Title

Presentation

Noodles & Company beats earnings expectations. Reported EPS is $-0.05, expectations were $-0.08.

Operator: Good afternoon and welcome to today’s Noodles & Company’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce Noodles & Company’s Chief Financial Officer, Carl Lukach. Please go ahead.

Carl Lukach: Thank you and good afternoon, everyone. Welcome to our first quarter 2023 earnings call. Here with me this afternoon is Dave Boennighausen, 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 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 2022 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risk and uncertainties related to the company’s forward-looking statements. I’ll refer you to the documents and the company’s files from time to time with the Securities and Exchange Commission. Specifically, the company’s annual report on Form 10-K for its 2022 fiscal year and subsequent filings we have made. Each documents contain and identify important factors that could cause actual result 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 our most directly comparable GAAP measures is available in our first quarter 2023 earnings release and our supplemental information. To the extent that the company provides guidance it did so only on a non-GAAP basis and does not provide reconciliation of such forward looking non-GAAP measures to GAAP. Specifically, forecasted adjusted EBITDA, adjusted EPS and contribution margin are forward-looking non-GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable effort.

The corresponding GAAP measures including net income, earnings per share and income or loss from operations are not accessible on a forward-looking basis and such information is likely to be significant to an investor. Now I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Dave Boennighausen: Thanks, Carl. And good afternoon, everyone. During the first quarter, Noodles & Company delivered strong results with comparable restaurant sales of 6.9% and a 400 basis point improvement in restaurant level margin versus prior year, culminating an adjusted EBITDA of $7 million, a $4.8 million increase and more than triple our results from Q1 of 2022. Our results in the first quarter are a testament to the continued strength in restaurant level execution and our ability to take advantage of a more normalized and favorable expense environment than we previously anticipated. I’d like to start today’s call by discussing our initiatives to improve restaurant level margins. These initiatives were instrumental in driving the 400 basis point improvement we saw in the first quarter.

Last year, at this time, we were seeing unprecedented inflation in the cost of many of our core products, particularly our high-quality, all white meat boneless chicken breast. Combined with continued pressure on wage inflation, we encountered the most challenging expense environment that we have seen in decades. During 2022, the company has definitely reacted to these pressures through several cost savings and productivity initiatives. We work with our vendor partners to optimize the production of certain items, maintaining the same quality ingredients while improving efficiencies. We carefully monitored our primary commodities and during the fourth quarter, entered into a fixed contract on chicken for the full year 2023 at very favorable rates compared to 2022.

We tested a simplified menu. We’re moving approximately 10% of our menu items, which yielded strong guest and operational metrics and was expanded nationwide during the first quarter. We began the rollout of digital menu boards nationwide, which affords us the opportunity to reduce trip testing costs and gives us more flexibility for executing real-time marketing and pricing strategy. And we engaged with a third party to help us identify opportunities to streamline operations in existing restaurants while further reducing our footprint needs for future new restaurant builds. These initiatives were met with great success and will allow us to continue to have a more favorable long-term margin profile. As we executed against cost savings initiatives, the company additionally capitalized on our value proposition by strategically increasing our menu pricing across our system, including an additional 5% menu price that was implemented in February of this year.

The effects of all of these initiatives can be seen in our first quarter margin expansion. Additionally, what’s exciting is that we continue to see favorability in our expense profile, particularly in commodities, which we now anticipate in 2023, we’ll have low single-digit deflation relative to 2022. During the first quarter, our cost of goods sold decreased to 25.2% with an even lower COGS percentage during the last half of the quarter. While our long-term margin profile continues to improve, I do want to share some thoughts on our current trends and how we anticipate 2023 to progress. As you have heard from multiple companies throughout the industry, there has been a meaningful amount of noise in recent traffic trends as we have lapped the benefit of Omicron from 2022, as well as based on our most challenging comparison of the year, which for Noodles & Company was primarily during the March through May time frame.

Similar to others, we have seen choppiness in sales of lane, which for us has particularly manifested itself in the delivery channel. The delivery channel, which represented over 30% of our sales in Q1, had in past quarters been relatively stable. However, beginning during the last half of Q1, while dine-in sales continue to improve, we have seen a meaningful decline in our delivery sales. Although we believe the trend of reduced delivery sales is consistent with others in the industry seeing the shift from delivery to on-premise ordering, we additionally believe that we are seeing resistance to our prior price increases, presenting themselves in our overall traffic trends. In particular, we are seeing a reduction in conversion rates during the checkout process on our digital channels, as well as a reduction in frequency from lower and middle income cohorts.

While we feel our pricing strategy over the last 12 months was an appropriate approach to protect and ultimately expand margins, we had not anticipated the expense environment to improve as quickly as it did. Combined with the current consumer sentiment, we ultimately have seen some consumer pushback on price, particularly with this most recent 5% price increase in mid-February. Coupled with the most challenging traffic comparisons of the year, we do believe that Q2 will be below our prior expectations. As things currently stand, we would expect a positive delta versus expectations that we realized in the first quarter to be offset by our early second quarter results. Fortunately, given the more favorable expense environment, we have been able to quickly pivot the business to provide value for our guests.

Including this past Monday, implementing the return of the previously successful 7 for $7 menu, as well as the introduction of our $10 Mac & Cheese meal which gives guests the opportunity to enjoy our top-selling Mac & Cheese, famous homemade Rice Krispies and a drink at an affordable price. These offerings are also on some of our most favorable margin items and when combined with other value-focused promotions, gives us the opportunity to provide value while still maintaining strong profitability. We have already seen a nice response to our value offerings with sales stabilizing and traffic declines improving. We continue to expect to complete the full year with significant margin expansion and EBITDA growth, and we’ve reiterated our full year guidance as we believe our strength in Q1, the promotions we have in place and our underlying margin momentum will offset the challenges that we have seen early in the second quarter.

As we focus on traffic driving initiatives, our performance will be bolstered by continued strides in our rewards program, which grew 14% versus prior year to 4.7 million members at the end of Q1. Encouragingly, we continue to see strength in the engagement and frequency of our reward members with frequency up 3% relative to last year. Many of our traffic-driving activities are specifically designed to continue to increase enrollment in our rewards program, which brings with it increased ability to better engage our guests and become more effective with our marketing communications. Additionally, our team continues to be incredibly engaged and people metrics continue to improve meaningfully versus last year. We are fully staffed with both year-to-date annualized hourly and GM turnover roughly 30 points below 2022.

This has led to continued improvement in operational metrics from cook times to Net Promoter Scores. The improvement in people metrics is critical as we continue to increase our net unit growth rate. During the second quarter, we anticipate opening 6 to 7 new company restaurants. Assuming no material changes in the development environment, we continue to expect for full year 2023, approximately 7.5% gross new units, offset by roughly five closures of units approaching lease end, including two during the second quarter. Finally, I would like to end by sharing a few awards our team has recently achieved. Over the past few months, we’ve been honored to be named by Newsweek Magazine as one of America’s greatest workplaces, both for win and for diversity and were recognized for the third year in a row as the best employer for diversity by Forbes.

I’d like to express our gratitude to our teams as these awards recognize our strength in becoming an employer of choice in an improving but still challenging labor environment. Now I’d like to turn it over to Carl to walk through our Q1 results.

Carl Lukach: Thank you, Dave, and good afternoon, everyone. I will provide details on the quarter and some forward-looking views. During the first quarter, total revenue increased 12% to $126.1 million compared to last year, driven by strong comparable restaurant sales growth and revenue generated from units opened since 2022. Average unit volumes were $1.34 million during the first quarter, representing a 7.5% increase from the first quarter last year. System-wide comparable restaurant sales during the first quarter increased 6.4%, including 6.9% at company-owned restaurants and 4.1% at franchise locations. We benefited from positive traffic growth during the first several weeks in the first quarter, similar to the positive traffic growth we saw during the fourth quarter of 2022.

However, as Dave mentioned, comparisons became more challenging throughout the first quarter, resulting in sequential traffic declines that continued into April. These declines have since stabilized, and we are encouraged by our recently launched traffic driving marketing initiatives, which feature our most craveable menu offerings at attractive entry price points. Pricing during the first quarter was just above 10%, driven by a 5% pricing increase taken across the core menu in mid-February. At its height, we were carrying 13% of price during the back half of Q1 and the early portion of Q2. Since then, we have lapped our primary pricing activity from last year and expect to run meaningfully lower price through the remainder of the year. Additionally, our marketing promotions will include selective pricing reductions across our core menu to maintain several entry point entrees at $7.

This pricing reduction is supporting the relaunch of our 7 for $7 marketing campaign, which was extremely effective last fall in driving value perception and traffic. Turning to the P&L. For the first quarter, restaurant level contribution margin was 13.7%, a 400 basis point increase compared to last year. This improvement was predominantly a result of a 280 basis point improvement in our cost of goods sold to 25.2% of sales, driven by the expected benefit from our contracted food vendors, namely chicken, in addition to improvements in the commodity market for our formula-based food ingredients. Looking ahead, we expect both our full year food contracts and a favorable commodities environment we saw during the first quarter to support ongoing margin benefit into 2Q.

As we launch a higher level of traffic driving marketing spend during the second quarter, we expect discounts to offset the better-than-expected cost of goods sold environment in the second quarter. Importantly, while these initiatives are expected to negatively impact cost of goods sold, we expect they will be accretive to restaurant margin dollars. We will continue to monitor the impact of these marketing initiatives on our margin but anticipate our cost of goods sold percentage in the high 25% area for the full year. We continue to expect cost of food deflation for the year in the low single digits, inclusive of our favorable contracted rates for chicken. Labor costs for the first quarter were 32.3% of sales, which was essentially flat to last year.

Wage inflation during the quarter was approximately 9%, but represented sequential improvement throughout the quarter. We anticipate high single-digit wage inflation for the second quarter with continued moderation from our Q1 level. Other operating costs for the quarter were 19.5% of sales compared to 19.9% last year, reflecting strong sales leverage throughout our restaurant expenses. Occupancy expense for the quarter was 9.3% of sales compared to 10.1% last year, driven by sales leverage. We anticipate continued leverage in both of these expenses through 2023 to further support margin expansion. G&A for the first quarter was in line with our expectations at $13.6 million compared to $11.8 million in 2022. G&A includes noncash stock-based compensation of approximately $1.4 million during the first quarter compared to approximately $1.2 million last year.

It is important to note that G&A includes a bonus accrual that assumes a year-end payout at target, all contingent upon the results for the remainder of 2023 compared to a lower bonus accrual in last year’s first quarter. GAAP net loss for the first quarter was $3.1 million or a $0.07 loss per diluted share compared to a net loss of $6.4 million last year or a $0.14 loss per diluted share. Non-GAAP diluted earnings per share was a loss of $0.05 compared to a loss of $0.13 last year. Please refer to our earnings release for a reconciliation of non-GAAP measures. Turning to the full year. I would like to provide an update to the 2023 guidance we shared on our previous call. As Dave mentioned, we have reiterated our full year guidance as we believe the strength in Q1, the promotions we have in place and our underlying margin momentum will offset the challenges we have seen early in the second quarter.

For the full year 2023, we continue to expect adjusted EBITDA of approximately $45 million to $50 million, a 35% to 50% increase versus prior year and adjusted EPS of $0.10 to $0.20 versus a modest adjusted net loss in 2022. We additionally continue to anticipate full year restaurant contribution margins between 16% and 17% compared to 13.9% during the prior year. As a reminder, absolute first quarter restaurant level margin is historically below full year results due to seasonality and consequently is not indicative of full year expectations. For further details on our 2023 expectations, please refer to the supplemental information in our first quarter earnings release. Turning to the balance sheet. At quarter end, we had cash and cash equivalents of $2.1 million and a total debt balance of approximately $52.8 million.

We maintained nearly $70 million of incremental liquidity available for future borrowings under our amended credit facility. For the full year, we continue to expect $53 million to $58 million of capital expenditures, of which we spent approximately $10 million during the first quarter. We anticipate a majority of our capital investment will support new unit growth in addition to continued innovation of our website, mobile app and digital capabilities. Our capital plan also includes the investment of full digital menu board rollout and an upgraded network capability in all of our company locations by year-end. With that, I would like to turn the call back over to Dave for final remarks.

Dave Boennighausen: Thanks, Carl. We’re proud that the first quarter of 2023 continued the momentum that we saw in the fourth quarter of 2022 as we make progress toward a significant improvement in our baseline adjusted EBITDA. While navigating the current economic environment and the related consumer sentiment can be challenging, we believe our improving margin profile, which in turn gives us the ability to be more aggressive with targeted promotions, the expansion of our rewards consumer base, new restaurant growth and the simplification of our menu should all combine to support meaningful earnings growth in this year and beyond. While it’s early, we are already seeing a positive response to our marketing strategy and look forward to sharing with you progress over upcoming quarters. Thank you for your time today. And with that, please open the lines for Q&A. Operator?

Operator: [Operator Instructions] And our first question comes from the line of Joshua Long of Stevens Inc. Your line is open.

Operator: Thank you. One moment please. Our next question comes from the line of Andrew Barish of Jefferies. Please go ahead.

Operator: Thank you. One moment please. Our next question comes from the line of Todd Brooks of The Benchmark Company. Your line is now open.

Operator: Thank you. All right. Our next question comes from the line of Jake Bartlett of Truist Securities. Your line is now open.

Operator: Thank you. I am showing no further questions at this point. I would now like to turn the conference back to management for closing remarks.

Dave Boennighausen: Thank you, Benny. Again, we’re pleased with our Q1 results and the underlying margin momentum at Noodles & Company. While there remains an uncertain macro environment, we’re excited at the initial response that we’re seeing from our targeted value messaging activities. And we continue to expect that ultimately, everything is going to culminate into a full year 2023, that’s going to be a year of meaningful margin and EBITDA expansion. We really look forward to sharing our progress as we go forward in upcoming quarters. Thank you very much for your time today. Have a great evening.

Operator: Thank you. And this concludes today’s conference call. Thank you for participating. You may now disconnect.