Q1 2022 Noodles & Co Earnings Call
Yeah.
Good afternoon, and welcome to today's noodles <unk> company's first quarter 2022 earnings conference call.
All participants are now in a listen only mode.
After the presenters remarks, there'll be a question and answer session.
As a reminder, this call is being recorded.
I would now like to introduce noodles and company Chief Financial Officer, Carl Lukacs.
You may begin.
Thank you and good afternoon, everyone welcome to our first quarter 2022 earnings call here with me. This afternoon, Dave banning housing our Chief Executive Officer.
I'd like to start by going over a few regulatory matters. During your 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 differ materially from those projections due to a number of risks and uncertainties. The safe Harbor statement in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for its 2021 fiscal year and subsequent filings with the SEC.
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 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 2021 fiscal year and subsequent filings. We have made these documents contain and identify important factors that could cause actual results to differ.
Clearly from those contained in our projections or forward looking statements.
During the call we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.
A reconciliation of these measures to the most directly comparable GAAP measures is available on our first quarter 2022 earnings release and our supplemental information.
Now I would like to turn it over to Dave banning houses, our Chief Executive Officer.
Thanks, Karl and good afternoon, everyone I'm excited to share with you our results for Q1, which included a recapturing of the momentum we have gained through the majority of 2021 as well as a positive inflection point in our unit growth trajectory.
Noodles <unk> company has made significant strides over the past few years and with a temporary disruption of COVID-19 related closures seemingly behind us we feel the company is well positioned to accelerate growth meaningfully through the balance of 2022 and beyond.
While the first two months of Q1 were impacted by both our historical seasonality as well as temporary closures due to the Covid variant the company quickly regain momentum as we entered March culminating in average unit volumes for the March fiscal period of $135 million $170000 above.
Pre COVID-19 2019 levels.
This momentum has continued thus far in Q2 with quarter to date average unit volumes cresting, one $4 million.
As our restaurant base has regained momentum. We also we're excited that the success of our new units and the unit growth opportunity ahead.
We opened seven restaurants system wide during the first quarter, the largest number of new openings in a quarter since 2016.
More importantly, these restaurants as a class are already exceeding our internal projections and performing well above company average.
As a reminder, our target is to achieve a 30% plus cash on cash return at new company locations supported by our smaller square footage off premise oriented prototypes. The majority of which include our order ahead drive thru pickup windows.
Our classes of 2019 through 2021 continue to track towards these return objectives in the class of 2022, thus far has been even stronger.
Looking at our initial performance and accounting for typical honeymoon patterns of prior classes. We anticipate these restaurants will settle above $1.5 million and average unit volumes.
Ultimately, we believe that noodles <unk> company has the potential for at least 1500 units nationwide.
We continue to be a differentiated category leader with proven mass appeal in a wide variety of trade areas, both urban and suburban as well as strong residents both college and small towns.
We feel this growth opportunity is supported by our proven success in a wide variety of geographies with our top 30 restaurants spanning coast to coast amongst 20 different msas with representation from urban suburban collegiate and small town locations.
Additionally, as we exit the temporary disruption of Covid, we expect nearly 40% of our restaurants to meet our long term target of $1.5 million of the EV during the second quarter.
With significant opportunity in both infill and new markets. This mass appeal broadens our unit growth opportunity increases attracted Mr franchisees and mitigates risk and our growth strategy.
We continue to make progress towards increasing the franchise mix of our business as evidenced by the recent Refranchising of California with the agreement calling for 40, new locations to be opened during the next several years.
Finally, the variety inherent in our menu our strength in off premise and low entry level price point gives us the ability to win in a wide variety of consumer occasions and environments.
While we can't ignore the near term impact of the inflationary environment, which Karl will discuss shortly simply put I've never been more confident in the growth opportunity ahead of us.
This confidence is bolstered by the effectiveness of our strategies around menu innovation guest engagement and operations.
From a culinary perspective over the past several years, we have executed a robust pipeline of menu development, resulting in additions such as luchini noodles and toward aloni that have increased both the reach and frequency of our brand.
As an example of the effectiveness of these introductions healthier items now represent 13% of mix up from just about 10% a few years ago, while toward aloni continues to perform very strongly at 7% of guest mix.
Noodles <unk> company.
<unk> ability to redefine traditional expectations of noodles and pasta has allowed the brand to resonate with a wide variety of audiences.
And we feel our upcoming introduction linguini is particularly powerful representation of how our menu can meet several dietary preferences without sacrificing taste or flavor.
Linguine has the taste and texture of traditional linguine mineral and gets its name from having 56% last net carbs and 44% more protein than a traditional weed noodle.
The culinary formulation for link we need is a proprietary first of its kind offering that as a result of over a year of innovation and exclusive to noodles <unk> company.
Guest response has been fantastic and we're excited to launch link we nationwide next week.
Wildly wildly Wendy will be featured with our new light Lemon arms source with our made to order approach to culinary it can be substituted into any one of our dishes, allowing guests have the same great flavors they'd come to love from Nielsen company with significantly fewer carbs and much higher protein.
We believe link we need to be a transformational new menu introduction that could significantly expand our reach encourage more repeat visits and provide a great option for the growing lunch occasion.
As we did with toward OLED, we will leverage our guest engagement program to give rewards members an exclusive opportunity to try linguini before being available to all guests beginning on may 18th.
Our rewards program remains an important pillar of our overall guest engagement strategy.
And with over 4 million members, which compares favorably on a per unit basis with competitors, we continue to garner greater insights to foster more personalized relationships with our guests.
Noodles rewards continues to be supported by our top tier detailed digital ecosystem.
With digital sales accounting for 58% of sales during the first quarter.
As our rewards program and digital asset strengthen we will also soon be launching our new brand positioning uncommon goodness.
Through uncommon goodness noodles is bringing its purpose to life by elevating uncommon goodness that has been core to the brand for more than 25 years.
How we treat our team members and create a unique guest experience to how we carefully select ingredients and positively impact the communities we serve.
Noodles infuses uncommon goodness into everything we do.
At the core of this brand positioning our operations and people and I'm incredibly proud of how our team has navigated the recent environment.
Nothing has improved dramatically over the past few months with nearly all of our restaurants now returned to full operating hours.
Accordingly, as we have navigated this environment. We've also gained efficiencies in our operating model through equipment and operational initiatives.
Resulting in significant improvements in throughput as well as the reduction in the labor hours needed to provide a great guest experience.
We've seen a 32nd reduction in Cook times on our restaurants through these initiatives as well as an over 15% increase in sales per labor hour since their implementation.
These efficiencies will be particularly advantageous as we navigate the current inflationary environment.
Again noodles <unk> company as a brand has never been better positioned to accelerate growth over.
Over the past few years, we've made tremendous strides in nearly every aspect of our business for menu innovation and guest engagement to new unit economics and bench strength.
As I look at the balance of 2022, I feel we have an incredibly strong slate of initiatives headlined by the launch of Linguine and our new brand positioning.
Combined with the strength of our team and new unit pipeline.
Confident that we have not only regain the momentum that was interrupted by the delta in Omaha variance, but we are also approaching an inflection point and realizing the company's immense potential.
I'll now turn it over to Carl to discuss in more depth, our financial results and expectations within 2022.
Thank you, Dave and good afternoon, everyone I'm pleased to share our first quarter results, which reflect accelerated momentum throughout the quarter as we move further away from Covid and staffing related volatility in.
In terms of the financial highlights total revenue for the first quarter increased two 7% to $112 $6 million compared to last year comparable restaurant sales increased six 4% system wide comprised of a five 3% increase at company owned restaurants and 11, 9%.
Kris at franchise restaurants, the gap between franchise and company comparable restaurant sales is due to less impact from omicron geographically with franchise <unk> now coming more in line with company averages.
Our revenue for the quarter was adversely impacted by Covid related temporary closures and reduced operating hours predominantly during the earlier part of the quarter, which we estimate was approximately $4 million.
Additionally, the year over year impact from the sale of our California locations with estimated and a $3 million impact to revenue which include lost revenue net of royalty payments received as mentioned before the California transaction will have negligible impact on our full year 2022, EBITDA. However.
Is expected to be meaningfully accretive as the market grows and as a catalyst for future franchise growth.
Underlying our revenue growth our average unit volumes were 1.25 million for the quarter, a six 8% increase from last year, and a 13, 3% increase versus pre COVID-19 levels. In 2019, specifically in March we reported <unk> of 1.35 million driven by a significant decline.
<unk> related temporarily reduced operating hours in addition to our typical seasonal sales lift.
We are pleased to see that build further accelerated into April reaching one 4 million, which represents about 18% over 2019.
Overall, we still feel very positive about our economic model and our ability to leverage sales momentum throughout the P&L for the first quarter restaurant contribution margin was nine 7% compared to 13, 6% during the first quarter of 2021, representing a variance of 390 basis points.
Within that variance of 150 basis points is a one time revenue impact from temporary closures. In addition to labor and Cogs inefficiencies related to those closures.
Our first quarter contribution margin was further impacted by 300 basis points and our cost of goods sold which increased to 28% of sales from our historical average of 25% of sales.
The inflationary environment has pressured many areas of our commodity basket, although as a reminder, the primary ingredients in our dry pasta is durum wheat, which represent 10% of our Cogs and has not been impacted by the current disruption in Europe to the same extent as other wheat markets.
The more material inflation and our food basket has been within protein, particularly chicken.
Chicken is our number one spend item and our high quality boneless all white chicken meat breast is an add on chosen by over 50% of our guests for their dishes.
This chicken market has been particularly challenging over the past few months, including the inability to contract prices further into the year as we normally would do this has resulted in our Q1 chicken cost being approximately 70% higher than prior year with the expectation that a nearly 80% cost increase during the second.
Quarter we.
We anticipate that the back half of the year will include meaningful relief from these unprecedented cost levels and we have already seen green shoots and then non Brent chicken meat market. In addition to pricing benefits from normal seasonality. During the summer we are continuing to make strong progress in identifying and executing operational efficiencies.
With the support of our long standing vendors to reduce food costs within our restaurants.
As a further mitigate to elevated chicken prices earlier. This week, we implemented a temporary $1 surcharge on our chicken menu prices.
We view this temporary surcharge as one time and fairly short lived as the market is expected to normal normalized reasonably soon.
We are fortunate that we maintain a strong value proposition and pricing power with an attractive entry level price point of around $7.
This has allowed us to take additional price without meaningful guest resistance bolstered by the fact that our core price has been relatively stable. During the last few years as most of our pricing increases have been concentrated on third party delivery.
For the full second quarter, we anticipate our effective price to be just above 10% inclusive of the chicken surcharge.
Pair with seven 5% during the first quarter.
Still with the unprecedented inflation in our commodity basket, we expect cogs to be approximately 28% of sales during the second quarter before easing during the balance of the year.
Turning to our cost of labor labor costs for the quarter were 32, 3% of sales, which is 50 basis points above last year.
While the first quarter labor costs did not include any one time expenses. Our results were impacted by labor inefficiencies for COVID-19 related temporary closures.
In March, which we expect will be more indicative of our second quarter performance given more normal seasonality as well as the significant reduction in temporary closures are labor costs costs were closer to our typical labor expense of 30%.
Our operating costs for the quarter were $19, 9% of sales compared to 18, 8% in prior years.
This increase was driven primarily by delivery fees, which increased 50 basis points to six 2% of sales.
Additionally, we were impacted by leap deleverage from temporary closures during the first half of Q1 as well as increased utility costs.
We expect other operating costs between 17.5% and 18% of sales in the second quarter, driven by sales leverage and a continued investment in our third party delivery channel.
With additional leverage anticipated in the occupancy expense line, we anticipate the second quarter restaurant level margins will be approximately 16%.
G&A for the first quarter was $11 $8 million compared to $10 $9 million last year.
The increase was driven by a return to travel and regular operating activities compared to last year G&A.
G&A included noncash stock based compensation of $1.2 million during the first quarter compared to $800000 last year.
For the second quarter, we anticipate G&A approximately in line with our spend last year, which was $13 million.
Our G&A forecast for the second quarter is inclusive of the anticipated marketing support for our culinary launch and Linguine and our new brand positioning beginning next week. In addition to $1.6 million of non stock comp based compensation expense.
GAAP net loss for the first quarter was $6 4 million or 14 cents per diluted share.
Paired to a net loss of 2 million last year or four cents per diluted share.
We also report net income on an adjusted basis, which adjusts for the impact of impairment divestitures and closures. Excluding these adjustments our first quarter net loss was 5.8 million or <unk> 13 per diluted share compared to a net loss of $1 million or two cents per diluted share last year. We.
We expect our effective tax rate to remain relatively low at least through 2022, and we do not expect to be a cash taxpayer for the foreseeable future given our sizable NOL and other tax credits of over $150 million.
Switching to our outlook for the rest of the year through April we have seen continued strength in our average unit volume growth and expect volumes to remain strong throughout the second quarter.
As a result for the second quarter, we anticipate total revenue to range between 130 and $133 million and comparable sales in the mid single digits.
As Dave noted during the quarter, we opened seven new locations system wide five of which were company owned the most openings that we have seen in a quarter since 2016, we.
We continue to anticipate 35, new restaurants to open system wide for the full year, representing 8% unit growth with approximately 70% of openings to be company owned and 30% at franchise locations.
As we discussed last quarter, we do expect the balance of the years unit growth to be somewhat back loaded with 45 openings in Q2 for.
For the full year, we expect $30 million to $34 million of capital expense supporting New unit growth and continued innovation on our web site and mobile App.
Turning to the balance sheet at quarter end, we had cash and cash equivalent of $1 $6 million and a total debt balance of approximately $35 $3 million.
Our first quarter cash flow included expensive related expenses related to new unit opens openings during the first quarter as well as typical timing and seasonality of payments.
We expect to produce positive free cash flow throughout the remainder of 2022, and our strong liquidity position will provide ample room to meet our growth objectives.
With that I would like to turn the call back over to Dave for final remarks.
Thanks Carl.
One final note I'd like to make is that I recently had the opportunity to meet with nearly all of our general managers in the field.
And I came away energized by our bench strength and the passion quality bar leaders, we have throughout the organization as we accelerate growth.
As onetime business disruption is behind us I can confidently say noodles <unk> company is better positioned than ever to become one of the premier growth stories in the restaurant industry and.
And I look forward to the balance of 2022 and beyond with.
With that please open the lines for Q&A.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby we compile the Q&A roster and once again that is star one if you'd like to ask a question and our first question comes from Jake.
Bartlett from <unk> Securities.
Your line is now open.
Great. Thanks for thanks for taking the question I appreciate it light first is on on the cadence of same store sales in may.
What I'm hearing is that the same store sales maybe average weekly sales growth are diverging in some way, but I wanted to just focusing on the same store sales.
You would provided what they were in January and kind of on court date or month to date in February last time, you reported it looks like if there's a deceleration in March.
Yet the average weekly sales growth seems seems strong and then what I'm hearing just the guidance for the for the second quarter looks like.
Indian a deceleration from there and so what I'm just wondering what the cadence on the improvement I would've thought that given the less.
Exclusions that you would've seen in March and now in April those two numbers would have gone up but maybe it's has do with compares just help us understand the trajectory of the business from the from a same store sales side, it's hard to see.
And instead of sharing a theory there would be helpful. Yeah, Jake first and foremost we unequivocally believe that we're actually seeing sequential and continued improvement and not deceleration of any shape or form.
We find that the year over year, one year comparison remains somewhat challenging and volatile based on some of the just volatility that you saw throughout 2021. So how we look at it first office I would look at a three year growth so looking versus pre COVID-19 numbers and we'll see you soon.
Yeah.
Okay.
Okay.
Okay.
15% during March and then adds accelerated as Carl mentioned to about 18% here in April .
Even within April we're seeing continued momentum in that accelerate as well from an average unit volume perspective to your point part of that seasonality, but.
But we have seen those continue to improve and accelerate even throughout April as well specific to the year over year. You are correct in terms of there was absolute one year same store sales was a little bit lower in March that's reflective of much more difficult comparisons why theyre being a little bit different as well.
Similar thing in April in terms of same store sales, thus far around 4%, we expect and are very confident that youre going to see that number continue to improve as we go through the balance of Q2.
As you see a little bit more pricing action in play and then very excited about the impact of both linguine can have as well as our uncommon goodness brand repositioning rollout. So ultimately we look at that three year growth Jake and we see that just continue to accelerate week in week out overall fundamental underlying mo.
Mentum into business is actually we believe accelerating certainly not decelerating.
Great. That's really helpful. And then gave you touched on it but the Linguine and I think you've made the comment that it is it's been tested and you've seen the strongest response, where I think particularly been stronger than the the Zeus.
And we are we know what what happened in the second quarter of 18, when those were long so maybe give us some more detail on how those how the linguini has tested and maybe I don't know what kind of impact you think it could have.
Yes, certainly I can either very meaningful impact on this business somewhat similar to what we saw with <unk>, which as a reminder, that brought a lot of people back into the brand really showcased our ability to meet different dietary preferences, while maintaining the soul of the brand what makes linguine. So special.
Much lower neck, carbohydrates, 56% loss, 44% more protein, but the taste and the texture. Unlike zucchini is that of a traditional weed noodle. So what we're seeing in test now granted we have not put a ton of marketing muscle behind this yet it's much more.
For the national rollout.
But we are seeing an increase in frequency as people try that particular dish, that's very meaningful and I think what's particularly important is all of our metrics that we look at from a very detailed real time perspective. When you look at net promoter score overall satisfaction taste of food the Linguini Lemon Orange and you can.
Cindy anything, but the Linguini 11 arm is number one in our entire menu across all of those metrics. So the gas response, what we're seeing from you are not sacrificing flavor and taste to having a healthy healthy alternative with much less carbs much higher protein.
And gas are very much responding to that so as we roll that out first exclusive to rewards members next week and then a couple of weeks later go across the entire audience. We just feel it can be a very transformative introduction, so very excited for what banking deal.
Great and then last question Karl on the Cogs you hit the low end of your of the range of the guidance range of 28% to 29% in the quarter. So one what moved in the right direction. It seems like the news has generally been made bad, especially as chicken breast prices have gone up a lot. Since you gave that guidance. So I'm wondering what drove you to that.
Lauren I'd put that guidance range, and then what kind of visibility do you have I'm not sure for instance, you know how much you can contract with durum wheat or some of the other proteins, but Arkansas other other commodity exposures, but what how are you contracted now what's what's your wish we pay attention to at the margin here going forward.
Sure happy to so starting with the first quarter.
We ended up at the low end of our guidance because there has been some stabilization in our non protein Cogs basket.
And we're looking at now the ability to contract that through the second quarter from both a supply security perspective, but also for pricing. So my confidence in the second quarter Cogs forecast.
Which we guided to at 28%.
It's higher now because we are able to secure some of those shorter term pricing contracts.
On the flip ended that there is still volatility in the chicken market.
We are seeing that with outsized inflation.
Both in the first quarter and leading into the second quarter.
So that's one area, where we're remaining in.
In pricing that's more.
Variable in nature.
What I would say that with that we are beginning to see some green shoots in the chicken market, particularly in the non breast market. So we are seeing some prices come down and wing size in other areas of the bird and then secondly, just the chicken market overall the fundamentals are strong so we should be anticipating some normalized level of seasonality in that market coming into the.
Summer and prices coming down.
Great. Thank you so much.
Exactly.
And thank you and our next question comes from Andy Barish from Jefferies. Your line is now open.
Hey, guys. Just a couple of quick follow ups and then another one I may have missed the total basket inflation in the one Q Carl players.
Sure so to the the total inflation in the first quarter.
Was around 20% total inflation.
And as I mentioned in the non chicken ingredients of our Cogs basket, we have begun to see some stabilization and that was more in the low double digits, but just given the inflation, we've seen specifically in chicken and as a reminder, chicken is about 13% of our food basket.
And that was about 70% that's kind of outside the total inflation you see when you look at the total Cogs.
Now, let's add to that Andy I mean, clearly what we've seen in the last few months is that inflation as a whole is not necessarily going to be transitory.
But we are seeing stabilization across nearly every aspect of the basket and as Karl mentioned kind of that low double digits a.
Perspective.
Boneless chicken breasts and as a reminder, that we have an all white highest quality aspect of the bird that is the one area that we have seen just that volatility that's had an outsized impact on Q1 and weeks and we expect in Q2 as well that is a market that we would expect normalization as Carl said you see it in five.
As you see it in other parts of the chicken. So that is one area, we would expect to come down meaningfully over the balance of the year and return us closer to that lower double digit inflation, which I think we're all seeing its stabilizing but it's not necessarily going to be coming down.
Gotcha and then.
Oh.
The pricing Institute Q.
With 10% or so.
That include.
I know that kick in.
Temporary surcharge, but is is linguine going to carry a premium if that substituted for another.
Yes.
Yeah. It will carry a modest premium we certainly believe this dish is so amazing that we want to make sure that prices no impediment for people trying because when people try it they are really going to be amazed.
So there is some potential average check benefit that we would expect to see.
Probably pretty nominal though because Andy we do want to introduce it at a pretty low price because we think its something that once people try.
Really going to make them rethink how they view the carbohydrate out in protein aspect of noodles and pasta.
Gotcha and then just finally.
You know as we as you continue to reiterate your 'twenty four targets.
You mentioned, 40% of units are currently running at a million and a half or.
Bob.
What is the margin profile on those.
That group of stores. Please.
Yeah. The vast majority of those restaurants are north of the 20% target it would be a little bit shorter than 40% probably closer to 35% just based on some of this temporary chicken impact that they're not quite there for close to 20% as chicken normalizes.
We would see that those percentages should be pretty equal across.
Across that 40%.
Okay sounds good thanks, guys.
And thank you.
And our next question comes from Andrew Strauss Zick from BMO capital market.
Your line is now open.
Great. Thank you and thanks for taking the questions.
The first one for me I believe some of your key.
Geographies in particular, the Midwest had been lagging from a recovery perspective in prior quarters, and so I guess I'm just curious if that's still the case and if so how much is that holding back the avs the AB recovery relative to maybe where it would be if it was holding in with the rest of the system.
Yeah, that's a great question, Andrew and I'm glad you asked it it's there though there are the markets that particularly got impacted by Delta. If we return back to Q4 and some of the temporary closures. We had now that we are seeing ourselves fully staffed.
So our staffing levels are back to where they were pre COVID-19 is not a little bit better we're seeing that momentum come back quickly as well as as the regulatory environment becomes more favorable in those markets.
So the impact that they're having as we go from a million three 5 million four and beyond.
That has continued upside as those continued to gain back some of what they lost but they've already returned and are showing.
Showing great momentum over the last couple of months, so tough to quantify exactly because we're still only a couple of months into kind of being fully staffed but we certainly like what we're seeing from a one momentum perspective, and then being able to provide a tailwind as we go further into 'twenty two.
Okay, Great that's helpful and then.
I think the labor side came in.
Pretty meaningfully below where you guys were expecting as a percent of sales perspective, I guess I'm just curious on the efficiency side are you at this point, we are realizing the full extent of that or does that.
<unk>.
Is that what drove that favorability there or is there something else to consider.
Yeah, one aspect that drove the favorability. We also ended up on the high end of our revenue range as well one of the staffing environment improved so dramatically. So the staffing environment has improved we returned to full operating hours. We didn't have the inefficiencies that you saw throughout Q4 and part of Q1 as well.
So that is the largest driver is just returning to being.
Nearly fully staffed.
Additionally, we did finished the rollout of the steamers and they continue to just be tremendous asset for us as we said 32nd improvement in throughput as well as me and drove meaningful improvement in sales per labor hour.
That will actually carry on into Q2 and beyond because now just really Q2 will be the first quarter, where we have the full implementation of steamers across the entire country. So.
So you're getting a combination of staffing getting much better and now is being fully rolled out in the steamer initiatives and I think one thing. That's exciting is we're pretty early on but Andrew we see certainly paths for us to have kind of this next generation of operational improvements I'm looking at everything from prop and processes within the restaurant.
Our current equipment and how they could potentially be more efficient and even looking longer term and aspects like robotics, we feel that while we're still in the early stages in some of these things. We've got continued momentum and opportunity for us to continue to get more efficient on the labor side.
Okay. That's good.
Wait to hear and then my last one.
Yeah, I guess this is more philosophical because youre seeing youre, obviously very excited about the unit growth potential in the management of the business, but you know.
If we were to go into an environment, where the consumer were to soften up a bit would it change the timing I guess or the trajectory of how youre thinking about the unit growth or would you just state law.
Look the business is what it is let's think longer chairman and plow ahead, I guess, just philosophically, how you're thinking about that would be helpful. Thanks, Yeah, I mean, absolutely.
We see elevated construction costs, but from a consumer environment, we're still well positioned and as a reminder, we were positive same store sales throughout the 2008 2009 recession.
This brand our gas tends to be a little bit more insulated and with our entry level price point remaining at around $7. We feel that we've just got great momentum and ability to meet all of those different consumer type environments.
We are above 30% cash on cash return for this classes of 19 through 21 as well as 22, and we really like what we're seeing from the development pipeline perspective.
Unit prototype being smaller square footage incorporating those drive through order had drive through windows. The boxes, such that we don't feel that regardless of the environment.
We can do very strong from a cash on cash perspective, and while others might be pulling back that actually would give us even greater opportunity.
Better results and interestingly enough. If you go back in time.
Our best performing class of new restaurants prior to the classes of 19 through 21, and now 22, our best performing class Andrew was actually the class of 2009.
So they often actually gives you opportunity to have even better results.
Got it okay, great I'll pass it on thank you very much.
And thank you.
And if you would like to ask a question that is star one again, if you would like to ask a question that is star one and our next question comes from Todd Brooks from benchmark.
Hey, good afternoon, a couple of quick questions and then one bigger picture question if I may.
Carl you talked about.
On the non protein side of the basket.
See any opportunity to maybe hedge some of that through Q2, but with Dave's comments about.
Cost stabilizing, but not really expecting them to come down thoughts about hedging out further to kind of lock in a surety to the cost base.
Risk of maybe being wrong about seeing some easing in the second half of next Chipotle, Hi highlighted last night that.
That they expect stable kind of at these levels commodity basket cost across the year. So I guess thoughts on why we're not contracting further out on some of these categories that we can contract them.
Sure So what I would say is.
When we as we're seeing prices stabilize.
We're working with the vendors and they're getting more comfortable that we can contract not only the supply but also the pricing as we think about getting further into that stabilization.
To continue to have those conversations ongoing and think about our full pricing contract for the remainder of the year. We are starting to see some opportunities across certain areas of the basket, where we are able to go.
Longer duration right now securing second quarter really is optimal for us.
Okay. So it's point sorry, John go ahead.
And I was just going to say so it sounds like it's more of a supplier willingness to contract versus your desire to get into a contract potentially.
Our desire and our traditional approach has been to be about 12 months ahead in terms of contracting and that typically and historically has garnered more favorable pricing. We are doing that there are certain aspects of the basket that we've been able to do that we're being opportunistic and as the opportunity arises we are absolutely.
Following that same strategy, but it does ultimately tied kind of come round for commodity mycotic commodity type of approach, where there are certain ones like chicken, where we couldn't contracts perfect price, even if we wanted to but then there's others b malls would be an example, where we actually can add relatively favorable prices.
Okay Fair enough and then based on.
That outlook I know on the last call you had talked about the restaurant level margins improving over the course of the year and hopefully exiting back towards.
That high teens or better range with the.
A V recovery in the stores the slope of the recovery curve I mean, if we get back to 16% in Q2, how do you see that kind of exiting the year now as Youre looking forward with what you know on the cost side.
Yeah, I mean, ultimately, it's probably a little bit premature in terms of we still see enough volatility in inflation.
We don't know the duration of what that chicken surcharge relatively be knorr <unk>.
Not necessarily what the chicken prices will be while we do feel significant confidence in is the average unit volume growth from the fundamental demands at the brand and then the leverage that we're able to achieve throughout the balance of the P&L. When you look at that guidance for 16% restaurant level margin in Q2.
Two it really the only reason is even below prior year is cogs.
So as that inflation environment becomes more clear.
It will allow us to have a better answer but in terms of the balance of the P&L, we could not we feel extremely strong with where we're at and the ability to expand margins as Cogs normalizes.
Okay, great. Thanks, Steve and then a final and this is a bigger picture one for you.
Looking at the improvements in the operating model, which have been.
Certainly material over the last couple of years and yeah you'd be growth.
And you see the stock trading at kind of sub four times.
SAR 40 EBITDA estimate.
I guess, what the market is obviously not believing something.
Uh huh.
Obviously the market is not.
Believing something about about kind of the recovery potential in what youre driving here.
And you've got other properties being taken out of kind of eight to 10 times I guess, what's your thought on the disconnect between the public market valuation noodles.
Kind of acquisition values that you're seeing of properties being taken out of eight to 10 times and how do we unlock.
Some of that value for the noodles brand can we do it within the existing model.
Is that a transaction is the capital allocation just how are you thinking about kind of where we sit right now.
Well, certainly as a management team and as a board.
We have regular dialogue around how we can best create shareholder value.
Do feel that when you look at the desk connect.
Between where are prices today.
We recognize that the near term pressures that we saw with Delta variant as well as Omar Chron.
Certainly caused a air pocket in the trajectory of this business.
So while we absolutely.
Look at what are the what what.
We can do to create shareholder value. We do believe first and foremost is continue to open very high profitable high return on investment new units launched Linguine and the new uncommon goodness brand platform show that continued average unit volume momentum and March.
Momentum and that is our first priority.
But certainly it is something we look at in terms of the best ways to create shareholder value.
Okay. Thanks for that and then the final one for me.
Kind of the the real estate opening environment I know you've been back half loaded bye bye plans and you've got the seven opened in the first quarter can you just talk about the environment for equipment for materials and are you seeing at least the supply chain side of construction loosen up to give you enhanced confidence in hitting the full <unk>.
35 for the year.
Yeah, we have strong confidence in the overall pipeline Todd we're not seeing the material availability issues that we had seen during 2021.
You are still seeing some challenges in terms of.
Confidence in the timing of landlord delivery, particularly of new builds.
The reason why we still want to be cautious with the timing of the restaurants up the number but the timing of restaurants in 2000 and pointed to but overall availability actually is very strong and our 2023 pipeline is.
Is well above where we were last year.
In terms of several units that have already gone through lease.
As well as the number of L. O I's interactive significantly higher than where we were last year at this time so.
So continue to have strong confidence, it's not the best environment, but as people are.
Pulling back we actually see it as even greater opportunity.
Okay, great. Thanks, Dave.
And thank you and we have a follow up question from Jake Bartlett for a Jewish securities.
Your line is now open.
Thank you and I just wanted to ask this question in a public forum. So we don't Miss it but could you give us what what the traffic and the mix was in the quarter.
Sure.
So as they look at.
The total comp I'm talking company for Q1.
<unk> was five 3% and then the pricing for the quarter was about seven 5%. So there was a slight decline in traffic.
Year over year, as you're thinking about the comparable particularly in March and with the omicron impact that we had in the earlier part of the quarter, Yeah and mix relatively negligible.
As a reminder, as a way to account for traffic Jake is not pure transaction count, it's actually number of entrees sold.
So as we see still digital business as you saw still incredibly strong it as we start seeing return to in restaurant we've.
We've already accounted for we already account for entrees in terms of count and traffic counts.
So one reason why overall mix shift.
Pretty negligible in Q1.
Great. Thanks, and then actually one other question on on the pricing do you expect on the menu pricing you expect in the second quarter and that includes the $1 surcharge you you mentioned that 50% of orders get get.
Get chicken until he gets 50% of the orders we get a $1 surcharge. So that seems like a like a pretty big price increase built into that so so so the question is if you could disaggregate that that 10% for us what is what is the surcharge impacting that and then what other I believe you expect it to take just menu pricing.
And the rest of the menu in the second quarter anyway. So just what size of the increase there there and then and then also just what you expect pricing to be in the third and the fourth quarter, maybe assuming no other pricing actions taken so how how things roll off and.
And what we should expect for pricing in the third and the fourth quarter.
Sure happy to so first there's two pricing actions, we're taking in the second quarter.
The first is the $1 surcharge and the second is an anticipated 3.5% increase which we're taking next week on our core items with that three and a half for staff, which we anticipated and we spoke about last quarter that was going to take us that pricing just below 10%.
So our guidance to pricing being just above 10% now includes that $1 surcharge.
And that surcharge, it's onetime in nature and the financial impact for pricing, but also the financial impact of the P&L, it's really going to be subject to the timing so.
So from a financial impact perspective, it really is dependent on if theres any change in guest behavior or the mix shift into any other protein. We've only been live with that for about a week and encouragingly, we have not seen any major shift in to any other protein. So overall encouraged by that so far and then in terms of the back half.
Half of the year.
Anticipating no further pricing actions again, we are.
Looking at this as a relationship to the inflationary pressure on the business in the first half so without any further pricing increase that should stepped down nicely kept probably around seven 5% for the full year.
Yeah, and obviously, a very dynamic situation and just to clarify as well if you're trying to bridge between the seven 5% price in Q1 versus your expectations for Q2 also keep in mind, we will roll off some nominal price from prior year, Hence what S way.
The non surcharges prices fell a little bit below 10.
Great. Thank you very much.
Yeah.
And thank you and our next question comes from Nicole Miller from Piper Sandler Your line is now open.
Okay.
And pardon me and it looks like that line may have dropped I would now like to go ahead and turn the call over to Dave betting Hausen for closing remarks.
Thank you Jasmine and nicely done with the pronunciation.
We certainly can't ignore the current inflationary environment, but I'll tell you I've never been more convinced in our opportunity for noodles mirror growth stored in the restaurant industry momentum has accelerated meaningfully staffing is back to pre tender emrich levels and we've a continually strengthening new unit economic model I'm really excited about this.
Slate of initiatives, we have for the balance of the year headline.
Headlined by Linguine as well as the launch of a new brand positioning and I look forward to sharing with you over our upcoming earnings calls our progress towards achieving those accelerated growth objectives. So thank you for your time today and stay safe.
This concludes today's conference call. Thank you for participating you may now disconnect.
Sure.
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