where we are currently most excited about is.
Which will launch in a few months.
He has the teeth and the texture of the traditional lately.
And gets its name from having over 50% less net carbs and over 40% more protein in a traditional way.
The culinary Formula for me, we as proprietary first of its kind offering it as a result of almost a year of innovation.
We feel that link we can have a similar impact <unk> had on the brand a few years ago, expanding our market reach meaningfully by redefining traditional expectations.
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As our culinary innovation accelerates in upcoming months, so will our second strategy, which is further activity.
Particularly through our digital capabilities and improved marketing effectiveness.
During 2021, our digital sales grew 20% over the prior year.
Both for the full year in Q4 accounted for over 50%, 57% of total sales.
We continue to be impressed by the strength in this channel, which.
Which is bolstered by how well our food travels Roque Carlos occasions, the strength of our rewards program and our presence with younger more digitally savvy consumers.
Continuing to enhance the targeting of our marketing as well as the capabilities of our digital assets.
Introducing a higher level of personalization to our guest engagement, thus enhancing the overall guest experience.
Of course, one of the biggest tools for driving digital growth is our rewards program.
Which has now crossed 4 million members.
During 2021, we saw significant increases both in our ability to attract and overlaps guests as well as converted rewards members to more frequent guests.
For example, 65% new members, who sign up for our rewards program return for a second visit within 60 days.
Which is faster and revisit rates you've seen in prior years.
We believe this points to not only the power of the program itself, but also have the ability to inform more effective targeted marketing communications.
Given the disruptions in the industry has seen in recent months, our marketing priorities in Q4, 'twenty, one and into Q1 of 'twenty two.
Focus on accelerating our brand building platform that will rollout in the coming months.
This increase in market activity will capitalize on the strength of our initiatives and increase the insights we gathered from our rewards program.
This provides added confidence in the ability for us to accelerate momentum during 2002 with efficient targeted activation of the brand.
Well, we look forward to culinary innovation and brand activation throughout 2022, perhaps most impactful strategy is the acceleration of our unit growth profile, which is now underway.
As we've discussed before the results the restaurants opened in the last three years continue to perform better than any group of new restaurants in our history.
<unk> borrowings and restaurant level margins above company average.
This momentum has continued thus far in 2022, which is particularly exciting given the openings. Thus far we put our first franchise location in the market in South Carolina as well as the test of a smaller square footage order have drive thru location outside of Madison, Wisconsin is also an entirely off premise location.
We anticipate approximately 35 openings system wide for 2022, including seven during the first quarter.
Well the balance of our 2022 openings will be somewhat back loaded given the current development environment. We remain very confident in the opportunity to accelerate unit growth to 10% beginning in 2023 with a proving 30% plus cash on cash return model again perfectly suited for today's environment.
This model, which incorporates our order have drive through Windows and an operating model that reflects the progress made over the last few years in terms of labor efficiencies continued to gain positive attention from our franchise community as well.
As we disclosed earlier this quarter in January we closed the transaction with an established 150 plus units.
On the franchisee we are exclusive partner for California.
The transaction included the sale of 15 existing company owned restaurants as luxury development agreement that provides for you'll be reporting these locations over the next several years.
This agreement our recent strong opening of our newest franchisee in South Carolina, and the previously announced franchise deals expanded the west, Texas and southern New Mexico validate the Nielsen company opportunity and we are pleased with the current quality and trajectory of our conversations with additional prospective franchisees.
As we enter this phase of accelerated growth the importance of our team cannot be overstated.
While we've not been immune to the staffing challenges seen throughout the industry in recent months, we're highly encouraged with both the improvement of our overall staffing levels and our ability to retain the key talent is critical to the execution of our new user acceleration.
Management tenure remains extraordinarily strong and we're on track to open your 100% new units with experienced proven general managers prepared to introduce the brands new trade areas throughout the country.
As always my thanks to our team for their incredible dedication towards delivering tremendous executions were addressed during an unprecedented time.
And I look forward to joining you on the journey as we celebrate all aspects.
Story now.
Now I'll turn it over to Carl to discuss in more depth, the financial results and expectations within 2022.
Thank you, Dave and good afternoon, everyone.
We are very proud of our full year financial results, which represents strong upward momentum towards our accelerated growth objectives, even with a challenging market backdrop for the full year total revenue in 2021 was $475 million and nearly 21% increase compared to last year.
Underlying our revenue growth, our average unit volumes for $1 $3 million for the year at 22% increase from last year, and an 11, 3% decrease versus 2019.
More specifically on the fourth quarter total revenue was $114 8 million, an increase of seven 1% compared to prior year.
Comparable restaurant sales increased 11, 2% system wide comprised of a nine 5% increase at company owned locations and a 28% increase at franchise restaurants.
Unit volumes for the fourth quarter were $1, three 1 million, representing a 14, 9% growth compared to 2020, and 10, 8% growth rate compared to 2019.
As a reminder, average unit volumes is adjusted for restaurants that had been temporary temporarily closed for a full day, but its not adjusted for temporarily reduced hours.
As Dave noted, while the business regained significant momentum during the latter stages of the fourth quarter October and November were particularly challenged first by staffing issues and then the prominence of the COVID-19 Delta variant and our most penetrated markets.
This led to an increase in both temporary closures as well as reduced operating hours, which we estimate negatively impacted the fourth quarter by approximately $8 million in revenue.
This increase in temporary closures combined with onetime staffing incentives also impacted our restaurant level margins during the fourth quarter.
Restaurant contribution margin for the fourth quarter was 12, 4% compared to 13, 6% margin during the fourth quarter of 2020.
For the full year contribution margin increased 400 basis points versus prior year to 15, 9%.
Cost of goods sold was 25, 9% of sales in the fourth quarter, an increase of 70 basis points from last year the.
The increase during the fourth quarter was predominantly driven by ongoing market challenges in supply chain and a volatile commodity environment.
Our cost of goods sold inflation was approximately 8% during the quarter largely driven by our protein basket specifically the price of chicken breasts are full year cost of goods sold was 25, 2% and roughly flat versus 2020.
Labor costs for the quarter was 33, 2% of sales, which is the 110 basis points above last year.
Fourth quarter Labor costs include approximately $1 1 million of one time expenses related to retention hiring and COVID-19 related expenses, such as vaccination and sick pay.
In total our core wage inflation for the fourth quarter was approximately 9% for the.
Full year labor costs declined 130 basis points as a percentage of sales to 31, 2%.
Other operating costs for the quarter were 18, 4% of sales, which was essentially flat to last year given is similar mixed in our delivery business.
And was 17, 9% of sales for the full year.
Delivery fees were five 9% of sales in the fourth quarter compared to five 7% in the fourth quarter of last year.
G&A for the quarter was 11, 4%, sorry, $11 4 million, which was essentially flat to last year G&A includes noncash stock based compensation of 700000 during the fourth quarter compared to 600000 last year.
GAAP net loss for the fourth quarter was $4 7 million or 10 cents per diluted share compared to a net loss of $3 8 million last year or <unk> <unk> per diluted share.
We also reported net income on an adjusted basis, which adjust for the impact of impairment divestitures and closures.
Excluding these adjustments our fourth quarter net loss was $2 5 million or <unk> <unk> per diluted share compared to a net loss of $2 3 million or <unk> <unk> per diluted share last year as.
As a reminder, our methodology for calculating adjusted net income no longer include a tax adjustment related to the valuation allowance and the impact on our effective tax rate.
Expect our effective tax rate to remain low at least through 2022, and we do not expect to be a cash tax payer for the foreseeable future given our sizable NOL and other tax credit in total of over $150 million.
Now I'd like to take a moment to talk about the first quarter of 2022 with a bridge to our expectations for the full year.
As you have no doubt hard external disruptions have had an impact on many of our peers in the first quarter to date and we are no different. In addition, it's worth noting that our first quarter is seasonally our lowest due to our geographic concentration in cold weather locations, even without the added impact upon the crime staffing challenges.
And elevated levels of inflation.
Despite these near term challenges we are extremely optimistic about our opportunities ahead of us. This year. We are proud of our successes in 2021, particularly the strength we demonstrated in our unit economic model, which set the scene for our strategic focus areas in 2022, including our accelerated unit growth.
Now, let's start first with our expectations from a revenue perspective for the first quarter, we anticipate total revenues to range between 110 and $113 million.
Lucid mid single digit comparable restaurant sales growth.
As David indicated the onset of omicron variance during the beginning of 2020 Q had a material impact on our business in January and to a lesser extent in February .
However, just as we saw in the fourth quarter with the Delta variant comparable restaurant sales have rebounded as omicron has subsided.
Comp restaurant sales increased two 7% at company owned locations and physical January and have increased seven 5% thus far in February .
It's also worth noting that with the successful close of our franchise transaction with Warner Goodies are prior California locations are no longer included in restaurant revenue as of mid January and and instead will be reported in franchise royalties we.
We estimate that the net impact in the first quarter from a total revenue perspective is $4 million impact to EBITDA will be negligible in 2022 and accretive as the territory is built out thereafter.
Now, let's look at our cost expectations.
We reiterate our target of 20% restaurant level margins by 2024, driven by acceleration of our average unit volume continued labor efficiencies and a return to a more normalized level of food inflation.
There is no question that the first quarter will be impacted by omicron and inflationary pressures.
Pounded by our historic seasonality.
And we anticipate Q1 of 2022 restaurant level contribution margins.
7% to 9%.
However, we expect meaningful acceleration of margin as the year goes on culminating in our restaurant level margins in the high teens during the back half of the year.
So the components of restaurant level of expense.
With cost of goods sold.
Our cost of goods sold margin is expected to be unusually high in the first quarter of 2022, given a reset in some of our annual food contracts and industrywide record levels of inflation, particularly in protein.
That cogs of 28% to 29% this quarter with a linear progression back to our long term goal of 25% by the second half of the year.
Our Cogs in the short term is particularly impacted by inflation, we're seeing in protein, which accounts for approximately a quarter of our cost of goods sold more.
Likely we are seeing outside can get inflation in boneless chicken breasts, which makes up about half of our protein expense.
Despite these challenges we continue to be encouraged by our strong vendor partnerships and ability to opportunistically secure shorter term inventory at more favorable rates in the spot market.
Like Cogs, we expect labor to be unusually high during the first quarter between 33, and 34% of sales driven by sales deleverage during our seasonally low first quarter and staffing inefficiencies and COVID-19 related temporarily closed restaurants.
We are forecasting low double digit wage inflation for the first quarter and remaining at elevated levels throughout the year with modest sequential improvement.
Even with the anticipated wage inflation, we are forecasting a return to our targeted labor costs up 30% of sales in the second quarter. This year driven by sales leverage as well as efficiencies gained from our steamer initiative, which will now be complete its national rollout during Q1.
Underlying our margin forecast is the anticipation of an additional price increase to our core menu during the second quarter. We firmly believe the company has meaningful pricing power, particularly as the majority of our pricing actions. During the past few years have been confined to the premium paid by our third party delivery guests.
As you can imagine it gives and takes as pricing increases roll on and others roll off but we expect the effective pricing to be around seven 5% in the first quarter, increasing to about 9% to 10% during the second quarter and leveling off between 6% to 8% during the balance of the year.
We anticipate general and administrative expense of approximately $12 million in the first quarter inclusive of stock based compensation.
We expect stock based compensation to be around $1 2 million.
Switching to development, we continue to see excellent performance from our new restaurants, and anticipate seven openings during the first quarter, primarily company owned restaurants.
For the full year, we expect approximately 35 system wide openings with roughly 70% of openings. The company operated we do expect the pipeline pipeline to be somewhat back loaded with roughly a third of our 2020 openings occurring in the fourth quarter.
From the restaurant closure perspective, while we are confident that we are now at the end of closures related to real estate and it is not well suited for today's current environment.
In the first quarter, we anticipate two closures, one which can side. It was the California transaction and one mall based location in the D C Metro area.
We continue to believe that our best use of capital is investing in new unit development, particularly given the strong performance of our recent classes, which are on track to support our target of 30% cash on cash return at new restaurants for.
For 2022, we anticipate $30 million to $34 million in capital spend of which roughly two thirds were support new unit development.
Despite the inflation, we are seeing in construction and raw materials for development.
Expect average net investment for new locations to be at or just above 800000 per location. We expect the remainder of our capital to be allocated to ongoing restaurant maintenance and continued investments in technology to enhance both our digital business and our guest engagement.
Our accelerated unit growth is supported by a strong balance sheet at.
At the end of fiscal 2021, we had cash and cash equivalents of $2 3 million and a total debt balance of approximately $22 3 million.
We anticipate that our 2022 restaurants develop needs.
Development needs will be funded through our operating cash flow. However, during our seasonally low Q1, we expect to utilize a portion of our revolver capacity to fund working capital and development needs.
With that I would like to turn the call back over to Dave for final remarks.
2021 was an extremely successful year.
Despite the well documented industry challenges related to COVID-19 staffing challenges and increases in inflation.
Well, there really isn't always as we enter 2022 fundamental business has never been stronger with significant improvements in our culinary innovation digital and marketing capabilities and operating model efficiencies all bolstered by a value proposition that allows us to mitigate the current inflationary environment. Most importantly, the brand is now embarking on.
The unit growth with the model perfectly suited for today's environment witnessed by the strength of recent classes. The expected opening of seven systems are in rotation system wide. This first quarter and increased momentum smart franchise sales.
Noodles <unk> company is well positioned to be one of them.
Year growth stories in the restaurant industry and I look forward to sharing our success with you in 2022 and beyond.
That Alexander please open the lines for Q&A.
Thank you at this time I would like to inform everyone in order to ask a question press star one on your telephone keypad again that is star one to ask a question.
We have your first question from Jack Corrigan wait till the Securities. Your line is open.
Hey, guys. Thanks for taking the question.
My first one is just on what's implied by your same store sales guidance of mid single digits.
In the first quarter, if I'm doing the math right with two 7% in January and seven 5% in February .
You sort of already at mid single digits, So does that imply.
Mid single digits in March.
Alright, and I guess why wouldn't we see an acceleration from here.
Yes, Jack we certainly think that there's opportunity for acceleration from here the only aspect that we'd like to keep in mind is the weather I mean, we saw.
The upper Midwest patterns of our restaurants in the Rocky Mountains could have an impact on the business and just knowing the volatility and lenders want to respect that that has the potential to impact March as well.
Great. Thanks, that's helpful.
And then I guess the second question is on your staffing levels.
Is there any way you can quantify where your staffing levels are currently versus maybe first 19 or versus.
What you think full staffing would be at this point for these volumes and I guess, how much is that limiting your sales sales still currently.
Yes, it would take the Liberty to you.
Very minimal so its a very small percentage of our restaurants that are now critically Schwartz app.
Of the woods, yet by any stretch, but at the same time that momentum.
Extraordinary and the retention of that team has been great I think one thing Jack that we point to that we're particularly proud of it.
Looking at recovery staffing side, our Cook times actually thus far in 2022 are the best they've been in the history of the company.
So we know <unk> got staffing to a much better level, but we're executing at a very high level part of that has to do with the steamer initiative for sure, but a big part of the staffing company not quite to where we're 100% I remember getting much closer.
Great. Thanks, that's really helpful. And then just last one on development.
You had elevated store closure in 'twenty, one and you said you expect to in the first quarter is that the only closures do you expect for all of 'twenty two.
Yes.
Oh I'm sorry go ahead.
Oh No you go ahead, sorry, yes.
Yeah, we're fine with that so there were some sites that from a financial perspective, it makes sense for us.
Wait until the lease was over <unk>.
And then they close that we're now at the end of that.
So.
Central for one or two where the developer is something happening or we see it we see a different opportunity frontier relocation or something.
Down the road like that that as long as possible.
Kind of along those closures related to really just the review of the portfolio and how house.
Trade area dynamics of the consumer needs change.
No.
This is an example was the mall locations.
It's hard to close here in Q1.
Great. Thanks for the questions.
We have your next question from Andrew <unk> with BMO capital markets. Your line is open.
Hey, good afternoon.
First question you mentioned some of the inefficiencies as well as some onetime expenses in the quarter.
Can you quantify how much the one time.
Stuff was in the quarter and then is there any assumption for <unk> given the guidance you gave as well for kind of not permanent costs.
Sure for the quarter the onetime impact that we had was particularly showed up in our labor margins was $1 1 million that was related to onetime staffing such as the retention bonuses sign on bonuses, but also related to.
<unk> because it related sick taher vaccine.
From a go forward basis in our Q1 guidance. There is no expectation for any of those to continue over one time charges, we don't anticipate that to be throughout the duration of next year.
Oh, sorry this year.
Yes got it okay. So that's helpful. And then obviously understand the kind of regional pressures in some of your key areas in the upper Midwest in the Rockies I guess I'm just curious.
What are the trends look like and maybe the rest of the country. I mean did you see just as we're kind of thinking about understanding a temporary this isn't those types of things just kind of maybe more durability at some of the other regions could you speak to some of those trends. Please.
So as you look at the mid Atlantic.
The southwest those markets that were impacted by Delta one thing that was encouraging that they carried over the momentum Andrew from what we've seen in Q3.
Pretty much throughout all of Q4.
So they didn't actually start seeing the impacts of our business until here.
Okay.
Good morning.
Which gives us added confidence in terms of the overall trajectory of the business.
I don't know any momentum.
Got it Okay and then.
My last question is just on the menu. So recently here just announced some of the new salads.
On the menu.
You talked about Linguine recently, we've seen trough, Matt can you just feels like the menu news paces kind of accelerated here is that right is that intentional and maybe some holdover from.
In the last 24 months, where maybe that you know the environment wasn't as can do so I'm just kind of curious how you're thinking about further opportunities across the menu as well kind of rolling forward here. Thanks.
I mean, let's just start with just the overall power.
Think that warehouses great casuals.
For the brand in terms of expanding the overall reach.
So many different.
What types of cases and guest profiles.
That's why it has been in test for a long time was something that we've been in test for a while as well this is ultimately.
Pretty deliberate disciplined process, where we have lots of lots of different items in the past.
And you can expect to continue to see that type of information.
Really for the foreseeable future here in terms of every three or four months.
Maggie news as we do it we take things off the menu as well to ensure that we don't sacrifice operational complexity and I will say they will it will be pulse salary fresh category. We're excited about it.
He is the one that as we look at 2022 a week.
Great driver and another reason, we have such great confidence.
Throughout this year.
Got it. Thank you very much I'll go ahead and pass it on.
We have your next question from Andy Barish with Jefferies. Your line is open.
Hey, guys wanted to.
Just kind of sense.
With me on the marketing side.
To clarify did you say with with the with the Covid surge exactly.
Pull back on what you would've expected from a marketing side and then.
I think it's the massive ping an.
The creative is supposed to have Bob a little bit in 'twenty. Two can you kind of let us know how that.
Kicks off in the in the <unk> beyond just product news.
Yes, I think youll see youll see things shift from being more transactional which is what we saw during the first part of Covid and then New York cracked it wasn't that we pulled back significantly from a marketing perspective, but there was a little bit of a muted nature to it given all the staffing challenges that you saw throughout the industry.
As well as well as the impact of the Delta.
What you will see as we look into 2022 is awesome harnessed the power of all the data insights we Pat.
Yes.
<unk> remains of the digital assets, which you will see those continuing to evolve and improve as well in general just making the brand more visible.
Pointing out of the open spread aspects from our cooking methodology to how we approach people to service value proposition to the variety of them.
This brand has so many great attributes and elements to it that we still feel we're just scratching the surface in terms of.
Consumers really truly knowing that.
What's great about this data that.
We've got.
The improvements we've made that route.
Our guest engagement as well as our horse platform is we're so confident that the activation is going to be honest.
<unk> as well.
Got it.
And then.
Carl on that on the G&A side of things I guess.
Is that $12 million, you've talked about in the <unk> a pretty good run rate.
Can you give any any noticeable savings from you know, California, now being being franchise.
With that market kind of.
Probably needing some regional support out here given it was it was not contiguous to some other areas.
Yeah, that's right. So first from a run rate perspective.
It assumed that.
Somewhat.
Lower quarter than the full year, if you think about annualized in the quarters, just given some of the cadence of our historical spend so I would anticipate that <unk> and beyond we'd see a little bit.
Elevated G&A expense in terms of California, there is a net benefit there certainly.
I would expect that that is baked into our number.
Doesn't help us streamline some of the operations.
Okay. Thanks, guys.
We have your next question from James Rutherford with Steve.
Your line is open.
Thanks for taking my questions, Hey, Dave Hey, Carl I Wonder if they get they get a little bit on the margin guidance for the one <unk> and most importantly, the ramp.
Through into the back half of the year starting on the on the Cogs side of it I think I heard you say that youre expecting 28% to 20% Cogs margin in the first quarter, then back to 25% in the back half of the year.
We know your menu price assumptions for each quarter. What are you assuming on the commodity inflation front to get you back to that 25% Cogs margin by the back half of the year.
Sure James Let me walk you through a little bit. So first of all we are continuing to see this inflation pressure on our cost of food, it's really driven by the commodity price volatility staffing pressures and as I mentioned, particularly protein.
The first quarter, we do see elevated levels of inflation, where we're at.
It's meeting right now is around 18%.
These challenges were seeing ongoing and we're still seeing some elevated pricing even at.
Where we are today, particularly in protein.
In terms of the go forward, there's really two elements here first if the pricing action that we're anticipating to take we're looking to take about two sorry about that 3% to 4% pricing action in the second quarter. So that's going to be a key offset but in terms of getting back to normal looks like in the second half you can imply.
Mid to high single digit levels of inflation jumped in the second half that will get us back to normal levels.
Okay.
Thanks for that flipping over to the wage piece of it.
I have my notes correct I think wage inflation was around mid single digits last quarter.
I think you said high single digits nine ish percent this quarter and then guided low double for the first quarter correct me if I'm wrong on those numbers, but where do you think we find the top end of that it sounds like most of your restaurants are fully staff based on what Dave was saying earlier, what are you predicting for wage inflation, how that progresses through the year.
So first of all Youre correct on those assumptions.
That's what we've seen so far and that's what we're anticipating in the first quarter.
We are anticipating that wage inflation for the most part continues there will be some relief as you go throughout the year.
But we're anticipating that that remains at elevated levels a lot of that is due to re hire rates. In addition to increasing our waistband as we remain competitive in each of these markets.
Thinking about what's going to get us back to that 30% target by the second half of the year. It's really three things first it's ongoing efficiencies that we're now anniversarying and having a full run rate, particularly our steamers, which youre going to complete in this quarter.
Secondly, there were some onetime associated cost with our labor force in 2021, and we are no longer going to.
Anticipating this year and then finally, if our sales leverage as you look at the continuing growth in traffic and pricing, we are anticipating sales, helping to drive that 30% target cost for labor.
Very helpful. Thank you if I could slip in one more.
Dave on the unit growth expectation for next year, which I think is still 10%.
Conceptually what kind of mix do you think in that number.
<unk>, but between kind of company owned and franchise and what sort of visibility do you have into into that growth acceleration.
Yeah visibility continues to strengthen and we're really encouraged by just the sheer number of quality that we're seeing come through the pipeline.
Obviously, the development environments will be volatile, but we're very pleased with what we're seeing there.
Overall, the pace can be a little bit dependent upon how we see that the franchise can go you can change the accelerate growth momentum.
Momentum there what do you expect the majority of the openings in 2023.
Company owned has been shifting in 2024 and beyond to be closer to a 50 50 mix in terms of.
Franchise openings.
Excellent. Thank you guys really appreciate the help.
Again, we had.
We have your next question from Nicole Miller with Piper Sandler Your line is open.
Thank you good afternoon.
Super quick on for Q.
What's the one 1 million labor investment you were talking about was that all in <unk>.
That's correct.
Okay and so.
The question is then on the 8 million dollar of sales impact from Micron.
Is the only store level margin impact that $1 1 million or did that hit other areas of the store level margin.
So first the $8 million was actually related to delta. So omicron as more of an impact that we saw in the first quarter, particularly January and February the Delta was the impact in the fourth quarter. So to your question. It was it was both the $8 million and then the associated flow through in addition to.
To labor inefficiencies for restaurants that were operating at partial hours plus the $1 1 million. So there was certainly a cause.
Compounding margin impact.
So the $1 1 million translates to 100 basis point. So if you didn't have.
These COVID-19 variance you know store level margin would've been 13, 4% instead of 12.4% just to put a finer point on it you're saying, there's there's other things that take into consideration it would've been even better than 13, 4%.
That's right Nicole so for that $8 million of rent.
The new impact that were related to partial closures, both full closures and partial day closures there.
Labour inefficiencies associated when Youre opening when Youre operating just a day parts are having to close intermittently. So I agree. There is there were other factors impacting labor as a result of the temporary closures.
Okay, I mean, I'm sure it's difficult to tease out, but if there is a number to throw out yeah, you know, let us know.
And what was the percent marketing and <unk>.
Fourth quarter marketing was just around 1% of which is consistent with what we've studied what we've seen in prior quarters as well.
Lower in terms of the absolute dollar spend versus what we had seen partially you actually saw.
The impact on the revenue side of Delta.
And I ask that then in the context of coming for the <unk> with all the conversation and guidance you've already.
Addressed at this point and assuming the marketing isn't changing too much any operating line.
The store level margin in total for <unk> barely going to be double digit I just wanted to make sure. We're on the same page before we hang up here is that is that the indication because you didn't really address occupancy and other operating costs.
Yes, Nicole that's.
That's about right, yes, that's correct. So we actually guided 79% in terms of <unk>.
Alright, thank you.
What kind of.
Hi, everybody at the historical seasonality, we have in our brand.
Yes.
<unk> hundred basis points lower margin perspective than what you see through the balance of the year.
So as we talked about on the call.
That Q1 margin guidance incorporates not just a pretty big seasonal impact that we have always had it but also because of that.
All of these elements that we've seen inflation perspective.
<unk>.
Right.
We expect this is going to materially improve throughout the course of 2022 and expect that we will be approaching.
Restaurant level margins.
Back half of the year here.
Just one last question on the subject and I realize it's a very challenging question, but yeah.
We couldn't absorb all the detail and just backup high level and say.
Gosh, you know, you're making a little bit less here than any other period. You know if you want to pick the same quarter different quarters, but for the same or different reasons right. It's a little bit of a question Mark is the delta between like Omicron market.
Say COVID-19 market conditions I think the Delta then it's just a commodity inflation can you slice and dice it that way and say, okay. That's 7%, 9% store level margin should be this yes.
Demand had been normalized.
And it should be this if commodities if you could keep pace with price action.
Yeah, I think we're gonna take care.
How we articulated a bit obviously expected a normal environment is around 25%.
Due to inflation and we expect that to be 28% to 29% so significant inflation here.
During Q1 that will alleviate a bit.
Not just through we expect some improvement rational and of course yeah.
Year, but also through the pricing actions that we're taking from a labor perspective again expectations between 33 temporary workers.
Always a bit higher in Q1 again from a seasonality perspective.
One is more related to just some of the inefficiencies throughout mccahon, we would expect that labor line.
Opportunity.
Actually leverage over the course of the balance of 2000.
And just very last question it could be a little challenging for franchisees with the sales being inconsistent and commodities being up like this what kind of conversations are you having with the current potential franchisees and how are you lending support.
Yes, very positive actually.
The impact that don't perhaps add on the business as well as local content.
These are totally multi unit operators that they're countering all of the sudden theyre gone.
They're good businesses well they are attracted to us because they see that pricing power and the value proposition. Most importantly, this is a track record of 30% plus cash on cash returns from our most recent classes.
Even before we're able to implement some potential cost savings.
So there are encountering the same challenges in their markets that we're seeing throughout the industry.
And if you look back in 2021 as a whole extremely strong year for us from a margin expansion.
<unk> expansion perspective, and we see the cadence through 2022.
We're mindful of as well.
There remains tremendous confidence around that.
Thank you.
Again, if you would like to ask a question. Please press star one on your telephone keypad again to ask a question that is star one to ask a question.
We have your next question from Todd Brooks with the Benchmark Company. Your line is open.
Hey, good afternoon, guys. Thanks for the questions.
Just couple of questions.
Questions here, one you bumped the AEP coal for.
Fiscal 'twenty four by another 50000 here, so 1.15 million.
You talk about what percent of the current base is above that.
Hurdle already and what the.
Our restaurant level operating margin profile of those stores will collect and are above the $1 5 million.
So Todd.
We have our existing restaurant base.
Anywhere from 30% to 35% that's already above that level.
And they are operating certainly above the 20%.
Contribution margin.
We were looking at this at $145 million of prior target.
Over 40% of our current locations were at that current level also and again operating at 20% contribution margin or above.
So with the increase in the vehicle.
Does the 20%.
Continuing for contribution margin just reflect.
Inflationary realities or because it.
It sounds like the base, that's already north of the $1 5 million, there's about a 20% target.
I don't know, if we'd say realities versus uncertain.
In terms of we feel that this concept.
Their margins.
It's really not just this.
This year, but beyond.
But just want to reflect that there is uncertainty in terms of the overall equation looks.
It looks like in 2023 and beyond.
So it really reflects that in terms of the overall confidence level.
The brick and mortar beyond this morning, its highest ever.
Okay, Great and then can you share with us.
Proceeds to the company from the sale of the 15 minutes to Warner Foods.
Now, it's something that we will be disclosing.
As Carl mentioned in terms of the overall impact.
As for EBIT perspective, relatively negligible for 2022, we're excited about in terms of this transaction is such a great established partner as they build out that territory will be meaningfully accretive I'm kind of across the board throughout our P&L with.
Proceeds very solid deal, but at the same time.
Not materially no.
I mean to move the needle significantly in terms of the overall balance sheet.
Okay, Great and then finally on the franchising pipeline.
Just you talked about maybe a little bit more of a corporate store mix to the 23 openings before getting to 50 50 now in 'twenty. Four is that just reflective of some lost momentum with discussions stood omicron or how would you how would you talk through that pipeline and the momentum that you would have around initial additional announcements here in the near term.
Yes, actually that was always our expectation.
Just given the realities.
As we sign on these new transactions.
Okay.
In 2022, two or three in 2023 as you build more and more momentum there is a waterfall effect.
Ultimately if that gets to.
Roughly 50, 50 split which is the math behind it.
It doesn't really happen until 2024.
So that was actually always the expectation was that we were not going to be able to kind of give that.
Disciplined.
Unit growth perspective until 2020.
Okay, and do you feel like omicron slowed down the ability.
For us to see more announcements in the.
In the near term as it just pushing out kind of closing deals. The reality is that everybody has to operate.
We don't think so.
We certainly recognize that.
During the staffing pressures, we've talked about I think we saw more of it.
During the staffing prices Todd.
Our operating partners that we were talking about there we're talking with prospective franchisees. They would typically have their own concepts.
During the stoppage prices if they wanted to make sure that they have under control.
We're probably a little bit different.
In terms of its been relatively short in terms of its impact.
We saw a significant spike quickly throughout the industry in January that come down.
Materially.
Almost completely subside here in February .
So that impact is very.
Very minimal.
Pretty quickly so momentum, we feel actually pretty strong.
Okay, great. Thanks for the questions.
I am showing no further questions at this time I would now like to turn the conference back to David for any closing remarks.
Yeah. Thanks, Alexander I appreciate everyone's time today and hope that you have a great evening. Thank you very much.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
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