Q2 2022 Noodles & Co Earnings Call
Okay.
Good afternoon, and welcome to today's noodles <unk> Company second 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'd like to introduce noodles, <unk> company's Chief Financial Officer.
Carl Lukacs.
Thank you and good afternoon, everyone welcome to our second quarter 2022 earnings call here with me. This afternoon is Dave <unk>, our Chief Executive Officer, I'd like to start by going over a few regulatory matters.
During our opening remarks and in response to your questions. We may make forward looking statements regarding future events or the future financial financial performance of the company.
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 be.
Bert 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 are considered a part of this conference call, including the portions of each at passport the risks and uncertainties related to the company's forward looking.
Chip.
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 2021 fiscal year and subsequent filings we have made.
Documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.
During the call we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our <unk>.
Second quarter 2022 earnings release, and our supplemental information.
Now I would like to turn it over to Dave <unk>, Our Chief Executive Officer.
Thanks, Karl and good afternoon, everyone I'd like to start today by sharing some of the highlights from our second quarter results, which overall met our expectations despite volatility in the market environment.
I would also like to spend some time adjust your confidence level in strategies towards achieving our 2020 for accelerated growth objectives.
Our second quarter revenue of $131 $1 million reflected system wide comparable restaurant sales of five 1% and was highlighted by record average unit volumes of $142 million at company restaurants, 18, 3% above pre COVID-19 2019 level.
Yes.
After a challenging first quarter due to the impact of temporary closures can be almost gone variant.
Our restaurants are now staffed above pre COVID-19 levels, and we recaptured meaningful momentum relative to Q1 <unk>.
Including restaurant level margins of 15, 5% compared to nine 7% in the first quarter.
As we move to our ongoing strategy I would like to remind you of our accelerated growth objectives, which include first one $5 million AEP is by 2024.
Second 20% restaurant level margin again by 2024, and finally at least 10% unit growth commencing in 2023.
Let's start with our average unit volume target of $1 billion.
The company has made clear progress over the last few years and growing our average unit volume from.
From $1 2 million in Q2 of 2019 to $1 four 2 million in the recently completed second quarter of 2022.
The brand's ability to meet the needs of today's consumer and particularly with the variety inherent in our paper menu, our digital strengths and how well our food travels persists positioning the brand for continued growth in our average unit volumes.
As we've all witnessed throughout the restaurant industry, we experienced some softening in our sales trends during the last part of Q2.
Beginning of Q3.
That said sales have quickly stabilized and we expect positive comparable restaurant sales in the current third quarter.
The stability of our recent sales is encouraging however, we recognize the near term economic environment is unstable and difficult to predict.
As a reminder, though the company achieved positive comparable restaurant sales during the 2008 and 2009 recession driven by the strength of the brands value proposition as well as our ability to be a trade down beneficiary, a softer consumer environment.
This ability to succeed in a more difficult environment is bolstered by the strength of our menu innovation as well as our strong entry level price point.
From our recently introduced <unk>, offering, which offers 56% last net carbs and 44% more protein than a traditional week prospect.
Or is that changing at all to our intestinal sources. Our menu offers great variety that is not easy to replicate at home or at other restaurant Tigers.
Additionally, we are leaning into the strength of our entry level price point with increased communication and messaging of seven or issues that are priced at $7, including popular favorites, such as our Wisconsin, Mac and cheese.
This core menu strength and value proposition is further supported by the insights engagement that we are able to derive from our digital ecosystem and our rewards program.
After that we did not have during prior economic downturns.
Our frequency and guest metrics have improved meaningfully in recent months and we will continue to leverage the strength and capability to drive consumer engagement that is personalized relevant and develops guest loyalty.
In coming months, you can expect us to continue to evolve and fine tune. These areas of the business streamlining and improving our digital experience for guests.
To increase our trial and awareness of <unk>, which we are seeing is associated with higher repurchase pace deferred airfreight with key metrics.
We continue to believe that we will be a transformative introduction for noodles <unk> company with our focus now shifting from introduction and commercialization to increasing trial amongst new lapsed and loyal guests alike.
While we are prepared for potential volatility during the coming months.
As I noted sales have quickly stabilized and we anticipate positive comparable restaurant sales in the third quarter.
Moreover, during the second quarter, 41% of our restaurants achieved our accelerated growth objective of average unit volume of over $1 billion in the house.
With strength from coast to coast and in a variety of different restaurant formats.
The average restaurant margin of these restaurants was nearly 21%.
Which brings us to our second accelerated growth objective, achieving a target for 20% company restaurant level margin by 2024.
As a reminder, our pre inflation results for Q2 of last year included restaurant level margin of 18, 9%.
Clearly the unprecedented inflationary environment that we are now seeing has led to some challenges thus far in 2022, but with a combination of more normalized commodity markets and execution of our efficiency initiatives that I will discuss further our 20% target remains in sight.
As you know cost of goods sold has been the most challenging area of the margin story in recent months.
Our cost of goods sold in the second quarter was 27, 8% of sales 280 basis points above our target for Cogs of approximately 25%.
Carl will go into more depth later, but importantly, we are confident that we have reached the peak of our cost inflationary pressures.
Several key ingredients in particular chicken and durum wheat has seen meaningful declines from recent historic highs. Additionally, we are currently rolling out a more efficient cut of our boneless chicken breast with significant cost savings.
While our Cogs will remain elevated in Q3, given the timing of lower cost items rolling through the system, we expect to exit Q3, and as our Q4 with meaningfully lower Cogs or you saw during the second quarter.
As we consider our 2024 target of 20% restaurant level margin. We Additionally, see opportunity at several several other areas of the P&L.
Delivery fees are beginning to come down as a percentage of sales as this area of the business normalizes and we are also seeing strong leverage on our fixed costs from recent price actions.
Additionally, the company is focused on a few key optimization activities to support margin expansion over both the short and long term <unk>.
Including menu optimization to eliminate select higher cost ingredients and better highlighted menu items that are both guest favorites and margin accretive.
Testing of high ROI from our alternatives to improve efficiencies within our restaurants, particularly focused on our prep activities and our protein preparation.
And the introduction of technology within our restaurants to drive consumer behavior and eliminate select current expense items.
Importantly, today, we announced the refinance of our credit facility, which gives us additional flexibility to pursue and implement these in other high return initiatives to achieve our 20% restaurant level margin target.
With stronger Evs, our restaurant level margin, we are well positioned to take advantage of our third accelerated growth objective, which is to achieve at least 10% unit growth by 2023, taking advantage of the tremendous white space potential for the brand.
It's no surprise that certain external factors, including municipal and landlord delays and supply chain issues have added challenges to the typical restaurant development timeline and Thats currently reflected in our unit growth expectations for 2022.
However, we remain confident in our long term target.
Fortunately on improving real estate cost primarily has allowed us to shift more resources into the 2023 pipeline, which is the strongest I have seen in many years at noodles <unk> company.
We already have 20 company deals for 2023 that are either complete or in final stages of negotiation with the significant number of deals in various stages of LOI is to support our growth objective.
The pipeline as it sits today is three times stronger than it was at this point last year in all phases of the phases of development and we see a growth of at least 10% in 2023.
This pipeline is bolstered by improvements that we're currently seeing in much of our development input cost as well as an overall more favorable real estate environment to execute our lower square footage off premise oriented prototype.
Moreover, our confidence in achieving our 30% cash on cash return is supported by the success of our recent classes.
<unk>, our first restaurant in suburbs of Las Vegas, which is tracking above our $1 billion of half AEP objective.
Finally, supporting our unit growth objective is progress we are making our franchise sales program we.
We are in the final stages of the agreement for a large area development in the southern part of the United States and have been very pleased with the increase in franchise interest that we've seen in recent months.
As I turn it over to Carl I would like to reiterate my confidence in how the brand is positioned to succeed in the short term as well as achieve our salary growth objectives.
Our unique brand positioning with strong value offerings allows us to navigate a more challenging consumer environment or.
Our strong digital ecosystem and guest insights allow the brand to drive consumer engagement and.
And our improving operating model bolstered by higher churn low square footage new units allows us to take advantage of the tremendous white space protection now.
Now I'd like to turn it over to Carl.
Thank you David and good afternoon, everyone I am pleased to share our second quarter results, including a record average unit volumes of 142 million, which reflects continued recapturing a momentum.
In terms of the financial highlights total revenue for the second quarter increased four 3% to $131 1 million compared to last year comparable restaurant sales increased five 1% system wide comprised of a five 1% increase at company owned restaurants, and a five 3% increase at franchise.
Restaurants are.
Our second quarter revenue was negatively impacted from the January 2022 sale of our California locations, which we estimate was approximately $4 1 million and includes lots revenue net of royalty payments received as a reminder, that transaction will be EBITDA neutral for 2022 and accretive in future years.
Underlying our revenue grow our average unit volumes for $142 million for the quarter of five 3% increase from last year, and an 18, 3% increase versus pre COVID-19 levels in 2019 as.
As Dave mentioned, we experienced some softening in sales trends during the latter part of the quarter, particularly in June .
However, it's worth noting that in June our average unit volumes for one $3 9 million, which represents 15% average unit volume growth from pre COVID-19 levels. In 2019, we are encouraged that <unk> growth quickly stabilized at these levels and have remained at approximately 15% thus far in July.
For the second quarter restaurant contribution margin was 15, 5%, which was a significant improvement from the first quarter levels of nine 7%.
Restaurant margin decreased 340 basis points compared to Q2 of 2021 with the vast majority of that decrease found in our cost of goods sold which improved 20 basis points relative to the first quarter.
But at 27, 8% with nearly 300 basis points above both the second quarter of 2021, and our historical norm.
The cost of chicken remains the most material driver of inflation in our basket as over 50% of our guests choose boneless, all white meat chicken breast as an add on to their noodle dishes.
The price of chicken rose throughout the second quarter to unprecedented levels, peaking at the end of May However, as of today. The market has already declined 20% versus those historical highs and we anticipate continued normalization.
Adjusting for the processing through our distribution systems, we estimate that the decline in chicken price will lead to a 50 basis point improvement in Cogs as we exit the third quarter from peak levels in July .
We will be able to realize this benefit having remained and variable pricing with our vendors.
Which was both a strategic decision to remain flexible on our purchases and driven by our vendors who are unable to set fixed pricing given the high volatility in the chicken market.
Additionally, we have strategically worked with our existing and new vendors to optimize the cut of our chicken breast to further reduce waste.
These vendors are now able to deliver the same high quality boneless chicken breast in a more.
More cost effective way, reducing the required preparation.
The run rate impact of this initiative is nearly 100 basis points of Cogs improvement.
This initiative is expected to be rolled out during the third quarter and largely complete by the end of October positively impacting cost in the fourth quarter and beyond.
Other areas of our commodity basket remained fairly stable, we are seeing some modest increases across our dairy and protein basket, but more favorable costs in such areas like durum wheat, a core ingredient of our process.
For the third quarter, we anticipate cost of goods sold slightly below our second quarter levels.
Head of realizing the benefits of more favorable chicken pricing and efficiency initiatives during the fourth quarter. When we expect to see Cogs closer to the mid to high 26% area.
Labor costs for the quarter were 33% of sales, which is 200 basis points better than the first quarter and 50 basis points unfavorable to last year.
Our labor margins continued to benefit from the full annualized the annualized impact of our kitchen of the future initiative, which has allowed us to offset continued wage inflation, which grew nearly 13% during the quarter.
While wage inflation is moderating somewhat.
We anticipate elevated levels will continue through the third quarter with our label margins expected to be largely in line with second quarter levels.
Other operating costs for the quarter were 17, 8% of sales compared to 17, 8% in prior year.
This increase was driven by an increase in marketing expense related to the launch of our uncommon goodness platform and rollout of <unk>.
Marketing expense for the second quarter was 2% of sales an increase of 80 basis points versus prior year.
We expect third quarter other operating costs to be at similar level to the second quarter as marketing normalizes to approximately one 5% of sales offset by an anticipated increase in our utility expense due to normal seasonality.
Pricing during the second quarter was just north of 10% a level, we expect to maintain during the third quarter. We are fortunate to maintain a strong value proposition with an attractive entry level price point of around $7.
This has allowed us to take price without meaningful guest resistance bolstered by the fact that our core price has been relatively stable during the last few years as the most pricing has been concentrated on third party delivery.
G&A for the quarter was $12 7 million compared to $13 million last year.
G&A include noncash stock based compensation of $1 $5 million during the second quarter compared to $1 6 million last year for the third quarter, we anticipate G&A in line with the second quarter and approximately $1 4 million stock based compensation.
GAAP net income for the second quarter was $1 3 million or <unk> <unk> per diluted share compared to net income of $5 7 million last year or <unk> 12 per diluted share.
We also report net income on an adjusted basis, which adjust for the impact of impairments divestitures and closures. Excluding these adjustments our second quarter net income was $2 4 million or <unk> <unk> per diluted share compared to net income of $6 million or <unk> 13 per diluted share last year.
We 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 of over $150 million.
Switching to our outlook for the third quarter, we anticipate total revenue to range between $125 5 million and $128 5 million with positive low single digit comparable restaurant sales.
The midpoint of our range assumes that the stabilization of average unit volume growth at approximately 15% growth relative to 2019 and reflect the historical negative impact on our absolute sales of the third quarter containing both the fourth of July and Labor day holidays.
From a contribution margin perspective, we anticipate third quarter restaurant level margins between 15 to 15, 5% at cost in particular is expected to remain elevated during the first part of the third quarter.
During the quarter, we opened three new locations all of which are company owned we anticipate 'twenty one to 'twenty three openings for the full year, reflecting 5% unit growth versus prior year <unk>.
Including four openings during the third quarter for.
For the full year, we now expect 30% to $33 million of capital expenditure from our previous guidance of 30% to $34 million supporting New unit growth and continued innovation of our website and mobile app.
Turning to the balance sheet at quarter end, we had cash and cash equivalent of $1 8 million and a total debt balance of approximately $32 2 million, representing approximately $3 million of debt pay down relative to the first quarter.
We are very pleased with the closing of our amended credit agreement yesterday, which upsized credit facility from $100 million to $125 million.
Eliminated the term loan and principal amortization component of the credit facility.
Lowered the spread within the company's cost of borrowing improved financial covenants and enhanced overall flexibility. We are confident that with our amended facility are highly supportive lender partners and our strong liquidity profile, we are well capitalized to support our accelerated growth objectives and strategic investments.
With that I would like to turn the call back over to Dave for final remarks.
Thanks, Carl as we consider the current environment, we're very confident the brand's positioning the uniqueness of our menu our strong value proposition and our digital streams.
All executed by a team of dedicated passionate team members allows us the opportunity to directly engage with gas and be a beneficiary of potential trade down within the industry.
Additionally, we remain confident in our accelerated growth objectives, as our 2023 unit pipeline strengthens.
These quickly approach the <unk> target and we see a clear pathway in progress to a 20% restaurant level margin by 2024 with that please open the lines for Q&A.
As a reminder, if you'd like to ask a question. Please press star one one.
Our first question comes from Nicole Miller Regan with Piper Sandler Your line is open.
Good evening and thank you can you talk a little bit about.
The cohort you're trying to speak to with the seven entrees at $7.
I'm wondering specifically how did you land on $7 and then in terms of maybe income profiles.
How much of your sales come from a lower end household income versus the higher end household income.
Sure, we'll start with the actual price point of $7. What's exciting is that that actually is already Nicole the natural starting price point for so many of our dishes. So we were able to read into what already is a great value proposition.
To answer your question in terms of the percentage of our guests that are low income is pretty small and as we look at the trends that we saw in the business throughout Q2, one thing Thats important to note is that a lot of the traffic trends actually didn't change at all our core guests actually remained very strong no real change in their purchase behavior channel day part.
We actually saw their frequency improved throughout the quarter.
What you saw is that pullback to that low income consumer similarly across all channels, we see that through our rewards program. Other third party data we have that's the one that we potentially lost now interestingly and I think encouragingly, we really just started messaging more explicitly on our digital assets and our menu.
That $7 entry price points, just about a week ago, and we're already seeing some nice momentum actually from that particularly from the low income consumer and we're not seeing any trade down at all either so we feel that that's able to address what is not the largest part of our guests. We've done we've definitely tend to skew towards higher income, but for that low income gas just.
Many of them of the great value proposition that we have a new company called.
Call that onto what Dave said about 52% of our guests have average household income over 75000.
Gotcha, Okay and that messaging piece was helpful too because I was curious about exactly that so and can you just quickly touch on a 5% company comp and I think you ran just under 10% price in the quarter. So theres a lot of noise in terms of transaction with both Nixon and traffic in there can you just.
Validate those numbers, if I was spot on or help us out and then let me fix it help me fix Adler and then speak to the transaction part.
Yes that is correct. So we are just north of 10% on price overall same store sales and just north of 5%. So you did see traffic lead modest traffic was modestly negative was tracking on the northern side.
The higher side of our expected range closer to flat to slightly positive traffic prior to when we saw that slowdown there kind of occurred in June , but then quickly stabilized from that point forward.
Thank you so much.
Our next question comes from Andrew Barish with Jefferies. Your line is open.
Hey, guys.
It looks like your thoughts.
Normalization in the digital mix.
Did that surprise you or is that just kind of a normal resumption of guest behavior back into the restaurants and and how much do you think that impacted.
Just that that channel impact would be overall mix numbers as a component of the same store sales.
Yes, as we look at the mix over the course of the quarter, Andy it's actually been remarkably consistent.
There is a little bit of a decline in delivery that we saw at a certain point, but then that quickly rebounded.
So it's been actually remarkably consistent as a reminder, we have always been one of the leaders when it comes to digital sales and we see that as continuing to be a very sticky channel for us so still north of 50% and perhaps you said.
Thus far three or four weeks into Q3 still at very similar figures.
We also think we're just getting started in terms of as we get more insight into our gas and continues to be a more personalized with our communication, which we think is a great asset as we had it more into a more uncertain environment being able to hold on to that digital sales while at the same time Diamond is now starting to increase.
So youre seeing dining to come back to about 20% of sales during the second quarter still well below where we were pre COVID-19, which was closer to 35% to 40.
Still opportunity for some tailwind as dine in returns, but at the same time as digital remains very sticky and still have some growth opportunity.
Okay, and then on the development pipeline.
<unk>.
Kind of 10, or so units that you took out of this year.
How do we think about that next year I mean is that make the development pipeline a little more even.
Those units.
Stick around I imagine.
Then you add on top of that just give us a little more color on the cadence of openings.
Next year winter.
Obviously significantly ramp.
Certainly more even cadence than what we saw here in 2022 and as I said earlier, the 2023 pipeline is stronger than I've ever seen as we have actually three times as many sites and the various stages of development and were not considered theres restaurants, a variety of leases signed.
Sites that are in lease negotiations our sites with Rois out.
We are significantly stronger today than where we were.
If any really any time I've seen in the last several years. We're also remind that back 18 months ago. Andy is when we set out to really accelerate growth at unit at noodles <unk> company. Indeed that is what we are doing in 2022, we will open over 20 restaurants. That's the most that we've opened in several years back 18 months ago, we didn't foresee that the development.
<unk> would have these unusual delays, which is certainly what has caused some of that push into 2023, which also gives us upside to that potential 10% unit growth target.
Okay. Thanks for the update guys.
Our next question comes from Todd Brooks with the Benchmark Company. Your line is open.
Hey, Thank you good afternoon guys.
Yeah.
<unk> okay.
Hey, Dave.
Questions, one with the relief that you've seen recently and chicken prices.
Benefit that youre expecting from the new cuts, what's the status of the chicken surcharge and how long do you think that's going to stick around on the menu is that.
Based on the response to it is that a longer stickier.
Type of pricing up charges that we're going to be able to harvest going forward, even as the commodity correct.
Sure So Jonathan update that chicken surcharge, which was we viewed as temporary has rolled off the menu, we rolled off about a week and a half ago.
At the same time to keep pricing consistent we spread that increased throughout the entire menu. So there really is a neutral effect in terms of overall pricing. So you are right. The chicken improvement has really driven the decision for us to take that.
After the chicken specifically.
Okay great.
So maybe talk to that.
That Karl mentioned on the call in terms of our overall inflationary basket has been impacted more than many in the industry. During the first half of 2022, we firmly believe that we are actually in a position where you're going to start seeing improvement as we get the rollout of significantly lower market.
That youre seeing from chicken breasts as well as some of the initiatives around that time as Carl mentioned, we see very clearly that is getting worked through the system as we speak being able to exit Q3 at meaningfully lower Cogs on where we are today.
Have a nice improvement as we go into Q4 and really beyond so we feel that theres been kind of an outlier and chicken breast that has caused us to have some particular inflation here in the first half that we are now on the better side of that equation.
Okay, great. Thanks second question on the.
Franchise deal that you teased us close to the finish line is there anything you can share with us on.
Type of partner compared to the California deals, there's another large multi brand multi unit operator, well capitalized that.
But you are bringing into the fold.
<unk>.
You, probably can't give us any sense of scale, yet, but I guess, where are we in the process as far as being able to get some visibility on what the speeds towards the pipeline as we get out.
'twenty four 'twenty five.
Sure I can share that unlike the California deal. This is not a re franchise. It is it is a new market, we will share more details as the deal gets finalized but we are in the final stages on this floor, whereas the southern markets that we've targeted a good sized deal as a reminder, new alluded to of Todd we target well established multi.
Unit operators as you can imagine in the uncertain environment, that's increased the lead time a bit as they navigate the inflation demand in their own businesses.
What we're seeing and we're very happy with the amount of interest we're seeing over the past few months again with these type of high quality well capitalized partners that see the overall potential and future of this brand so more information to come on that particular that particular deal, but we're feeling pretty good with where the momentum is going from the franchise side.
That's great and then finally on amending the credit facility congrats on getting that done.
You talked about some.
Covenant relief without much specifics I know the old facility.
Hey.
Covenant prohibiting share repurchase can we comment on.
Any covenants regarding share repurchase and the new facility.
Okay.
Sure. So first of all thanks for that we are very encouraged by the closing of our credit facility. The amendment is highly favorable to us it provides us with the additional flexibility on certain covenants, which indeed you pointed out.
Typically on restricted payments. So yes, it does provide us enhanced flexibility there.
And of course any type of restricted payment is a topic, we discussed frequently with management and very pleased with the just the work we've seen with our partners continue to have the same lead bank bank with U S Bank, they've been fattest partners in <unk>.
Certainly a favorable outcome in terms of giving us flexibility as we pursue these objectives.
Okay, great Congrats guys.
Okay.
As a reminder to ask a question. Please press star one.
Our next question comes from Andrew <unk> with BMO capital markets. Your line is open.
Great. Thank you and good afternoon.
My first question you had a couple of.
Encouraging initiatives I guess that launched during what was a challenging period to drive sales and Linguine and the brand building.
The campaign can you just comment obviously kind of some of the results are obscured by the macro but can you comment on what you saw as a result of that was in line with what you expected or are you happy with how that way or any tweaks or anything like that.
Yes.
Question, we're very pleased with what we're seeing from both Linguine launch as well as uncommon goodness with we as you saw on task associated with higher frequency higher repurchase the objective right now is really to increase trial.
As you know, particularly in this environment it can be difficult to get people to shift from their familiar favorites, but we see that when they do try linguine, they're amazed at the quality of the tastes give them interesting benefits. So still believe this is very much a transformative introduction from a culinary side.
<unk> uncommon goodness remind it's less of a short term traffic driver more of a long term positioning of the brand showcasing how we infuse uncommon goodness into every aspect that we do from how we treat our people to how we actually saw today and do real soon.
Sophisticated cookie methodologies to the quality of our ingredients were very pleased with some of the leading indicators, we're seeing because we track brand regard brand perceptions seeing nice improvement across all of those as well as the power of this potentially not just into externally, but internally. So you are correct.
Really a lot more talk in the industry around the overall market dynamics and inflation and so forth, but underneath underneath the foundation needles, we're very pleased with what we're seeing with Linguine uncommon goodness and think that is going to be a key factor as we grow to $1 five.
Okay, Great and then.
Yes, I was just hoping you could help frame the different cogs opportunities because it sounds like Theres a lot there you have.
The new Chicken agreement you have other commodities that are coming down.
Some cost savings efficiencies internally that you're also working on.
Can you frame kind of the magnitude of the cadence of how quickly maybe you can start to realize some of the commodity decline should they sustain but just.
There's a lot there I'm trying to trying to frame the potential impact that it could have yes, I will let carl walked through that but one thing that I think some form to note is that these are known savings. These are one it's a matter of Jim just working through the system as you can imagine when you purchase chicken. This morning, it's not related to the gas play that afternoon takes some time to get through the system.
They are known savings that will start realizing in short order. So Carl maybe you can go into with you a few of those sure and in terms of the savings chicken really is the outlier here and as Dave alluded to the worst.
It is behind us in terms of the market volatility. There is two major components. The first is purely just the price of chicken, which has come down by over 20% for historical highs.
And we're expecting just where the prices are today, that's a 50 basis point run rate improvement on Cogs. This.
Second is the initiatives that we're executing with our vendors that's about efficiency, it's about reducing waste and a run rate improvement on that initiative is 100 basis points. So in total 100 150 basis points really adjusting for the lead times and working inventory quickly through our system, that's where we get the confidence in and it's really the uncertainty about in fourth.
Quarter, we're going to forecast Cogs in the mid to high 20%, 26% area.
Got it okay that makes sense and just one quick last one for me you said the stores that are at or above the $1 five or.
Doing a 21% restaurant margin, which is already ahead of the 20% target and then you've got these cost savings obviously coming in on top of that is there a reason that.
You would be limited in the rest of the system to 20% or is that just a nice starting point and then maybe we start to build from there even at that one 5%.
Trying to make sure I understand the different pieces. Thank you.
Yes, I don't want get premature given the uncertainties in the environment.
Absolutely Andrew we feel that there is really strong capability to continue to leverage those sales growth.
Concept itself fundamentally historically and we think in the near future has a great strength and low cost of goods sold with absolutely improved the labor model to be significantly more efficient and you see that those restaurants are north of 1 million five being at 20%.
So we absolutely believe there could be upsides that said, we recognize there is work to be done we need to see where the market ultimately land in certain areas.
We are as confident as we've been in terms of that 20% less restaurant level margin and as a reminder, just a year ago, we were approaching 19%. So we know the fundamental operating model was actually quite strong.
Great. Thank you very much.
Our next question comes from.
Mr Brooks with the benchmark company your line is open.
Hey, Thanks, just a quick follow up guys if I may.
You talked about the.
The average unit volumes kind of stabilizing after the pullback that you saw in June .
Maintaining that stability so far in July .
To triangulate that to the low single digit positive same store sales guidance.
Does that level of <unk> that $1 39 type of level does that support positive low single digit same store sales or do we require a bit of a lift.
As the quarter progresses to get to the positive low single digit same store sales. Thanks.
Yes.
Sure.
So first the way we look at the.
The growth.
As we looked at third quarter.
For average unit volume there is a normalization foreclosures so as we think about.
The trajectory for the rest of the quarter and the stability in terms of what we're seeing so far in July there will be somewhat of a closure impact so that would help support the low single digit same store sales as a reminder.
Last year in the second quarter, sorry in the third quarter, we saw about 150 basis points from a comp perspective foreclosures, yes, I'd also add to it we're already as we sit today.
In Q3, we are in our range for what we're targeting here for Q3, the absolute dollar figure, though Todd to your point there is a little bit more seasonality from we have both the fourth of July and Labor day in Q3.
Relative to what you see in Q2, which doesn't have as much impact so actually that 139 mathematically would translate to even a higher same store sales.
Okay, great. Thanks, guys.
Our next question comes from Jake Bartlett with <unk>. Your line is open.
Great. Thanks for taking the questions.
My first I just wanted to build on that last one and maybe if you could explicitly frame.
Frame.
Sales trajectory and the trend in terms of same store sales kind of in relation to the guidance of low single digits. So did you just say that essentially in July you've seen low single digit same store sales.
I believe as of the last call April was roughly 4% if I got that right. So it sounds like it went up and then it came down if you could just help us with the trajectory of the same store sales growth by month, and just what Youre, what youre running today on.
In the last.
Month would be really helpful.
So as we said so far here in July we are in low single digit positive Jake.
And encouragingly, especially as we started to highlight the 7% $7, we're seeing continued stabilization and potentially even a little bit of improvement.
Some of those underlying metrics.
As you bifurcate out Q2.
Key sectors June I should say fiscal months was actually softer than low single digits for the last couple of weeks.
So it actually started off reasonably strong and then actually saw some deceleration just in the past the last two or three weeks of the quarter than you saw immediate stabilization and then now starting to see it a little bit of bounce back hopefully that helps a bit.
But ultimately sales.
Flat in that in that genotype that June may June timeframe.
Okay, and then as we think going forward from here can you help us understand some of the drivers of a sale. So it sounds like youre getting an incremental boost from the marketing of the $7 menu.
You talked about kind of more effectively are kind of driving frequency or trial with the linguine.
How confident are you in terms of really material with tangible drivers to offset some concern about further weakness on the consumer.
Well I think part of the confidence comes from the fact that we've actually started seeing some momentum here in the last week or two that's showing that a lot of the efforts. We have done are having an impact on whether it be linguine, which we see continuing to increase and next week. After week. So we feel that that will be continued to be a kind of a slow burn but will continue to be.
A driver of sales as we go as we go forward.
In our operations.
We're seeing our net promoter scores our guest metrics improved dramatically.
Over the last several months and our teams are running a better cook times than what they did a year ago staffing is back to prior levels, we do see a tailwind as you have more.
More diet and gas come.
That will help as we as you've seen with the delivery or the digital a lot numbers, we've been able to retain that.
So between the digital strengths linguine, gaining traction already some momentum we're seeing in some of the really targeted marketing around seven for seven.
We still we're still feel that there is quite a bit of potential tailwind not to mention we will kind of reinforce catering for the first time in a few years as we go into Q4.
There will be some culinary innovation looking at plant based protein potentially rolling out nationwide. During Q4. So we will have continued innovation pipeline as well to help support that average unit volume growth target.
Great and then on the on the development for 2022, obviously, a pretty large decrease.
'twenty one to 'twenty three from 35.
New openings and so before you had given us that 70% were expecting to be company owned of the 'twenty one to 'twenty three how many of those are expected to be to be company owned.
The vast majority there only be three or four that are likely to be franchise. They are encountering some of the same challenges that we've seen and you've seen it throughout the industry as well.
When we set those targets in early 2021, we didn't foresee how challenging the environment would get from a real estate timing perspective, the availability actually is quite strong its been the timing.
And we hope that we have been able to navigate through that here in 'twenty. Two ultimately it just to give examples we've seen things like utility companies not having to staff to turn power on time, we've seen developers with the new development not being able to get asphalt to complete their base building delivery day for us.
<unk> seen permitting takes a lot longer than historical so much of that has been seen just not by the company, but also in franchise as well, but also gives us confidence that as we see the strength of that 23 pipeline. We see some of the benefit of some of the carryover of some of these sites have taken longer than we've got great confidence in that target for 'twenty three.
Okay, Great and then my last question is just on pricing you mentioned that your pricing in the second quarter was about 10%, you're saying you think it's going to be about 10% from the third quarter.
Wondering just what.
When new pricing has come on when it when it's rolled off just in terms of the impact of that $1 surcharge. That's now no longer going to be an impact of just if you can help us understand.
Yes.
When you've taken price so we can kind of.
Also have some visibility into the fourth quarter and then also whether you're open one of your larger competitors taking more price.
Helping margins, but.
What's your appetite for continuing to take any price even in this environment.
Yes, I'll, let Karl answer some of the rollout timing questions and then I'll talk to the overall value proposition.
That's right so.
You are right for the second quarter.
Pricing just over 10% and we're expecting the same for the third quarter predominantly because that chicken surcharge, which contributed about 3% of price is rolling over towards the core menu.
Encouragingly when we had the surcharge in place we did not see really any impact in terms of chicken protein attachment, we didn't see guests opting out of chicken or swapping chicken for other protein in terms of attachment. So that continues to build our confidence in terms of the price that we have on the menu when we.
Thought about pushing that.
The surcharge throughout the entire menu again, we look at this surgically through inelasticity of additions, but predominantly we're preserving $7 entry point still for seven of our core dishes, because thats really critical in terms of an entry point, so even by pushing that out we were able to preserve that and that helps underscore the value.
Physician.
Yes, and in terms of.
Additional price.
We have seen any impact on the low income consumer in terms of some pullback.
I think others have seen similar things Fortunately again for us that's not much of our consumer.
I would say that what is maybe a little bit unique Jake is for us. The particular inflation. We believe has peaked and we are now on the other side.
So in terms of needing incremental pricing.
To overcome additional inflation when you see chicken prices down pretty dramatically for chicken for us since rates you can process. A reminder, as that comes down dramatically as you see some of these initiatives roll in we believe we can absolutely expand margins without having to go to the menu.
I'd say, we don't have pricing power, we absolutely believe we do.
But we feel that there is enough momentum that we can see that we are actually on the branch side are seeing inflation start to come down.
Great and then I'll just sneak one quick one and then you mentioned, 13% wage inflation I think you start to lap just industry wide as well as I would imagine you.
Higher wage inflation from.
Back half of last year. So what is your expectation that wage inflation is going to come.
Coming to a more historical range or are you kind of planning for it to remain quite high for the back half of the year.
Our embedded into our Q3 guidance is that we continue to see some relatively high inflation, so above double digits.
There are signs that youre seeing throughout not just the industry, but kind of throughout the economy that this is starting to normalize.
And similar to many others, we did a lot of investment in our teams during the back half of 2021.
<unk>, we would assume that there is potentially some relief there, but probably a bit premature to kind of guide to what we would expect that inflation number to be in Q4 of this year.
Great I appreciate it.
Okay. Thank you Jake.
There are no further questions I'd like to turn the call back over to David <unk> for any closing remarks.
Thank you Michelle lots of discussion inside and outside the industry on the current economic environment everything from demand to inflation, but I will tell you from our brands perspective, we remain extremely confident in the business's trajectory.
And our ability to meet our objectives and importantly, we're seeing strong signs and we have a clear path towards accelerated unit growth and margin expansion. We feel we're on the positive side of both of those initiatives and we look forward to sharing with you those progress under future calls so thank you and stay safe.
This concludes the program you may now disconnect everyone have a great day.
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