Q2 2019 Earnings Call
Welcome to today's noodles <unk> company's second quarter 2019 earnings conference call.
Hi, Richard.
No.
After the presenters remarks, there will be a question and answer session.
As a reminder, this conference call is being recorded I would now introduce noodles <unk> company's Chief Financial Officer, Ken Q.
Thank you and good afternoon, everyone welcome to our second quarter 2019 earnings call here with me. This afternoon are Paul Murphy, our executive Chairman and Dave bending housing, our Chief Executive Officer.
I'd like to start by going over a few regulatory matters during our opening remarks and in response to your questions. We may make forward looking statements regarding future events or the future financial performance of the company any such items, including our guidance about our anticipated results from 2019 and 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 2018 fiscal year and subsequent filings with the FCC 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 2018 fiscal year and subsequent filings we have made.
These 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 second quarter 2019 earnings release, and our supplemental information.
Now I'd like to turn it over to Paul Murphy, our executive Chairman.
Thanks, Ken and good afternoon, everyone.
Over the past several quarters, we have laid out the company strategy to deliver top tier sustainable growth at the top and bottom lines.
As we continue to make progress against our initiatives. We're extremely pleased with our Q2 results, which was our fifth consecutive quarter of positive same store sales highlighted by 4.8% company wide comparable sales growth.
To your growth of 9.8% and restaurant level margin expansion.
160 basis points to 17.1%.
As we have discussed in prior earnings calls, we firmly believe that noodles <unk> company has the inherent strengths necessary to become one of the premier growth concepts in the restaurant industry.
Our unique noodles and pasta based menu delivers flavors from throughout the world and variety spanning from our famous Mac and cheese tour unhealthy. So Kenny dishes. Additionally, the brand is uniquely positioned to meet the increasing consumer demand for convenience as our food travels well amidst a variety speed and pricepoint necessary to compete favorably for the off premise occasion.
As we transition to the next phase of our strategy, including the incorporation of meaningful unit growth.
We're convinced that the brand is positioned well from a consumer people and operating model perspective.
While we continue to remain focused on expanding top and bottom line results in our existing restaurants. We also see significant potential to expand the brand in a disciplined manner that will provide sustainable long term shareholder value creation.
I'm proud of her 10000 team members nationwide, who continued to provide outstanding guest experiences day in and day out you know, it's helped us deliver another quarter of strong financial performance.
I will now turn it over to Dave to provide more details on our Q2 results and current initiatives.
Thank you Paul we're very pleased with our second quarter financial performance as the company continues to deliver top tier results executing on the strategic initiatives that we have discussed over the past several quarters.
As Paul noted the second quarter was highlighted by strong topline growth and margin expansion.
In fact, our two two results reflected our best two year stack comparable sales growth in six years, and our strongest quarterly restaurant level margins since the second quarter of 2015.
Our performance in the second quarter benefited from our continued commentary innovation investment in the off premise occasion, and further execution of our operational and people initiatives.
From a country perspective, we continue to better define how guests can access deals the company regardless of their dietary preferences.
Choice has always been a great strengths of the brand and we continue to innovate in ways that allow guests to enjoy the world flavors, They know and love as well as discover new ones with all the benefits of healthier noodle options.
As we discussed the introduction of the Teeny rose last year removed a major obstacle to the brand by providing a low carb gluten free noodle alternatives to our guest.
We continue to innovate around plant based menu options and we anticipate launching a cauliflower infused rigatoni dish systemwide in late September this year.
Like the Zutto, our cauliflower infused rigatoni has tremendous versatility as a substitute in all of our dishes.
In addition to a more helpful. Alternative for adult we're also excited to offer parents the opportunity to bring vegetables into their kids diet without sacrificing the flavors did the picket have kids have come to love from Nielsen Company.
As we increase the variety of our core menu. We also continue to provide multiple avenues for our guest to access the brand.
Building, our off premise business to meet the increasing need for convenience from today's consumer.
Off premise sales again, representing more than half of our total sales and increased 500 basis points over last year to 56% of sales.
Growth was led by digital ordering which inclusive of delivery grew 47% year over year during the second quarter and represented 22% of total sales.
Well, we are excited about our growth in digital sales to date, we still believe there is significant opportunity to simplify the digital experience as well as better communicate the brand to existing and potential guests alike.
Concurrent with our launch of cauliflower infused new rules at the end of September we will also be relaunching, our entire digital platform.
Including our App online ordering experience and our rewards program.
Both the App and online ordering improvements will significantly reduce friction for our guests, particularly surrounding their ability to customize their meal to meet their individual preferences.
Meanwhile, we'll be moving from our current surprise and delight rewards program to a new rewards program that will incorporate not just surprise and delight capabilities, but will also provide a points in tier system to better reward our guest and allow for more customized customer engagement.
We believe our new rewards program in digital capabilities will transform our ability to communicate with guests from a marketing perspective, and a more personalized targeted and relationship driven manner.
As our core off premise business continues to grow we also still see significant runway in the delivery and catering opportunity delivery grew to 6.6% of sales during the second quarter and we will soon begin testing of third party delivery direct from the noodles and company website now.
Allowing us to better engage with guests as well as mitigate the cost pressures that come with delivery.
Since starting catering, which still accounts for less than 2% of total sales we remain on track to relaunch our program during 2020, which we believe will add to our ability to deliver long term sustained growth.
As our initiatives continue to drive our best performance in years from a comparable sales and restaurant level margin perspective.
I would like to take a bit of time to discuss our increased confidence in the company's ability to successfully expand our unit count.
We are working diligently at our restaurant pipeline and anticipate six new restaurants to open system wide during the back half of 2019.
Including five company and one franchise location.
Two of the five company restaurants have opened thus far in Q3 with an additional opening occurring tomorrow.
As we return to unit growth I would like to discuss a few aspects of our strategy, namely our growth targets our approach to the operating model and finally, our thoughts on franchise.
From a growth target perspective, as we've mentioned in the past, we're targeting 5% unit growth system wide beginning in 2021 with potential acceleration to roughly 7% unit growth at some point in years beyond.
Our approach will be disciplined factoring in strict site and economic characteristics as well as ensuring that our people pipeline is robust enough to support the unit expansion and provide operational fulfillment of the brand promise.
As to the operating model for new restaurants, we have already begun incorporating pick up windows into the majority of our new restaurants and continue to target smaller square footage units to reflect the evolution of overall guest preference towards the off premise occasion.
Additionally, we have completed the first stage of our efforts to optimize our equipment package and operating processes.
We expect these changes will yield improvements to labor efficiency throughput and food quality, while also creating the flexibility for future culinary innovation.
This initiative will require changes to many of our operating procedures and as such we anticipate rigorous testing before it gets incorporated into all of our restaurants.
Well, we will start testing the kitchen remodel during the fourth quarter of 2019 in existing locations new restaurants are expected to begin seeing the new operating model in Q1 of 2020.
We anticipate this project will meaningfully improve our restaurant efficiency, but until we have thoroughly vetted each initiative and alive restaurant environment. We believe it's a bit premature to speculate as to the potential impact on unit level economics.
Additionally, we believe that utilizing a smaller square footage footprint with a more effective economic model will provide a greater opportunity for us to grow the franchising side of our business.
Well, we expect franchise growth to remain modest as we've got our new design, we are seeing increased appetite for growth from existing and new franchisees alike.
In July we Refranchise five restaurants to a strong existing franchisee.
Expanding their territory and align the acceleration of the brands growth in their respective market.
Additionally, we have recently finalized our first new area development agreement in several years, which calls for the construction of six new franchise restaurants are in certain markets of South Carolina over the next few years.
While still early we are extremely excited about our progress on the development front and look forward to sharing more with you over the coming quarters.
Meanwhile, noodles <unk> company's performance in Q2 delivered against some of the most challenging comparisons in years is further evidence of the strength of our brand the power of our initiatives and our ability to position the brand to capitalize on a significant growth opportunity ahead.
I would now like to turn it over to Ken to discuss in more depth, our Q2 results and expectations for the balance of 2019.
Thanks, Dave and good afternoon, everyone for the second quarter ended July 2nd 2019, we reported net income of $400000 or one cents per diluted share compared to a net loss of $5.9 million or 14 cents per diluted share during the second quarter of 2018.
During the second quarter the company recorded revenue of $120.2 million, a 2.4% increase over the prior year as we saw the benefit of strong comparable sales growth, including a 2.8% weighted price increase during the quarter, partially offset by the impact of close restaurants.
Systemwide comparable sales increased 4.6% comprised of a 4.8% increase at company owned restaurants, and a 3.7% increase at franchise locations.
Second quarter comparable sales were negatively impacted by approximately 50 basis points due to a fiscal shift in the Easter holiday. This impact offsets the 50 basis point tailwind we saw in Q1.
As we noted despite the slight headwind our two year comparable restaurant sales growth at company owned restaurants of 9.8% was our best performance in six years.
Company owned comparable restaurant sales included an increase of approximately 2.8% of menu price and a mix shift increase of approximately 2.5%, partially offset by half point decline of traffic.
From a menu mix perspective, we saw continued growth from delivery as well as from the early second quarter launch of our new menu board that features higher price signature items as well as the opportunity for guests to make it a meal by purchasing a drink and aside for one low price.
Additionally, we saw a continued benefit from the higher check associated with our zucchini noodles, which continues to grow in mix.
Turning to profitability overall restaurant margins improved 160 basis points to 17.1% their highest level since the second quarter of 2015.
This improvement was driven by leverage on higher LTV, lower marketing spend supply chain savings initiatives and labor efficiencies, partially offset by an increase in third party delivery fees and labor inflation.
Cost of goods sold as a percentage of restaurant sales decreased 110 basis points to 25.6% during the quarter, reflecting successful implementation of certain supply chain savings and pricing initiatives.
We anticipate Cogs to remain between 25.5 and 26.5% during the last half of the year as we expect our cost saving initiatives to be partially offset by promotion of the new guest engagement program that Dave referenced earlier.
Labor during the quarter was flat compared to last year at 32.7% of sales.
Well, we did see leverage from our comparable sales growth and labor systems introduced in the first quarter. They were generally offset by wage inflation of approximately 5%.
We continue to expect wage inflation of 4% to 5% for the remainder of 2019. However, we expect to achieve modest year over year leverage in labor during the balance of 2019 as a result of comparable sales growth and earlier labor initiatives.
Additionally, as Dave discussed as we move into 2020 and beyond we are encouraged by our work on the back of the House design, which we anticipate will help us to better address wage inflation over the long term.
Other operating expenses decreased 30 basis points from the prior year to 14.2% of sales benefiting from leverage on a TV growth as well as reduced marketing expense, which declined 40 basis points to 0.9% of sales.
These benefits were offset by a 130 basis point increase in third party delivery fees, which increased to 1.5% of sales.
And what delivery as a whole is incremental and accretive to earnings we are continuing to test different approaches to delivery pricing and direct delivery to mitigate the impact that delivery has on margins.
General and administrative expenses in the second quarter decreased 270 basis points to 9.9% of sales.
DNA in last year's second quarter included charges totaling $3.7 million related to data breach liabilities and the settlement of gift card litigation.
Excluding these charges Gnh increased 50 basis points due primarily to higher compensation costs as we filled out the management team.
Adjusted EBITDA increased 20.5% in the second quarter to $10.9 million, while adjusted earnings per diluted share increased to five cents in this year's second quarter from one cents last year.
Turning to the balance sheet long term debt at the end of the second quarter was $46.1 million a $3.2 million decrease from the end of the first quarter due to the strong second quarter operating results.
And cash on hand at the end of the second quarter was three point.
$3 million.
Our balance sheet remains strong and we anticipate that we will be able to continue to pay down debt over the remainder of 2019.
Our anticipated effective tax rate for the full year is between one and 4%.
Moving to guidance for the remainder of 2019, let me start with our development expectations as Dave discussed we anticipate five company restaurants to open during 2019 complemented by one franchise opening.
And outside of unit development, we are affirming our guidance from our prior call and this guidance includes comparable sales growth of 3% to 5%.
Total revenue of $466 million to $474 million.
Restaurant contribution margin of 15.5% to 16.5%.
Adjusted EBITDA of 37 million to $41 million.
Adjusted net income per diluted share of eight cents to 16 cents and capital expenditures of $42.5 million to $19 million.
In closing we are pleased with the performance as it continues to reinforce the substantial upside potential of the noodles and company operating model and we look forward to sharing how our top and bottom line initiatives continue to help drive sustainable consistent long term growth for the brand.
And with that I would now like to ask Howard to open the lines for QNX.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
If your question has been answered or you wish to remove yourself from the queue simply press the pound key.
Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our first question or comment comes from the line of Jake Bartlett from Suntrust. Your line is open.
Great. Thanks for taking the question.
My first was given the results in the second quarter, which were stronger than what we were expecting much or how they relate to what you were expecting but I'm just curious as to why guidance wasn't raised it seemed like it was a.
A very strong quarter and I'm wondering within that that that answer does have anything to do with the refranchising over those 11 stores.
No really the the refreshing of this refranchising of those stores Jake somewhat de Minimis to the overall impact on our financials ultimately our guidance from the last quarter reflect our confidence in the balance of the year and I think you saw it in the same store sales targets as well as margin and EBITDA.
Second the second quarter performed as we expected it and we continue to expect a strong back half of the year lot of confidence in the initiatives that we have.
Whether it be the cauliflower introduction or the rewards program. So we still feel very strong about the what we see for the balance of this 2019.
Got it and if you could just give us some maybe some detail on how the composition of the of the comp changed as you rolled over the launch of observables last year and I'm, just I'm, noting that I think the traffic was stronger at the beginning of the quarter. It ended up.
Negative, but you had that big check.
I thought that kind of lapping the Czech wood wood lapping the doodles would would would have been mixed come down. So maybe you any any commentary on how how that's that's all kind of looking as you exit the quarter.
Including what the impact of the menu change the pricing changes in the structure changes were on the menu.
Sure Jack Yes, as Ted alluded to we still are very excited with what we're seeing from a check perspective from both delivery, which is coming with a higher per person spend as well as with as a keen it'll which does continue to grow and mix a lot of the growth you see there does come from the new menu board, which includes making the meal includes some other aspects that are helping move the needle. There we continue to be very happy with the trajectory of the business overall exiting the quarter and at the very beginning of Q3. There was some choppiness around the fourth of July holiday. Once we got past that fourth of July holiday week, we're seeing the business come back strong momentum.
Got it and then last question is just on the longer term development plan and want to make sure I'm clear as to whether.
Whether you expect that to be more franchise store led or company, let it I might have missed it but just in the context of some of the new development agreements and the Refranchising what should we expect unit growth to look like in terms of the source in 2021 and beyond.
Yes, I would certainly like Paul to weigh in as well, but one one way we look at franchising is our first goal is to improve the economic model of the organization and as we do the work on the back of the house kitchen design.
Smaller square footage units the pickup window, we feel it's imperative that we are able to prove those out in order to more aggressively pursue franchising as a part of the growth strategy. We certainly believe that there is a lot of optionality and opportunity there.
But I believe it's a touch too early to really break out what we expect will be company versus franchise growth and Ajay. This is Paul I anticipate early on being.
A bit more company driven.
We are very pleased with the.
Results of the first phase of work on the back of the house has really.
Met all day.
And certainly in the in the mock kitchen tests were about to bring it in the fourth quarter in July then.
Our three different types of.
Back to houses that we have but he was able to address.
The quality of the product it was able to address.
Basically the speed of service in reference to Cook times and.
Able to address the labor efficiency, which.
You know David called out in his remarks, so as we get that put into the.
The prototype.
Scaled down the footprint, we think that the economic model will be very compelling from a franchise point of view. So we see that starting to layer in as we move through time and then hopefully.
Becoming a real.
The driver of our of our unit growth or restaurant, yet I do want to clarify Jake and your first question in terms of the franchise activity that occurred over the last few weeks. There are two separate transactions. The first one was a refranchising to an existing franchisee that was five restaurants relatively minimal impact on the overall projections for the company.
But feel very excited they will be able to accelerate growth under a new territory agreement the second.
The second thing that occurred was actually the signing of a new 88.
So that calls for six restaurants opening in South Carolina over the next few years again, not going to have significant impact in terms of the overall growth pile profile the organization, but really I think good bellwethers for the momentum we're seeing from the franchise community.
Great. Thank you very much.
Thank you our next question or comment comes from the line of Andrew.
Stress.
From BMO capital your line is open.
Hey, Good afternoon. My first question is about the cauliflower Rigatoni can you talk about.
Any testing that you did around the product what was the impact.
The price is the price point going to be similar to the zoo tools and I guess bigger picture did you find it to be incremental from a mixed perspective does oodles such that.
Adding better for you products grows that pie within within.
I guess the share of the better for you products or is it more kind of switching between the better for you.
No absolutely those are great questions, Andrew I mean from the initial task, but we're excited about is the overall acceptance as well as the repurchase intensive that rigatoni and one reason we went with the cauliflower infuse neutral is unlike the zucchini. It does have a bit of a different taste profile. It doesn't have the texture that you see listed keeney. It has exactly what you weren't for somebody that wants to get more vegetables into their diet have a more plant based alternative but doesnt necessarily have the bite of what you see listed keeney instead has a bit more of your traditional wheat pasta bite. So we were able to see that it was able to attract the guest that Kenny was just a little too much for them Thats, a Kenyan was a bit polarizing.
And what we also enjoyed seeing was the versatility of the cauliflower noodle somebody who I have an eight year old in a six year old I'm getting vegetables into their diet is extremely difficult transitioning it into as you can in Italy.
Not necessarily in the cards, but when you try the cauliflower neutral.
Among the spaghetti or Mac and cheese or anything along those lines you really can't tell the difference. So we are seeing the opportunity to hit a different type of guest here.
From the pricing perspective, it's not price to the premium that that's 15 years.
So it is a little bit higher than the core menu, but not the dollar upto RCC with as a Kenyan neutral.
Okay, Great that's helpful and then.
Can you talk a little bit or give us an update on the pricing strategies that youve been testing to mitigate some of the delivery margin headwinds and I know now you're talking about potentially pushing people through the app, but it feels like the magically one of the things. We're hearing more is the ability to renegotiate those fee structures lower is that an opportunity for the brand is is there some limitation on your ability to do that.
Yes, I don't want to speculate on where we'll ultimately land with with fees from our third party providers, which have been great partners with us as we've gotten this program off the ground.
But certainly that is something we're looking at from a pricing perspective, we are still in test we want to see a few more kind of guest guest rotations through the cycle to see what the impact could potentially be on traffic as well as Chuck.
We will give a much more wholesome fulsome update on that during the next earnings call, but we are still in test where no plans to not necessarily rollout any pricing changes.
Over the next several weeks nationwide.
And then if I could just squeeze one more how much was the marketing down in the quarter and whats the plan over the balance of year and beyond.
Marketing as a percentage of sales correct, if im wrong down 40 basis points to 0.9% of sales, we would expect it to be in around that 1% number for the balance of this year. What you will see Andrew is from the Cogs perspective, a bit more promotional dollars going towards engaging and energizing our guests around the new rewards program. We're excited with what the capabilities are with this particular program. We've talked about in the past that this is a brand that has greater choice and we personalize menu and offerings to our guests liking and unfortunately for US we have not had quite the capabilities, we would like from a marketing perspective to target folks.
We've ended up with the brand providing greater choice for being limited in how we engage existing guest as well as activate new new guest into the brand. So you end up with Mac and cheese and zoo to going to the same audience, even though they might be completely different gas and what their preferences are so you will see a bit more on the cost of goods sold line as we activate that program and become a bit more targeted and how we communicate that's where you'll probably see more of the impact than you will in the actual marketing line.
Great. Thank you very much.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question or comment comes from the line of Andy Barish from Jefferies. Your line is open.
Hey, Alex on for Andy.
Good.
Maybe digging in a little bit more to that piece.
From the customer research that you had done in head ultimately led to the satellite launch.
And then we can refresh.
What were you running from customers with respect to.
What they wanted out of the rewards program, maybe just beyond kind of that expression of customization.
Yes, I think customization was probably the one that came most loud and clear Alex in terms of just a weakness that we had more so in the online ordering experience within the rewards program itself on the rewards program. The one that we consistently here is the fact that when we do provide.
Provide offers or provide just communication in general just how it might not be relevant to them. So when you have a brand that has strength with families and kids.
That has this this generation Z band.
You then see us have as a key new tool and the color flower infuse neutral and when you're spreading it very thin in terms of across the entire platform.
It just you'd get a lot of folks that would say.
I get this offer zucchini, Oregon, Soffer for Mac and cheese, that's not relevant for me. So that was the biggest learning we had is to allow it to be a bit more customized to their preferences at the same time.
Folks want some psychological productivity, our predictability from the rewards program, so surprise and delight there was a bit of frustration we heard from the gas in terms of not really understanding.
If they were getting rewarded for their loyalty or not how we are approaching it is yes theres points based aspects of it but also tiering in terms of being able to provide.
Guests the ability to access certain features or aspects of the brand based on their loyalty.
Two noodles and company so.
To put it in a nutshell it would be really the customization has been a challenge from the App execution perspective, and then our ability to effectively segment and target communications and promotions.
Has been the second aspect.
Got it that makes sense and then maybe going back to the guidance.
And maybe I missed this but.
I think of all the guidance was trend toward the lower end.
Of the previous range, so with some of that ramp toward 5%. In 2021 includes some of this year's unit slipping from 19 to 20 or.
Within that change, yes, there's an aspect there so as we see that benefit.
Potential of this back of the house kitchen design, there were a few locations that we strategically.
Place since the beginning of Q.
2020, which allows us to have that out.
The learnings from that and ensure that we have the proper execution.
Of the new kitchen design when we go into those restaurants. So you will see kind of a flurry of activity early in 2020 from some of the openings that were originally slated slated for 2019.
Got it all right. Thanks.
Thank you. Our next question or comment comes from the line of Dennis Geiger from you be if your line is open.
Great. Thanks for the question.
You mentioned the sales mix trending higher.
But curious if you could speak to kind of what you've seen over the last couple of quarters I guess from a gas perspective is it still new customers coming is it existing customers that are increasingly orderings hurdles and I guess, just how you think about what youve seen from a customer perspective, there with respect to future offerings cauliflower and other plant based items new customers existing ordering it more.
Thanks.
Yeah, we still think Theres no. It's a good question Dennis we still think there is a lot of upside in terms of great gaining awareness versus a canyon is what we're seeing is in our rewards program as it exists today only about 20% of our rewards members have actually tried zucchini.
So being a bit more targeted in a bit more.
Engaging an open width.
Getting folks to try that 16 year old, particularly based on how versatile it is.
You will not see us shy away from zucchini, even as we launch cauliflower and it'll it will be part of an overall, how do you eat in a plant based healthy way from Nielsen company. So the research the data.
The results were seeing still shows that there's quite a bit of upside in terms of articulating that offering to guest.
Thanks.
Thank you.
I'm showing no additional audio questions in the queue I'd like to turn the conference back over to management for any closing remarks, yes. Thank you. We appreciate everyone's time today, obviously very pleased with the trajectory of the business.
Going against some of the most challenging comparisons we've had in years, just very pleased to see where we're at from a two year growth perspective.
From a margin perspective, as well as the trajectory going into the balance of the year. So thank you a lot have a wonderful evening.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.