Q3 2024 Noodles & Co Earnings Call
The End
Speaker Change: Good afternoon and welcome to today's Nuduzen companies, 3rd quarter 2024 and his conference call, our participants are in listening mode. After their presenters remarks there will be a co-estee in answer session.
As a reminder, this call is being recorded. I would now like to introduce new to new companies, chief financial officer, my times. Please go ahead.
Mike Times: Thank you and good afternoon everyone. Welcome to our third quarter 2024 earnings call. Here with me this afternoon is Drew Madsen, our chief executive officer.
I like to start by going over a few regulatory matters.
During the call, we may make forward-looking statements regarding future events or the future financial performance of the company.
Any such items should be considered forward-looking statements within the meaning of the private security litigation reform act.
Such statements are only projections and actual events or results could differ from those projections.
due to a number of risks and uncertainties, including those referred to in the afternoon's news release in the cautionary statement in the company's quarterly report on Form 10Q and subsequent final inch with the SEC.
Speaker Change: During the call, we will discuss non-gab 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 GAT.
A reconciliation of these measures to the most directly comparable gap measures is available in our third quarter, 20, 24 earnings release.
to the extent that the company provides guidance. It does so only on a non-gap basis. It does not provide reconceliations of forward-looking non-gap measures.
Wannethay the reconciling information for these measures is unavailable without unreasonable efforts.
Speaker Change: with that. I'd like to turn the call over to Drew Madsen, our chief executive officer.
Drew Madsen: Thanks, Mike, and good afternoon, everyone.
Our third quarter results reflect both industry-wide volatility caused by a difficult consumer environment that has led to significantly elevated levels of competitive discounting, as well as two other dynamics specifically related to noodles.
Drew Madsen: A high level of prior year discounting in the third quarter, plus an unexpected sudden drop in third party delivery sales. Collectively, these negatively impacted our short term results in the third quarter.
Drew Madsen: That said, we remain very encouraged by our positioning for long-term growth, aided by the positive early results from our menu innovation work, which I will touch on shortly.
Drew Madsen: Let's start with the third quarter dynamics. First, last year, noodles pursued an aggressive discounting strategy to help offset the impact of a February price increase.
Drew Madsen: This year we've chosen to prioritize guest experience improvements driven by operations excellence.
Drew Madsen: Normalize our discount level and invest the savings in targeted loyalty program outreach, broader digital media messaging, and increased third-party marketplace spending to drive longer-term sustainable improvements.
Speaker Change: This strategy was effective in helping us improve month by month from a significant gap in sales and traffic versus the fast casual industry benchmark in January to equally in the benchmark in July.
Speaker Change: However, a significant increase in competitive promotions in this town in this year, combined with our own elevated levels of discounting last year, proved challenging in August and September for our same store sales.
Speaker Change: As a result, later in the third quarter, we moved temporarily increase our level of promotional support to compete more effectively in the near term while our many transformation progresses.
Speaker Change: This included the addition of a kidsy tree offer in mid-September and a buy one get one offer in connection with the rollout of three new menu items in October.
Speaker Change: and we have seen a significant improvement in sales to date in the fourth quarter. Even as the bio-ungetland promotion has ended.
Speaker Change: As I noted earlier, we saw a sudden and significant decline in third-party delivery sales with our biggest partner starting late in July.
Speaker Change: We've also worked with this third party delivery partner to identify and test a strategy to address the sales decline we have experienced in this channel. And believe we've identified as solution which should help these sales recover.
Speaker Change: As I just noted, in early October, we were excited to roll out three of our new manufacturers nationally and are very encouraged by the noticeable improvement we saw in our traffic trends relative to the third quarter as a result.
Speaker Change: This has given us increased confidence in our strategic vision and the innovation improvements still to come.
Speaker Change: Although the crew consumer environment is caused variability in our near-term result, we're focused on what we can most directly impact and continuing to position noodles to capture the significant growth opportunity we believe it has long term.
Speaker Change: Importantly, we continue to make meaningful progress on all five of our strategic priorities to achieve sustained profitable growth and drive long-term shareholder value.
Speaker Change: We also continue to strengthen our senior management team.
Speaker Change: Last week we announced the appointment of Stephen Kennedy as our new Executive Vice President of Marketing.
Speaker Change: Stephen Brings, Concentraville Expertise, and Digital Innovation, paid Digital Media, Loyalty, and Brand Building. He will be a very strong partner with Scott Davis, our new Chief Concept Officer.
Speaker Change: Now let's talk about our progress on each of our five strategic priorities.
Speaker Change: Creating a Foundation of Operations Excellence Remains our top priority.
Speaker Change: Building this foundation demands that we be brilliant with the basics of staffing, training, and consistently executing the standards that will make us a better competitive alternative.
Speaker Change: Importantly, we've made great strides in all three areas.
Speaker Change: on staffing are turnover at both the hourly and management levels continue to improve. In fact, our management turnover is now well below industry average.
Speaker Change: on training, we continue with bi-weekly sessions across the system to review proper execution of a new fluid execution standard, a new service standard, and a new accuracy standard during each training session.
Speaker Change: Our primary training focus is to improve the dimensions of our guest experience that correlate most directly with traffic growth. Overall satisfaction, taste of food and accuracy.
Speaker Change: Finally, on execution, the combination of team members who are better trained and managers who are in our restaurants more consistently during our busiest periods to provide immediate coaching.
Speaker Change: has led to guest satisfaction scores accelerating each month of the quarter on all three of our priority measures.
Speaker Change: For perspective, a one percentage point improvement in our guest satisfaction surveys is statistically significant.
Speaker Change: and our overall satisfaction has improved by 10 percentage points in the last six months.
Speaker Change: As a result, our gap between the best casual industry average on overall guest satisfaction has already been reduced by more than half with all of this progress coming before our new year.
Speaker Change: In the near term, it's difficult to correlate guest satisfaction improvement with traffic growth, but we are clearly establishing the culture and team member behaviors for more consistent and a more satisfying guest experience.
Speaker Change: and I'm confident this will drive stronger guest loyalty and improve traffic over the long-term.
Speaker Change: Our second priority is to stimulate more guest desire for noodles through a comprehensive manufacturing transformation guided by our contemporary, comfort kitchen culinary Norstart.
Speaker Change: Phase one of this process involved concept testing to identify the most compelling ideas for both new and improved dishes.
Speaker Change: During Phase 2, we placed the new and improved dishes created by the Culinary Edge in a central occasion taste test with noodles customers to ensure they exceeded the guest satisfaction average on our current menu.
Speaker Change: These first two phases are complete.
Speaker Change: Phase 3 began in July when we placed the best new and improved dishes in test locations to assess real-world guest satisfaction, operational feasibility, and any related financial implications including many mixed shifts.
Speaker Change: Our goal is to impact roughly 2,000 of our menus through new or improved offerings over the next year.
Speaker Change: Given the magnitude of change involved for both guests and operations, we are taking a very thoughtful and strategic approach to testing and we plan to stagger the national introduction of the complete updated menu over several months.
Speaker Change: and I'm excited to say that the National Introduction has begun.
Speaker Change: and I told her we introduced three of these new dishes nationally.
Speaker Change: Chris B. Chicken, bacon and Alfredo is a more contemporary version of our current Alfredo Montmorei, which it replaced.
Speaker Change: In just a few weeks, it has become the most viewed item on our digital menu and our second best selling dish overall with average daily unit sales more than double Alfredo Montemore.
Speaker Change: The second disc introduced nationally, Lemongrullic Shrimp Stampi addresses the need we identified for additional light and fresh menu options.
Speaker Change: The third dish, Chipotle Chicken Cove Toppie, was added to address the need we identified for a Latin inspired flavor profile on our menu.
Speaker Change: Both dishes address gas and our current menu offering. I guess satisfaction equal to or better than our current menu average.
Speaker Change: and our meeting ourselves expectations based on prior test market results.
Speaker Change: The introduction of these three dishes was supported with a new commercial shot inside a noodles restaurant called Taste the Start of Something Great. Showcase in all three dishes and emphasizing our commitment to both exciting culinary innovations.
Speaker Change: To encourage trial as I mentioned earlier, we also offered a BioWun GetWin Free exclusive offer to our rewards members as a special perk for being a part of the program.
Speaker Change: and our guests are beginning to notice.
Speaker Change: Traffic has improved from a run rate of approximately minus 6% before these changes were introduced to just minus 0.8% for quarter to date.
Speaker Change: Not yet where we want to be, even in a challenging environment, but most importantly shows that our menu innovation works has the ability to positively impact our traffic trips.
Speaker Change: to help maintain this momentum, advertising during November and December will continue to focus on these three new dishes. Supported by an increased level of media investment compared to last year.
Speaker Change: Looking ahead to further menu innovation, in two weeks we will introduce three new signature back-and-cheese dishes into our test restaurants.
Speaker Change: Garlic Bacon Mac Crunch
Speaker Change: Pull the towards barbecue Mac and Buffalo Chicken Ranch Mac.
Speaker Change: These three dishes have been our strongest performers in Central Location Taste as so far.
Speaker Change: and Lincoln Bynd was in a proof was constant mac and cheese.
Speaker Change: should account for our largest sales next category. So we believe improvements, enhancements, and newly introduced Mac dishes should have a very positive impact on our traffic when introduced nationally.
Speaker Change: Assuming the success of these new dishes in our test mark, they will be introduced nationally during the first quarter of 2025.
Speaker Change: Our third priority is to drive profitable traffic growth by further leveraging our strong digital ecosystem.
Speaker Change: As a reminder, Nudel has 55% of total sales from digital channels.
Speaker Change: Additionally, our loyalty members, but come for 26% of total sales, and spend twice as much per year as non-loyalty members.
Speaker Change: Last year, we invested in a customer data platform that aggregates all information about our known customers in one area.
Speaker Change: This has enabled us to engage these customers using smart, relevant, personalized offers with fewer discounts to drive profitable traffic growth.
Speaker Change: In particular, we focus on reactivating last loyalty members because our active members have frequency more than 50% higher and have 2 and 1 more visits per year that our loyalty program average.
Speaker Change: The double down on one of our core equities is a family-oriented brand.
Speaker Change: In September we introduced a kidney-free promotion which drove approximately 1.5% in incremental sales.
Speaker Change: This allowed us to showcase our menu improvements and reintroduced customers to the constantly improving noodles experience.
Speaker Change: During the Q4 this year we will launch our new app for Android and iOS with an all new home screen and reward store experience.
Speaker Change: This update is intended to further strengthen our conversion rate.
Speaker Change: Once guests start in order by introducing easy to use quick actions like reorder, order of favorite and order of same order while also allowing loyalty members to attach their most relevant active loyalty program reward.
Speaker Change: Turning to delivery, our third party delivery channel was a strong, traffic driving channel for us through the first half of this year.
Speaker Change: Starting early in the third quarter, traffic from our largest partners suddenly began to decline. Despite continued investment in sponsored listings, exclusive dishes and profitable promotions.
Speaker Change: This change in trend was a significant contributor to our negative company's loss for the quarter.
Speaker Change: Discussions with this partner identified a potential opportunity to increase traffic profitably by addressing our many markup on their platform.
Speaker Change: We are roughly one month into a test of different menu markups within curge and results.
Speaker Change: We plan to finalize the test and introduce the optimal menu pricing strategy next month, which we believe will meaningfully improve traffic in our third-party channel.
Speaker Change: Our fourth priority is to maintain double digit growth in our catering business while we improve the fundamentals required to drive more aggressive growth in the future.
Speaker Change: Catering has grown from 1% of sales in 2022 and 1.2% in 2023 to 1.7% year-to-date in 2024.
Speaker Change: During the third quarter, system-wide sales were up 27% versus last year.
Speaker Change: We continue to believe catering has the potential to be at least 4% to 5% of sales in the future.
Speaker Change: and we believe that catering growth would be incremental and contribute to higher overall margins.
Speaker Change: During the quarter we have multiple wins in our catering channel, including unlocking a new cater in occasion and back to school during August, which generated our third highest catering sales week to date this year.
Speaker Change: driving repeat purchase and attracting new users with dedicated food news messaging about our three new menu items on our catering landing page.
Speaker Change: and generating impressive sales for my new fractional catering managers who drive incremental sales by creating strong relationships with schools and local sports teams and high potential markets.
Speaker Change: During the third quarter, we rolled out a new EasyCater integration capability in all company restaurants, eliminating the need to manually rekey orders from the EasyCater third-party catering platform into our point-of-sale.
Speaker Change: In addition, we are currently evaluating options to outsource delivery of catering orders placed through our website.
Speaker Change: and a technology-driven solution to transfer catering orders between restaurants when needed.
Speaker Change: Thank you.
Speaker Change: Our final priority is to strengthen our financial foundation with proactive cash management and an increased emphasis on operational efficiency across the business.
Speaker Change: This year, we have reduced our capital spending from $52 million in 2023 to a projected $29 million to $31 million in 2024.
Speaker Change: implemented a major cost reduction effort we expect to deliver over five million dollars of savings in 2024.
Speaker Change: performed a detailed portfolio review that identified approximately 20 restaurants that were evaluating foreclosure before the end of their lease terms.
Speaker Change: Mike will discuss in more detail where we are in the portfolio review process.
Speaker Change: and we announced last week an amendment to our revolving credit facility which reflects the strong support we have from our bank group while we were in the process of executing on our strategic pillars.
Speaker Change: Despite the third quarter decline in sales, our liquidity position remains solid.
Speaker Change: In addition, our reduced level of capital expenditures puts us in a better position to reach our target of positive free cash flow in 2025.
Speaker Change: As you can see, we've made substantial progress on all of our strategic priorities and believe we are positioning noodles to capture the full growth opportunity we see ahead.
Speaker Change: Now I'll turn it over to Mike to review our financial results in more detail.
Mike Times: Thank you, Drew. In the third quarter, our total revenue decreased 4.0% compared to last year to $122.8 million.
Mike Times: System-wide comp restaurant sales during the third quarter decreased 3.3 percent including a decrease of 3.4 percent at company-owned restaurants and a decrease of 2.9 percent at franchise restaurants.
Speaker Change: Company comp traffic during the third quarter declined 5.8 percent, pricing contributed 2.2 percent, and mix contributed 0.2 percent.
Speaker Change: The 4th of July shift from the 2nd quarter in 2023 to the 3rd quarter in 2024 negatively impacted our 3rd quarter comp sales by approximately 80 basis points.
Speaker Change: Company average unit volumes in the third quarter were $1.27 million.
Speaker Change: Restaurant level contribution margin was 12.8%, down from 16.4% in the third quarter of 2023, primarily due to sales fee leverage.
Speaker Change: COGS in the third quarter was 25.5% of sales, a 40 basis point increase from last year.
Speaker Change: Our third quarter pricing benefit was offset by inflation and makeshift.
Speaker Change: Labor costs for the third quarter were 32.0% of sales, which was up 70 basis points to prior year, primarily driven by sales fee leverage.
Speaker Change: Hourly wage inflation was 2.4% versus prior year, which was largely offset by pricing.
Speaker Change: Occupancy costs were flat versus prior year at $11.5 million.
Speaker Change: and other restaurant operating costs increased 210 basis points in the third quarter to 20.1 percent.
Speaker Change: The increase in other restaurant operating costs was primarily driven by a combination of sales fee leverage and increases in marketing expenses and third-party delivery fees.
Speaker Change: G&A for the third quarter was $12.9 million compared to $11.9 million in 2023, primarily due to expenses from the company's 2024 summit, which is a biannual national conference with our managers, vendors, and franchise partners.
Speaker Change: We also had an increase in obsolete warehouse inventory expenses related to menu transformation.
Speaker Change: Net loss for the third quarter was $6.8 million, or a loss of $0.15 per diluted share, compared to net income of $700,000, or earnings of $0.02 per diluted share last year.
Speaker Change: Adjusted EBITDA for the third quarter was $4.9 million compared to $10.9 million in the third quarter of 2023.
Speaker Change: In the third quarter, we opened three new company-owned restaurants and closed five company-owned restaurants.
Speaker Change: One franchise restaurant was opened and one franchise restaurant was closed in the third quarter.
Speaker Change: Also in October, four company-owned and three franchise restaurants were closed.
Speaker Change: As we discussed last quarter, we're undertaking a comprehensive portfolio review where we're evaluating closing underperforming restaurants on or before their lease expiration dates.
Speaker Change: Our accelerated rate of closures in the back half of this year is a result of that process.
Speaker Change: We continue to negotiate with landlords, and we will determine future potential closures on a case-by-case basis.
Speaker Change: Turning to full year 2024 guidance, we have revised certain expectations for the full year to reflect our recent trends and the continued challenging consumer environment.
Speaker Change: For the full year 2024, we are providing guidance of $487 to $495 million for revenue, inclusive of negative 3% to negative 1.5% comp restaurant sales.
Speaker Change: We anticipate full-year restaurant contribution margin between 12.7% and 13.3%.
Speaker Change: General and Administrative Expenses of $51 to $53 million.
Speaker Change: inclusive of stock-based compensation expense of approximately $4.59.
Speaker Change: Depreciation and amortization expense of $28 to $30 million and interest expense of $8 to $9 million.
Speaker Change: In October, we completed our 2024 new restaurant development.
Speaker Change: For the full year, we opened a total of 10 new company-owned restaurants and three new franchise restaurants.
Speaker Change: We expect total 2024 capital expenditures between $29 and $31 million.
Speaker Change: We currently expect to close a total of 12 to 14 company-owned restaurants.
Speaker Change: and seven franchise restaurants in fiscal year 2024.
Speaker Change: In fiscal year 2025, we anticipate having substantially lower capital expenditures, primarily due to a reduction in company-owned new restaurant openings from 10 in 2024 to two planned openings in 2025.
Speaker Change: As a result, our expectation is that 2025 total capital expenditures will be less than $15 million.
Speaker Change: At quarter end, we had a total debt balance of $89.9 million and over $30 million of incremental liquidity available for future borrowings under our credit facility.
Speaker Change: As Drew mentioned, last week we amended our credit agreement to provide for more flexible financial covenants.
Speaker Change: which together with our cash savings efforts and lower capital expenditure run rate will improve our overall financial flexibility.
Drew Madsen: With that, I'll turn the call back over to Drew for final remarks.
Drew Madsen: Thanks, Mike. I am excited about our continued progress on our five key priorities.
Speaker Change: Our foundation of operations excellence is improving, and our many transformation is on track, with encouraging early test market results and an initial national rollout of three of our new dishes.
Speaker Change: I look forward to sharing more progress with you soon.
Speaker Change: Thank you for your time today. Operator, please open the lines for Q&A.
Speaker Change: Thank you. At this time, we'll conduct a question and answer session.
Speaker Change: To ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while I compile the Q&A roster.
Speaker Change: Our first question comes from Jake Bartlett from Tourist Securities. Please go ahead.
Jake Bartlett: Great. Thank you so much for taking the question. My first one was about the trajectory of sales throughout the quarter. It looks like roughly consistent in August and September versus where you started in July.
Speaker Change: A couple moving pieces you mentioned, I just wanted to just make sure, maybe try to disaggregate some of the impacts.
Speaker Change: at the end of July, the drop-off in delivery sales. You also mentioned you increased promotional activity. Just trying to reconcile your trends, what drove it versus what looks to me like an accelerating trend throughout the industry.
Speaker Change: Yeah, thank you, Jake. I'll start on that. And you're right. At the end of July is when we saw a sudden drop in our third-party delivery channel sales, and that's a significant channel for us with a material drop.
Speaker Change: And I think that's the biggest reason that we didn't mirror the rest of the industry in August. In addition, we were rapping on more aggressive promotional support of our own in the prior year that we had chosen not to pursue this year because up until August.
Speaker Change: our strategy to position noodles for long-term sustainable growth was working. So that's exactly why we pivoted to a different promotional strategy.
Speaker Change: when we introduced our new dishes. And as we said, Q4 sales and traffic trends since then have improved materially with these new dishes, some increased advertising support, and those positive trends have continued more than two weeks after our BOGO has expired.
Speaker Change: In addition, our test marker results remain strong.
Speaker Change: with more food news to come, starting with the three new mac and cheese dishes that I mentioned.
Speaker Change: Our Foundation of Operations Excellence against satisfaction continues to improve. We believe we've identified a new strategy to regain to regain profitable traffic growth in the third party delivery channel. We'll be activating that shortly.
Speaker Change: And so while the challenging consumer environment impacted our Q3 results, we feel very good about capturing the opportunity ahead.
Speaker Change: Great. And maybe just to go in a little more detail as to what happened in delivery and the sudden drop-off. You mentioned identifying the reason. It doesn't sound like you would change anything. It sounds like maybe – was the reason that just the platforms just got more promotional, highlighted value in general? I'm just trying to understand what would have caused the deceleration and the kind of identification that you – I think it sounds like you need to lower your prices within the delivery channel.
Speaker Change: to engaging on the third-party channel. We believe that our existing menu markup
Speaker Change: the algorithm on that platform.
Speaker Change: Okay, so it was the consumer behavior change or just the algorithm just drove consumers in a different direction given where your pricing was? I'm just trying to understand the trajectory change. Anything specific happen or did the consumer change?
Speaker Change: The consumer didn't change, we believe it was the latter, the algorithm changed.
Speaker Change: Okay, great. And then, you know, just in terms of your guidance, I understand the wide range. It's an uncertain environment. It looks like, you know, at the...
Speaker Change: You know, the high end is slightly, you know, less, I'm looking at the fourth quarter.
Speaker Change: comp guidance, implied comp guidance of roughly 1% to negative 5. So obviously a pretty wide range. It sounds like with pricing, just want to make sure I'm right, that you would be at that roughly at that 1% already if you're looking at traffic of negative 0.8. Is that right? And I guess I'm just trying to understand the...
Speaker Change: Why is such a wide range and do you feel fairly confident that current trends can at least continue?
Speaker Change: So first on the pricing, effective pricing in Q4 will be just over 1%, about 1.3%. And so, together with the traffic trend we talked about, it gives you a base.
Speaker Change: Bye.
Speaker Change: of Just Under One today.
Speaker Change: When you look at quarter-to-day results impacted by FOGO and our Kid Feet Free promotion, which
Speaker Change: drive our check a little lower.
Speaker Change: The guidance range, we wanted to leave room for variability, which we've seen all year. So we wanted to make sure we captured some upside, which we believe in. And we believe we have room to the upside as third-party delivery continues to improve week over week in Q4. And as we build on the momentum with our three new dishes.
Speaker Change: But we also wanted to recognize there has been variability and leave some room for that on the downside.
Speaker Change: Great.
Speaker Change: I have one more and then I'll pass it on, and that is just around your free cash flow generation. You mentioned, Drew, that you thought you'd be positive in 25. I'm wondering whether that's a commentary, that you'd be positive for 25 as a whole, or at just some point during 25 you would turn positive from a free cash flow perspective.
Speaker Change: Yes, our expectation is that with lower CapEx, much lower CapEx, under $15 million expected for 2025, and that's...
Speaker Change: It's a pretty broad guidance point there. We haven't totally fine-tuned 2025 CapEx, but we know with just two planned openings it's going to be sub $15 million that we're going to have an opportunity for the full year to be free cash flow positive and then be able to carry that forward.
Speaker Change: Thank you so much. I'll pass it on.
Speaker Change: Thank you, Jake.
Speaker Change: Thank you.
Speaker Change: Thank you. I'm showing no further questions. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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