Good afternoon and welcome to today’s Noodles & Company's Second 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, Mike Hynes. Please go ahead..

Thank you and good afternoon, everyone. Welcome to our second quarter 2023 earnings call. Here with me this afternoon is Dave Boenninghausen, our Chief Executive Officer. I'd like to start by going over a few regulatory matters.

During our remarks, 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 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, including those referred to in this afternoon's new 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.

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 2023 earnings release.

To the extent that the company provides guidance, and it does so only on a non-GAAP basis and does not provide reconciliations of forward-looking non-GAAP measures, specifically forecasted adjusted EBITDA, adjusted EPS and contribution margin. Quantitative reconciling information for these measures is unavailable without unreasonable efforts.

The corresponding GAAP measures 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 Boenninghausen, our Chief Executive Officer..

First, continued but moderated new restaurant growth. Second, the streamlining of certain administrative functions to reduce G&A cost. And third, the return of shareholder value including share repurchases.

One of our primary objectives going forward is to achieve positive free cash flow in 2024, through the combination of revised unit growth, the completion of our customer data platform and digital menu board investments and a corporate restructuring effort to align our organization with our growth objectives.

In support of our free cash flow activities and considering continued delays in the development and permitting process as well as construction inflation, we are revising our targeted annual unit growth rate to 5% for the coming years, including 2023.

We continue to be pleased with the performance of our new units, but believe this slower growth rate will allow us to achieve long-term sustainable growth and achieve positive free cash flow next year.

Combined with the completion of our customer data platform and digital menu board investments, these actions are driving factors in our revised capital expenditures guidance of $45 million to $50 million for 2023, down from our prior guidance of $53 million to $58 million.

Additionally, earlier this quarter, we reviewed our needs as an organization to meet our long-term growth objectives. As a result of this review, we implemented a corporate restructuring that we anticipate will yield nearly $2 million of G&A savings annualized.

These actions allow us to continue to invest in areas such as our digital experience and technology initiatives, while streamlining our administrative functions.

Finally, today, we announced that our Board of Directors has authorized a share repurchase program, giving the company the opportunity to purchase up to $5 million of common stock, as part of our strategy to increase long-term shareholder value.

Before I turn the call over to Mike, while we are disappointed in the results of the second quarter, I want to reiterate my belief that the core of the Noodles brand is well-positioned for success. And there is significant upside potential of our current results.

You have heard today our plans and strategies to address our current shortcomings, build upon our strengths and deliver sustainable shareholder value. We are excited to provide you an update on our progress in the quarters to come. As we execute these strategies, I'm excited to welcome Mike Hynes to the team as our Chief Financial Officer.

Mike brings nearly 25 years of finance, accounting and Investor Relations experience to the team. And I look forward to working with him and for Mike to have a significant influence with our team and company to achieve our full potential..

Thank you, Dave. It's great to be here. I'd like to thank the Noodles team for welcoming me into the business. I have only been with the company a few short weeks. I'm energized by the opportunity ahead of us, and excited about what our team can achieve. Turning to results for the second quarter.

Total revenue decreased 4.5% to $125.2 million compared to last year, driven by a decline in comparable sales, partially offset by revenue from new restaurants. System wide comparable restaurant sales during the second quarter decreased 5.5%, including a decrease of 5.9% at company-owned restaurants, and a decrease of 3.4% at franchise locations.

Our recently completed July fiscal period included a system-wide comparable sales decline of 3.8%, including declines of 4.5% at company-owned restaurants, and 0.3% at franchise locations. Company average unit volumes in July were $1.35 million, 14% above pre COVID July of 2019 AUVs. Company comparable traffic during the second quarter declined 9.1%.

As Dave mentioned, traffic was especially challenged during our April fiscal period, with a decline of 14%, followed by sequential improvements to declines of 8.7% in May, and 5% in June. Pricing during the second quarter was 6.1%.

Although given the lapping of pricing from 2022, as well as strategic actions taken in May, pricing year-over-year came down meaningfully throughout the quarter. We entered the quarter carrying 13% of price, but during the last half of the quarter, pricing decreased to 3.2%. We anticipate this level of price to carry forward in the third quarter.

For this current third quarter, we anticipate total revenue of between $125 million and $130 million and comparable restaurant sales to decline mid-single-digits. Turning to the P&L. For the second quarter, restaurant level contribution margin was 14.8%, a 70 basis point decrease compared to last year.

Our restaurant contribution margin included meaningful improvement in our cost of goods sold line, offset by deleverage across other areas of restaurant expense. COGS in the second quarter was 25.1% of sales, a 270 basis point improvement from prior year.

This improvement was the result of continued favorability in normalized commodity markets relative to last year, as well as the impact of initiatives executed over the last 12 months. We continue to expect overall low single-digit food deflation for 2023 led by chicken, which is contracted for the full year.

Labor cost for the second quarter were 32.4% of sales, compared to 30.3%. Wage inflation continue to moderating but year-over-year hourly inflation growth of 7.7% for the full quarter, but only 6.1% during the recently completed July fiscal period.

While we continue to expect de leverage across the labor lines for the balance of the year, we expect that deleverage to moderate as wage inflation subsides, and we implement initiatives from our recent menu and operations simplification efforts.

Due to deleverage other operating costs and occupancy costs, both rose 70 basis points over prior year to 18.5% and 9.3% of sales, respectively. G&A for the second quarter was $12.5 million, $300,000 less than prior year, due primarily to reduced cash incentive compensation.

G&A also included noncash stock-based compensation of approximately $1.5 million during the second quarter in line with prior year. For the current third quarter, we anticipate G&A expense of between $12 million to $13 million, including $250,000 of restructuring expense and approximately $1.5 million of non-cash stock-based compensation.

Inclusive of the impact of the restructuring Dave noted, we anticipate full year G&A to be between $50 million and $53 million. GAAP net loss for the second quarter was $1.3 million or a loss of $0.03 per diluted share, compared to net income of $1.3 million last year.

Non-GAAP diluted earnings per was a loss of $0.02, compared to earnings of $0.05 last year. Please refer to our earnings release for reconciliations of non-GAAP measures. Turning to the full year, I'd like to provide an update to the 2023 guidance.

As Dave mentioned although the company has gained traction relative to our performance at the beginning of the second quarter, we have revised certain expectations given the current performance.

For the full year 2023, we are providing guidance of $500 million to $510 million for the full year revenue, inclusive of negative low single-digit comparable restaurant sales. We anticipate full year restaurant contribution margin between 14.5% and 15% with our current guidance reflecting margin expansion of 60 to 110 basis points versus prior year.

For the current third quarter, we anticipate restaurant margin just north of 15%. We now expect adjusted EBITDA between $35 million and $40 million with the upper end of our guidance, reflecting EBITDA growth of over 20% versus 2022.

Included in our full year guidance is expected adjusted EBITDA for expectations for third quarter of $9 million to $11 million. Our adjusted EPS expectations for 2023 are now between negative $0.11 and $0. For the third quarter, we anticipate adjusted EPS between negative $0.03 and positive $0.01.

For further information regarding our 2023 expectations, please see the business outlook section of our press release. Turning to the balance sheet. At quarter end, we had cash and cash equivalents of $3.1 million and a total debt balance of approximately $64.7 million.

We currently have nearly $16 million of incremental liquidity available for future borrowings under our amended credit facility. During the second quarter, the company opened six new restaurants and as discussed at the last earnings call, we closed two restaurants. In the third quarter, we expect 3 to 4 new company openings, and no company closures.

For the full year, we now expect approximately 20 new restaurant openings system-wide including 1 to 2 franchise openings in the fourth quarter, representing 5% gross unit growth for the year.

As we complete our one-time investment in digital menu boards across the system, we expect to be able to support our ongoing 5% unit growth target, primarily through operating cash flow. With that, I would like to turn the call back over to Dave for final remarks..

Continued with moderated new restaurant growth, streamlining our G&A infrastructure, and the authorization of a share repurchase program. Fortunately, we have a strong foundation to build from.

With a differentiated brand, robust digital and rewards program and the culinary and pricing flexibility that we will garner from the upcoming completion of our digital menu board rollout. Average unit volumes have stabilized and are growing, and the cost environment remains favorable.

We have great confidence in both our short-term and long-term strategies to address opportunities. We see both in our value proposition and our overall competitive positioning, and I look forward to sharing our progress in upcoming quarters. Thank you for your time today, and please open the lines for Q&A..

[Operator Instructions] Our first question comes from Jake Bartlett with Truist Securities. .

Great. Thank you so much for taking the question. Dave, I want to start with just the diagnosis of what's caused this this really sharp deceleration. I know you have talked about the menu pricing that you took in February.

As you have dug deep into this, is there any other you know, explanation, whether it's service levels, customer satisfaction, maybe delivery has been a, anything you can help us to understand such a sharp deceleration in the trend here with traffic..

Yes, Jake. Certainly, we feel that pricing has been the dominant factor. We have not been alone in raising prices. We obviously know that. But we do feel that, ultimately, we were more aggressive with pricing than many of our peers. At hight, we are running 13% year-over-year pricing and nearly 20% two-year pricing.

While we have remained strong with rewards members, higher income guests, we needed to and we are continuing to work to win back some of those more price sensitive guests. That says you look at all of the other metrics to your point about what the diagnosis is.

We feel very comfortable with the people metrics improving, cook times, operational metrics improving. But one thing we noted today is that, we do think it is time for us to take a fresh look at our overall menu. We feel the menu has a strong foundation.

Our internal analysis research gives us a lot of confidence in the potential of Chicken Parmesan as well as other optimization opportunities.

But that said, we think it's an appropriate time for us to take a comprehensive fresh look at the overall menu and culinary strategy because we know the upside AUV potential of this brand is much higher than where we are today. From a channel perspective, again, we have seen strength in dine in dining.

We have actually seen a rebound in part of the delivery program as well. Some of the digital and -- to go area as learning that. Again, we think will be specifically benefited by digital menu boards. Those are some opportunities we have as well..

Great. And just to follow-up on that, I just want to make sure I understand that the pricing commentary correctly, and the 13% increase year-over-year. How much of that was on the in-store menu? I know 20% two year, 13% one year, but my impression that, it was that a lot of the menu pricing you have taken has been on the delivery side.

So just if you could isolate that to the in-store menu, that'd be helpful..

Yes. Actually, the 13% year-over-year, really was across all channels. So during the course of COVID, when we did implement price increase and as you look at the two year, there was a significant amount that had to do with the delivery price premium.

But really over the last, last year or so, that price increase has been kind of across all channels including in restaurant. To put just some more texture behind it. As a reminder, we implemented 8% of price in Q2 of 2022, and an additional 5% here in February of '23. Those were across all channels, not just on the delivery side.

As we lap the 8% price increase from last year, we didn't replace it. And as we introduced the 7 for 7 menus during our pivot, that effectively dropped our price another 2% or so. So our run rate, as we sit today, again, is approximately 3%.

So we have gained some good traction, winning guests back from a value perspective, but it's going to take some time and we continue to be focused on improving that value perception..

Great. And then my last question is, just on the cost side. And you have taken some pretty solid measures to decrease your G&A. I want to make sure that the level that you're cutting it to is a right is the right kind of level to grow from in '24? Just to kind of make sure we understand you know, how G And A grows from here on out.

And then also I didn't hear you mention. I know you're kind of had been going back into the kitchen of the of the future sort of efforts to try to find efficiencies.

But, is operating cost efficiency, a big focus for you at the store level, in '24 as well?.

So I will start with the G&A expense items. As we said, we completed the G&A kind of a overview of our entire structure.

Really wanted to ensure that as we continue to grow at pretty solid rate, that we have the right level of resources to invest in areas such as unit growth, technology, digital enhancements, so we absolutely maintained the integrity of those aspects of our G&A structure.

What we saw is that over the course of the last few years, as we have implemented new systems, new technologies, there were certain administrative functions that we felt we would probably just gotten a little bit too heavy from.

So we feel very comfortable that as you look at the core G&A rate, where it sits today, that should be a good spot for very modest, just more inflationary type increases as we go into the future. From a labor cost perspective, we have made great progress over the last several years.

We have reduced roughly 10% to 15% of hours out of our system, on a per restaurant per day basis. That continues with some of the work that we did last year, from an operations menu simplification perspective. We are incorporating some of those initiatives here into the model just even as we sit today. We will continue to look hard at that.

Everything from how the management team is structured, are there efficiencies we can gain there, continued enhancements in technology, as well as just looking at equipment overall flow. So certainly, we have made great progress on labor. We will continue to do so as we go forward.

Also buttress by the fact that we are now not seeing the wage inflation rate that we have been seeing in prior quarters..

Our next question comes from Joshua Long with Stephens Inc..

Great. Thank you for taking my question. Mike, welcome on board. Looking forward to working with you in this next chapter. Dave, following up on on some of the comments you made in terms of just the guest that you lost during the quarter, make sense that it might be that more economically sensitive guess.

But just curious what you have been able to see in terms of, that specifically.

And then as you think about going forward, can you talk about some of the digital systems or marketing messaging systems that you have in place to be able to go back and target that guest? How do you -- as you start to see traffic start to improve, how do you know if it's that guess that you lost coming back in or maybe just your core guess coming a bit more frequently?.

Sure.

I think one of the exciting things has been -- a key message, I think, for us, as we look forward, Josh, is just the overall flexibility that we are going to have based on our technology investments from an in restaurant perspective with the digital menu boards, as well as with the customer data platform and just overall our ability to target guests.

One thing that has been extremely encouraging is that, when you think of flexibility, as we started to diagnose and see a value issue, we were able to first off touch those rewards members.

Rewards members are people wereable to quickly and easily access, were able to give them specific promotions or specific messaging, maybe not even tied to promotions. We saw as we talked about in the earlier remarks, we actually saw an increase in frequency from our rewards members of 2% as well as overall growth in the program.

So that gives us quite a bit more information, and we have been able to maintain and retain that guest, partially because we have been able to act quickly against them. Now you incorporated CDP. So at CDP, our team has already made tremendous strides in being more targeted with how we approach our guests.

This allows us just to have a significantly more surgical approach to segmentation, to messaging, to just overall how we communicate with our teams. And that really just went live a couple of weeks ago. So we are just starting to reap some of the low-hanging fruit when it comes to that technology.

Another aspect as we continue to evolve from a technology perspective, as we said, we are starting to use machine learning in terms of recommendation engines. The testing of that has been very successful. So we are implementing that as we speak, that should be another nice tailwind.

So the overall infrastructure from a rewards program perspective, as well as the technology that drives our digital programs continues to improve and become best-in-class. Now you layer on top of it digital menu boards.

Digital menu boards for us, one reason why they are so, so powerful is that, it just gives us flexibility across nearly as every aspect of the business, whether it's how the menu is laid out, the pricing structure, new culinary items, messaging.

Traditionally, we couldn't pivot or test very quickly because we always had to wait on the physical menu boards to kind of catch up to the digital assets. This even impacted some of our flexibility, when it comes to things like pricing because we didn't want to disjointed experience.

So we feel digital menu boards combined with all of the enhancements we have made from a technology and data perspective, really allows us. We are frustrated with the reset from a revenue perspective. But as we go forward from here, feel that we have extremely strong foundation that's just going to continue to strengthen..

Very helpful. And when we think about that target for I think you said 75% by end of year on digital menu boards. Correct me if I'm wrong there, but just, can you walk through just maybe high-level bullet points? I think a question would be my in our minds. It just sounds amazing. Why don't we roll it out faster? Obviously, it never works that way.

There is implications. You got to make sure we get it done right.

Can you talk through what that, the pushes and pulls are there in terms of rolling that out across the system and when you think you could be at a 100%?.

So we will actually expect to be Josh at 75% by the end of Q3. So 75% by the end of Q3 expect to be in all company restaurants by the end of this year. As we implement digital menu boards, it's certainly to your point, it's not just simply plug in the screen and there you go.

We are upgrading all of the network within every single one of our restaurants to enable us to not just execute digitally perfectly, from a menu perspective, but any further network and technology enhancements will be able to execute as well.

So there is a network upgrade that happens a little bit of construction, and then setting up and ensuring we have the right cabling, all the electrical components as well.

As we do that, one thing that's exciting is we are already seeing good results from leading indicator perspective, check average, some of the messaging being really responded well to, but we haven't even started really to implement things like price optimization, where they are really looking at the interplay of pricing throughout the menu.

We have to be able test some of the aspects of that as well as menu layout until really just in the upcoming quarters. So it's really expect some good step change from that perspective moving quickly.

But we are also obviously assured that we have the right network infrastructure, the right systems and able to execute and and really garner as much of the benefit as possible..

That makes sense. I appreciate that. And then one last one for me. When we think about the new menu work and I mean, on one hand, definitely makes sense, you have done a lot of innovation over the years, and so maybe a good time to maybe stop, take inventory of what you have works.

And understand that the research is not complete yet, but expected to be done by the end of the year. Can you talk a little bit more about, why now is the right time? What you expect to find? And then to maybe any sort of early research in terms of what supports the idea of Chicken Parme? Obviously, sounds delicious and favor to mind.

But just curious if that's something you have tested in the past or any sort of over overarching strategy you might be able to, offer up in terms of kind of that next leg of culinary innovation?.

I mean, I will first start with Chicken Parm. And one reason we absolutely love it is the staple of Italian cuisine not something that you are able to really see in any format from a price fast casual perspective. So it will be really on the front edge there. So we are excited to bring it in the fast casual environment.

It just right down the little fairway extreme breadth of appeal, great familiarity. Over the years, we typically try to, as you as you know, Josh, balance kind of more familiar items such as the Tortelloni that we launched a couple years ago, with a bit more innovative unique items such as linguine.

This is kind of the natural sequencing of our overall culinary innovation to our Chicken Parm, which is something that we have seen with all of our research has as much potential as Tortelloni did, which was extremely successful. This is just the natural progression from that perspective. That says you look overall at the at the menu.

The world has changed in the last several years. We all know that. The shift towards more off-premise, catering is now coming back. We want to ensure that we are not missing some potential big opportunities in terms of our menu.

And we are open to understand we are working with one of the best out in the business to really evaluate it and say, what are we potentially missing from a guest perspective that could really meaningfully have legs. So the fact that we have gained a lot of traction, in our overall traffic trends, but are still not comfortable with where we are at.

We know we have tremendous upside. We think this is a really good time for us to step back now that there is more normal guest behavior and identify where there is some opportunities..

[Operator Instructions] Our next question comes from Andrew Barish with Jefferies. .

Hi, guys. And, welcome, Mike. Just trying to contextualize the diamond sales increase with the off-prem challenges.

I mean, last quarter you have kind of focused on the delivery channel, seeing the most weakness, I imagine just given the numbers that that has continued, but I'm not exactly sure kind of by how much or kind of where that that starts to flatten out?.

We've actually highly interestingly enough, Andy, as we did pivots, in our overall value messaging, one of the areas that we looked at specifically is in delivery, and really put some focus attention on that, both from a marketing perspective and a bit on the promotion side. We have actually seen a nice rebound in the delivery business.

So from a perspective of you think about the channels, where people maybe are the least price sensitive, which would be when they are going out to eat, they are looking for a good experience, or is the part of that delivery occasion where they recognize they are paying a premium but they ascribe a significant value to that.

Those are areas we are actually seeing strengthening. Where we are seeing a little bit more weakness is kind of that off-premise occasion where somebody, maybe the alternative, would be bringing something at home that could be a little bit less expensive than our offerings.

So one reason we are really, again focused on that value proposition as well as focusing on just in improving our overall competitive positioning, including looking at the culinary aspect, because delivery has come back a bit, dine-in again strengthening.

It's that kind of to go area as well as the digital quick pick up where we are seeing a bit more softness..

And just a quick follow-up there.

Did you actually take your menu premiums down on third-party delivery, or you are just responding with promotional activity?.

That was more marketing as well as promotional activities. So marketing could also include how you are featured on a website as an example. So we did not reduced the pricing on the third-party delivery side..

Okay. And then, on the on the culinary, I mean, you have been working on actually kind of streamlining menu and kind of focusing what is the consumer sort of telling you in this pivot to kind of looking at more variety potentially or wherever the culinary assessment is going to take you.

What's kind of been the consumer feedback in your research?.

Certainly, internally of the research that we have already done Andy, we are seeing the opportunities that we talked about with Chicken Parm as well as some optimization of our existing dishes. So looking at really ensuring that they are able to travel. Our food generally travels great.

But there are certain areas that we feel we could optimized potentially with additional increase in sauce or looking at the recipes of those items. So that's what our internal research showing that we are already activating against. In terms of overall where there potentially are culinary holds, which should be the right size of the menu.

Are there areas right now where we should double down or maybe areas where we don't necessarily need a dish? Those are areas that we're really going to be very open as we are working with that third party consultant to really evaluate the menu in its entirety, to ensure that every single dish is delivered towards surpasses our guest expectation.

So we are honestly pre-open. We have some good ideas for our internal research. But I want to be able to to have somebody else take a fresh look at it..

And then, I'm sorry if I missed it, but when does Chicken Parm launch and do you have a price point or a price point range that you are considering?.

It'll be in early fall is what we are targeting at the moment. From a price perspective, hoping to be around $10.95. So what we think is a very attractive price point for what should be a very, very popular dish..

Our next question is a follow-up from Joshua Long with Stephens Inc..

Great. Thanks for taking my follow-up. Just wanted to throw one over to Mike. And I realized it's been relatively recent that you joined. We are excited to have you.

Curious if you could give a little bit of perspective just on early days, what you have seen and learned from the team, the structure that's in place? Any sort of, observations there? And then secondarily on the COGS side.

I know you said you were locked in on chicken for the year, but curious if you could give us a little bit of a peek into the rest of the basket, and kind of how things are positioned as we have started to hear more about inflation on the food side moderating from peers?.

Sure. Thanks, Josh. It's just been a couple of weeks, as you know, and really excited to join the team. Off to a good start with the team.

As far as the support office here, it's an impressive group of people that are supporting the restaurants and I have been impressed with how energized and focused everybody is, leading and driving towards the initiatives that Dave talked about today.

So off to a great start and looking forward to getting more entrenched, and getting involved with the initiatives Dave talked about. As far as COGS goes, you are right. We are locked in for the rest of the year, chicken -- with chicken and a lot of our primary commodity basket items.

One area we are looking at as we start to talk to our suppliers about pricing for next year is, we are seeing the same thing everybody's seeing around beef, which that's very familiar to me and it's a familiar story about the beef roller coaster.

And so we are seeing that go the wrong way in the market right now, and we are talking to our suppliers and doing some things to try to get ahead of that. But outside of that, it's pretty early to talk about '24. For the rest of the year. We are anticipating very consistent COGS as a percentage of sales for the balance of the year..

I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect..