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spk06: Good afternoon, and welcome to today's Noodles & Company Third Quarter 2020 Earnings Conference Call. All participants are now in a listen-only mode. After the presenters' remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I will now introduce Noodles & Company's Executive Vice President and General Counsel, Melissa Heidman. You may begin.
spk04: Thank you, and good afternoon, everyone. Welcome to our third quarter 2020 earnings call. Here with me this afternoon is Dave Benninghausen, 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 2019 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 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 2019 fiscal year and subsequent filings that 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 third quarter 2020 earnings release and our supplemental information. Now I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.
spk02: Thanks, Mel, and good afternoon, everyone. I look forward to sharing with you today the continued progress the meals and company has made since the onset of the COVID pandemic and our excitement with the opportunities that lie ahead. Before I discuss that, though, I would like to share how incredibly proud I am of our team members and partners for their continued commitment to providing delicious meals prepared safely, quickly, and consistently at our restaurants across the country. Our team has never been stronger, and their dedication has allowed us to navigate through these challenging times and given us confidence in our ability to take advantage of the opportunities ahead. Of course, the health and well-being of our team members and guests remains our company's top priority. We continue to actively monitor and follow local and federal mandates related to COVID-19 and are committed to remaining a leader in the past casual space in our health and safety protocols. We believe that our approach has increased trust and brand equity with our consumers, which is evidenced by our sales recovery, as well as improvements in guest sentiment that have occurred during the past several months. Although there remains uncertainty around the duration and severity of COVID-19, I have never had greater confidence in our opportunity to thrive and accelerate growth in the years to come. Today, I would like to focus on three key areas of our strategy to take advantage of this opportunity. First, continued differentiation of our concept to appeal to a broad range of lifestyle, convenience and dietary needs. Second, activating our brand, particularly through our digital assets and marketing strategy. And third, accelerating unit growth to take advantage of an operating model we feel is perfectly suited for a post-COVID world. I'll start with how we intend to capitalize on the unique strengths of the brand. As you know, we are the only national chain delivering world flavors through a core menu focused on noodles and pasta. The variety inherent in our menu has been and will continue to be a meaningful strength of the brand, as we offer favorites from kids to adults, healthy to indulgent, and flavors both familiar and new. Aside from the great variety in our menu, unlike many of our competitors, our food travels extremely well, and given our relatively low price point and strong speed of service, Noodles is particularly well suited to take advantage of the increased need for convenience from today's consumer. As we've discussed in the past, 60% of our sales were off-premise even prior to the COVID pandemic. Clear evidence of how well our concept and menu meet that need for convenience. While during the initial stages of the COVID pandemic, we focused on amplifying our core menu, we have since returned to our standard discipline process for menu innovation. We believe there remains significant opportunity for us to broaden reach and frequency through menu innovation, while at the same time simplifying our existing menu and reducing unnecessary execution hurdles for our operations teams. The item currently in test that we are most excited about is our cauliflower gnocchi, which we expect to roll out nationally during the first quarter of 2021. For years, our guests have requested a gnocchi offering, and what we particularly love about the item we are testing is that it meets all of the flavor and texture expectations the guests have come to expect from Noodles & Company, but also offers an additional plant-based alternative on our menu, which is low-carb, low-calorie, gluten-free, and contains a full serving of vegetables in each regular portion. The gnocchi will be well-suited for many of our classic pasta sauces and will be featured with our roasted garlic sauce, which has the highest taste of food score of all sauces on our menu. We are confident that the cauliflower gnocchi will broaden the appeal of our brand, particularly with our attractive target market. Noodles & Company's core audience is comprised of individuals who seek great flavors delivered fast and easy. The brand over-indexes with both millennials and Generation Z, with notable strength with young families. This overall variety of our menu, the ease and quality with which our food travels, and our natural appeal to families have been evident during the pandemic, especially as it relates to our dinner sales. As we reported on October 1st, our company-comparable restaurant sales in September returned positive with a 1.1 percent increase. Despite continued limitations on our dine-in capacity, our afternoon and dinner day parts have been especially strong, with growth of 4.8 percent and 7.3 percent respectively in September. Our dinner strength gives us increased confidence that we will be well positioned for outside sales growth as consumer patterns ultimately normalize in a post-COVID world. While we do expect that there will remain a work-from-home trend that continues after the pandemic, resulting in continued industry pressure at lunch, we're actively working on a refresh of our salad category to position us to capitalize on increased lunch demand for those who do return for more traditional lunch patterns. While we did not anticipate our salad category refresh to be launched until late spring of 2021, in the meantime, we're utilizing the launch of group ordering as well as other digital enhancements to meet the increased needs of those working from home or doing online learning with their children. As we continue to further differentiate the brand for today's environment, I'd now like to move to our second strategy surrounding activating the brand, particularly through our digital capabilities. Digital sales during the third quarter increased 151% versus the prior year and accounted for 61% of total sales. We continued to elevate our digital properties during the third quarter, including the aforementioned launch of Group Ordering. Our digital assets have allowed us to improve the effectiveness of our marketing strategy as we better target our guests and more effectively engage with them through our rewards program. Despite a cluttered social media environment, we have seen a meaningful increase in the open rates of our email communications, a decrease in the cost per acquisition of our media spend, and improved engagement with our social media content. While our rewards program has grown to over 3.2 million members, we still feel we are in the very early stages of utilizing the program to understand and engage with guests at a more personal and targeted level. We expect the program will be an important catalyst for sales growth over the next few years, as we elevate our engagement and form deeper, more personalized relationships with our guests. During the third quarter, about half of our digital sales came through delivery, with the remainder coming from order-ahead quick pickup and curbside channels. We continued to optimize all of our digital channels and anticipate technological enhancements to our curbside pickup, as well as continued optimization of our digital marketing mix during the fourth quarter. Importantly, digital momentum remained strong thus far in October with digital mix at 58% of sales. With our increase in delivery sales, there of course comes increased pressure to the P&L through delivery fees. During the third quarter, delivery fee cost was 5.5% of sales, an increase of 390 basis points versus the prior year. Currently, we maintain an approximate 10% price premium for guests that are ordering through third parties that was launched in Q4 of last year. We've not seen resistance to that price premium and are currently testing an additional 5% price premium that we expect to expand nationally by the end of 2020. As a reminder, we do not currently incorporate a price premium for delivery orders that are made directly through our own digital properties, and we continue to optimize to move delivery orders into our own channels, which bring with it improved guest engagement as well as lower costs. Although delivery has definitely placed some pressure on our margin, We remain pleased with how delivery and digital in general have accelerated brand awareness throughout the country, particularly in markets where we have less saturation. New customers are being attracted to the brand as this access has increased. As an example, our Northern California and Arizona markets, which have nine and five restaurants only, respectively, recorded comparable sales of 35% and 32% during September. The ability to use technology to activate the brand and increase awareness in newer trade areas or less saturated markets gives us even more confidence in our third strategy, which is to accelerate our unit growth. We continue to believe that there will be meaningful disruption in the real estate environment for restaurants in coming years. And we're excited about the opportunity for us to take advantage of that disruption with a more efficient off-premise oriented footprint. Our new restaurants continue to be our best-performing class in the history of the company, bolstered by two restaurants opened thus far in October that have performed strongly, including one restaurant in Wisconsin that has set new records for sales during their first 7, 14, and 21 days of operations. Like many of our new restaurants, this particular restaurant includes our order-ahead drive-thru pickup window, which has proven very beneficial in meeting the increased need for speed and convenience from today's consumers. 78% of digital orders for this location have been processed through the drive-thru window, and average time has been an impressive 62 seconds despite their tremendous volume. We continue to target at least 70% of new restaurants to include the order ahead drive-thru window in their construction. These types of numbers give us greater confidence not just in a reduced square footage in general, but additionally in the potential to test materially cost-effective build-outs that only incorporate off-premise and or digital sales. We are also exploring virtual restaurant or ghost kitchen alternatives, which could provide certain high-density or infill opportunities that we did not feel were viable even a few months ago. We are aggressively building a robust development pipeline, and we've recently bolstered our team with three new hires to advance both our company and franchise development strategy. We continue to target at least 10 to 15 restaurants open system-wide during 2021, with a target of at least 7% annual unit growth beginning in 2022. In the current environment, while it's difficult to reliably anticipate exactly how the recent disruption will influence timing and availability of real estate, we do feel well-positioned to take advantage of additional growth opportunities as they arise. This opportunity is supported by our strong balance sheet. During the third quarter, we paid down a significant amount of our borrowings, and as of September 29th, the company held $8.6 million of cash on hand and had borrowings of $44 million. The company currently has $52.3 million available for borrowing under our revolving credit facility. Our net debt of $35.4 million at the end of Q3 was a small increase relative to the end of Q2, but did incorporate catch-up on rent and other obligations after the completion of generally favorable negotiations with our landlords and vendors. Just as importantly, our growth opportunity is supported by our strong team. For the past few years, we've invested in building our pipeline and culture as a competitive strength. We continue to see significant improvements in our turnover trends and have built a dedicated, robust pipeline of future leaders with great tenure and knowledge of the noodles brand. We've continued this investment in our team through targeted, relevant, and industry-leading benefits. To that end, we recently announced several benefit enhancements, including the availability of free in-person and virtual counseling to support mental health, supporting team members growing families by offering six weeks of paid maternity and paternity leave, as well as providing assistance for surrogacy and adoption. Our strategies around further differentiation of the concept, activation of the brand, and accelerated unit growth would not be possible without our tremendous team members, and I'm extremely humbled at the opportunity to work alongside them to meet our collective tremendous potential. Now I'd like to turn to some detail on our third quarter results and expectations for the balance of 2020. As we pre-announced on October 1st, we reported revenue of $106 million, a 10% decline over the prior year. Comparable sales declined 3.8% system-wide for the quarter, comprised of a 3.6 percent decline of company-owned restaurants and a 5 percent decline of franchise locations. Our company comparable sales decline included a 150 basis point negative impact due to closing for the 4th of July weekend. As noted in our earnings release, comparable sales improved throughout the quarter, culminating in a 1.1 percent comparable sales increase and a 2.4 percent increase in average unit volumes over prior year in September. I'm happy to report that in over half of our markets, we continue to see sequential improvements in trends from September through to October, despite increasing COVID trends throughout the country. Comberville sales are roughly flat quarter to date, and we continue to see average unit volume growth versus prior year. Currently, just over 85% of our restaurants are open for limited in-restaurant dining, and while we expect there may be more restrictions in coming weeks and months, we remain very confident in our ability to navigate those restrictions and be positioned for outside sales growth in a post-COVID environment. Third quarter restaurant level margin was 15.4%, a decline of 170 basis points versus prior year. Like comparable restaurant sales, margins did improve throughout the quarter, with restaurant level margin flat year over year at 16.5% in September. We are proud of the efforts of our teams to improve efficiencies throughout the operating model, as that has allowed us to overcome much of the impact of the increased delivery fees associated with digital sales, which, as I noted earlier, increased 390 basis points versus prior year to 5.5% of sales in the third quarter. In the third quarter, the company recorded adjusted EBITDA of $7.7 million, and adjusted earnings per diluted share were one cent. Looking to the balance of 2020, of course, there remains uncertainty in the current environment, and we remain focused on building sales volumes and optimizing our model while making the appropriate adjustments for COVID-related restrictions and capacity constraints. While we are pleased with our continued momentum, we do feel the uncertainty surrounding COVID makes it difficult to provide comparable sales guidance for the remainder of 2020. As a reminder, During the fourth quarter, total revenue year over year will continue to be impacted by nine locations that were re-franchised earlier in 2020, as well as six restaurants that have closed since the beginning of Q4 of 2019. Primarily sites that were at or approaching their lease end and were not well situated to meet the changing needs of the consumer trends. Two additional locations that are located in areas that have been particularly impacted by the restrictions in place remain closed. Finally, we continue to experience temporary restaurant closures related to the restrictions and the COVID pandemic, typically only for a day or two, as we ensure the ongoing safety of our team members and guests. Collectively, we expect these circumstances to negatively impact revenue year over year by approximately $6 to $7 million during the fourth quarter. Of course, as we lack closure and re-franchising activity, and ultimately exit the pandemic, these temporary impacts will abate and position the brand for meaningful revenue growth. As a reminder, averaging volumes, which normalize for these impacts, were roughly flat year over year during Q3, and our AUVs are growing versus prior year thus far in October. From a margin perspective, assuming no meaningful change in restrictions related to the current pandemic, we expect our margins in the fourth quarter to be modestly below prior year. with significant improvements in labor and our overall model being offset by the impact of increased delivery fees. We do feel that we remain well-positioned as we optimize our operating model, particularly regarding the delivery channel, to have a more efficient and profitable economic model in a post-COVID world than we did entering the pandemic. Before we open the call to questions, I would like to reiterate my thanks to our teams throughout the country and my confidence in the future of Needles & Company. We have a differentiated concept particularly well-suited for short and long-term consumer trends, the digital strength to further activate the brand, and a tremendous growth opportunity ahead of us. While 2020 has certainly been a remarkably challenging year for the country, I do feel that Needles & Company has risen to the challenge cemented our brand with our team members and our guests, and positioned ourselves to be a clear winner for the years to come. With that, Tawanda, please open the lines for Q&A.
spk06: Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, it's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Jake Bartlett with Truist. Your line is open.
spk00: Great. Thanks for taking the questions. Dave, my first one is on the October quarter or month to date of flat. You mentioned that 50% of the markets are doing better and 50% are doing worse. Can you give any more detail around that and maybe what is common with the stores that are doing worse than that average?
spk02: Sure. I think we'll start from the geographic perspective. So obviously, Jake, as you follow the industry and others that follow the industry, the segments of the country are behaving differently in terms of their impact on the restaurant space. Well known that the Northeast particularly impacted. The upper Midwest has been probably right behind the Northeast in terms of the impact that COVID has had on sales. There were recent restrictions that were implemented in several counties in Illinois. What we are seeing is that we have a large number of our restaurants that are in the upper Midwest states, particularly in Minnesota, Wisconsin, and Illinois. They continue to lag behind the rest of the country, just as we're seeing with the rest of the industry. I think encouragingly, we are not seeing any change in the trajectory of their business from October versus September. So that gives us quite a bit of encouragement. Where we are seeing particular strength on the other side of the equation is continues to be those markets that don't have much brand awareness, that people are really beginning to understand, discover, and gain affinity and loyalty to our brand. So I mentioned Northern California and the Phoenix markets. Those continue to be great strong points, as are several other areas that we're seeing that brand awareness really start to kick in.
spk00: Got it. And, you know, I think as of the last business update, your update that you gave in early October, you mentioned that you had just reopened some company-owned stores for indoor dining. Just by the commentary in October, it doesn't seem like that's had a huge impact. Maybe if you could just give us a feel for how the stores have performed as you've reopened indoor dining. And I think within that, maybe it could frame what the risk is if restrictions come back.
spk02: Sure. Ultimately, dining still only was about 5% to 10% of our sales. During the third quarter, and we continue to see that thus far in Q4. I think one thing that's important to note is that as we enter the winter months, we already talked about the preponderance of restaurants that we have in the upper Midwest. Our brand actually becomes less reliant on dine-in when you get to the winter months as we see more people shift towards off-premise and enjoy the food and the comfort of their own homes. We already have significant strength there. So in a nutshell, we've seen some incremental lunch business from the opening of dining rooms. If that potentially were to go the other direction, we feel very comfortable that we're well-positioned. to actually, you know, still maintain some nice improvement in our sales trajectory.
spk00: Got it. And then last question is really on the drivers of things for sales, you know, from here going forward. And, you know, I'm wondering if you can frame kind of which you think are going to be most impactful, whether it's the menu innovation with Miyoki coming on or whether it's kind of finally being able to really utilize your customer segmentation in your rewards database. Maybe just kind of give us some of the drivers in which you think are going to be most impactful.
spk02: Yeah, I think, you know, I'll start with what's the foundation. And the foundation is our team members and our operational strength, which we would put up against any in the industry and very happy with our team and how they continue to rise to the challenge. Specific to new initiatives, I would expect that our marketing channel mix will just continue to improve. We have had some great success in terms of lowering cost per acquisition and improving our email open rates, improving the content engagement, but we're at the very early stages. So there remains quite a bit of upside that I think will carry us through, you know, not just Q4, but really several years into the future. Also, honestly, feel we're at the early stages of some culinary innovation. I think the cauliflower gnocchi I discussed on the call really can be a very meaningful driver for us given its not just health profile, but its taste profile as a plant-based alternative that is low-carb, that is low-cal, gluten-free, full serving of vegetables. So I think there's culinary innovation there. Really across every segment of the business, we continue to see there being opportunity from the digital engagement to culinary innovation to even things like reducing some of the friction from our curbside experience. Great. Thanks a lot. I appreciate it.
spk06: Thank you. Our next question comes from the line of Nicole Miller with Piper Sandler. Your line is open.
spk05: Thank you very much. Quick housekeeping, and then I'll get to a question, if that's okay, please.
spk02: Absolutely, Nicole.
spk05: On October flat for the system, if I go back and piece together the pre-release and then what I heard today, can that still imply companies up and franchises down a little?
spk02: Not necessarily. I mean, there is some geographic impact, as we said, the upper Midwest. It is similar kind of company relative to franchise, but the geographies continue to be a challenge on that franchise number. As a reminder, we have a smaller segment of the franchise restaurants that are in the same store sales base, and a lot of those are in the upper Midwest. But ultimately, you can't assume that kind of that comparison of company to franchise is similar.
spk05: Okay, great. And then price and mix within comp, I think you've been talking about those together. It's been running around 3% to 4%. Has anything changed there?
spk02: Yeah. This number is one, Nicole, that I think for the entire industry has become a bit more challenging to really understand, and it's lost a little bit of its relevancy. Certainly, like the rest of the industry, we are seeing outsized growth in average check than what you would typically see. And it remains volatile enough that I don't necessarily think it's appropriate to disclose what the exact numbers are, but I do want to provide some texture to show how it's kind of an unusual environment where the check mix dynamics aren't what they normally are. Delivery through third parties, roughly 25% of our sales during the third quarter we have a 10% price premium. So you see there's an effective price increase that is much more substantial than you would see in a normal environment. So ultimately, while we don't think that typical mix is as relevant as it has been in the past, it is safe to say that we're seeing a significant amount of check growth similar to others in the industry.
spk05: Yeah, that is fair, and I hear you on that. Maybe turning to... Maybe turning to getting ready to reaccelerate development, I was comparing and contrasting tonight's results in terms of the AUV run rate, 1.187, wasn't that much different, frankly, to the last growth cycle. So how do you expect these new units to come on in terms of the percentage of a mature volume?
spk02: I think what's exciting for us is that we're seeing that Our restaurants that have been open in the last two years are actually meaningfully above the company, both from a sales perspective as well as a margin perspective. And I attribute it to a handful of reasons different from where we were at during the last growth cycle. First and foremost would be the concept itself is in a much stronger position in terms of how we've been able to, in a pre-COVID world, really build average unit volumes, build the margin profile, Our brand is, I think, more clear in our guest's mind, and the net promoter scores attest to that. Additionally, I would add the discipline that goes towards our site characteristics, our economic model. There aren't compromises being made through that, and you see that in the effectiveness of those new restaurants that have opened. Third, the model itself. We've streamlined quite a bit of the operations. It's easier to train. It's easier to operate. The drive-through pickup windows are a game changer in terms of increasing the amount of convenience. As I said, that restaurant that set all those daily records that just opened in October, a very large percentage of their sales are going through that window and only averaging just over a minute per transaction. But I think all three of those are important. The fourth one, which is the one that gives me the most excitement, if you will, is our pipeline. So, Nicole, the people pipeline. The bench strength that we have within our teams is so much stronger than it was during our last growth cycle in terms of opening these new restaurants with top performers that know the brand. Our turnover, our operation metrics, our people metrics at new restaurants are are dramatically better than where they were during the last growth cycle, and they're actually better than the company average. So the combination of a better concept that's easier to run, an economic box and an operating box that is much more suited for consumer trends, and then a very, very strong people pipeline gives us a lot of confidence that we'll be able to enter this next phase of accelerated growth in a much more favorable position.
spk05: That actually is very helpful. Thank you. Last question, and I'll mute myself. What can you share on the CFO search front?
spk02: Thanks, Dave. Very excited. We're in the final stages and would hope to be able to make an announcement within the next several days.
spk05: All right. Thanks again. Congrats to you and your team.
spk03: Thank you, Nicole.
spk06: Thank you. Our next question comes from the line of Andrew Strelvik with BMO Capital Markets. Your line is open.
spk07: Hey, Dave. It's actually Dan on for Andrew tonight. Thanks for taking the questions. First, you know, you've talked about the opportunity to reaccelerate unit growth over the next couple years, and you touched on some of the potential real estate opportunities that could emerge moving forward. But I guess I'm just wondering, are you beginning to see any sort of uptick in real estate opportunities already today? And if you are, What kind of sites are becoming available, and are they properties that work for the brand?
spk02: Yeah, we are already seeing some nice benefit, Dan, and very excited with how the pipeline is shaping up. I do think there is a reality of good sites are great. Great sites are great sites, and particularly the box that we are very well suited for, which is that small square footage with the drive-through circulation. Those remain in high demand. One thing we're excited about is the conversations we're having with developers and landlords around with some of the disruption in the industry, how properties will be redeveloped to be much more suited for that box, which really just fits in the wheelhouse of where noodles and company does great. So they think there is some time for that to settle out, if you will, because the availability of the exact type of box we want will take a bit of time. But we are seeing already really strong green shoots in terms of that pipeline being able to develop. Not to mention we continue to explore items like the off-premise only, potentially a ghost kitchen as well. We continue to see some really nice opportunity from those fronts as well.
spk07: Got it. That's actually pretty interesting. And then just, you know, you touched on Noodle's rewards program a little bit. It sounds like you're pretty pleased with how it's worked for you during the pandemic. I guess I was just wondering if there's anything you could share in terms of just maybe more specific learnings from the program so far and anything you're looking at in terms of maybe a change strategically in terms of how you're engaging with customers moving forward.
spk02: Yeah, I think going forward what you'll see, Dan, is quite a bit more customization, personalization, and targeted not just communications but ultimately even the appearance of the menu and how that overall experience from the beginning to end will be more personalized. Now that's a journey and it will take us some time to get there. Right now we're focusing much more on reducing friction. Some of the things we're seeing is that the conversion rate of when people go into our website or through our app for ordering continues to increase. We're seeing a lot of people come into the funnel that are new guests. Again, I kind of come back to some of those newer markets and less saturated markets. We're seeing that group be particularly instrumental in our sales recovery. And then we're seeing our loyal guests increase their frequency meaningfully. So there still is kind of that swath in the middle where we think is going to be a tremendous growth opportunity for us as we continue to enhance and develop that program. So what you'll see is I think just our overall strategy become much more targeted, much more personalized than it is today. We've already made good progress. Team's done a very nice job, but we're in the very early innings.
spk07: Okay, great. Appreciate the color, and thanks for taking the questions. Absolutely.
spk06: Thank you. Our next question comes from the line of Andy Barish with Jefferies. Your line is open. Okay. Check to see if you're on mute. Andy? Our next question comes from the line of Marshall Tippmann with Jeffrey. Your line is open.
spk03: How's it going? I'm filling in for Andy. I think we had a little tech issue just now. But just a quick question on GNA. It's about 2 million or so higher sequentially. I was just wondering if you guys could break that down and if this is the level of GNA we should think about going forward, at least in the near term.
spk02: Yes, from a GNA perspective, and we will be filing a queue early in the morning, and you'll see some of that detail. You'll also see it in our release itself. A lot of those were non-recurring items, particularly from the stock compensation side, as well as from the severance line items. You did have some non-recurring expense that occurred kind of quarter over quarter, if that's where you're seeing the comparison. We think from a normalized basis, if you look to Q2 to Q3, excluding those events, actually Q2 to Q3, roughly flat.
spk03: Okay. Great. And just lastly on labor, obviously you're seeing a lot of efficiencies now, and I believe you said next quarter should be a little lower than last year, you know, for a total margin. But just on labor, just wondering if you could elaborate on, you know, if you think we could see the same kind of, you know, efficiencies next quarter and just what you think going out to next year.
spk02: A very modest uptick, Marshall, as you have dining rooms open. There is a little bit more labor that does come into the system, but it should be relatively modest because we have been able to find efficiencies throughout all of our processes, implemented a lot of those really over the last year even, not just during COVID. But additionally, when you have 60% of your sales coming through digital channels, you just don't need as much front of house presence as we had in the past those we expect will continue to carry forward into a new world. Additionally, we spend quite a bit of investment in the training of new hires. We think that's a very critical part of our success. As we have seen turnover go down meaningfully over the last really couple of years, but particularly in the last several months of COVID, we would expect that will carry through as well. So on the net, labor should be Relatively similar, Q3 to Q4 is the percentage of sales, potentially a little bit of an uptick just to accommodate the dining rooms that are reopened. Got it. Thank you.
spk06: Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of Todd Brooks with CL King & Associates. Your line is open.
spk01: Hey, great. Thanks, Dave. A couple questions for you. One, you talked about the northern tier exposure of the brand, and it's an opposite of a lot of other concepts that have that smile exposure through the southern states. If you think about the northern tier and you think about competing concepts in that market and how much they may have benefited from the ability to create capacity, with outdoor dining. As you're looking forward to Q4 and Q1 in those markets, do you feel there's share that comes back to noodles as other competitors aren't able to service customers via incremental outdoor capacity?
spk02: Yeah, absolutely. So, patios, obviously, we have a significant amount of patios in those upper Midwest, Todd. But that tendency that I started, that historical trend that I talked about in the earnings call where during the winter months we are just not nearly as reliant on dine-in business as we are during the other seasons. That's particularly amplified in the upper Midwest, and people do shift towards off-premise in general. So the combination of maybe some of the other concepts that don't have that off-premise capability and then our particular strength in it gives us confidence that ultimately that trend is going to reverse. We have seen not just ourselves in the industry as a whole, that upper Midwest be under a bit more pressure throughout the COVID pandemic. We do feel that we're positioned probably better entering these winter months than most of our competitors.
spk01: And do you have any early reads on the benefit of curbside in those markets and the thought of creating new occasions for customers that don't have to get out of their car but want to show up and grab their noodles at a specific time. Sure. Any thoughts you have on the incrementality?
spk02: Huge incrementality, actually. We don't expect it will necessarily be an enormous percentage of sales, but all of our analysis has shown that it is a nice driver of incremental versus other channels. And I think in the upper Midwest, you particularly will see it. I've obviously visited a lot of our restaurants, Colorado and the Mid-Atlantic often don't behave that much differently. You sometimes have parking lots that, of the 15 available parking spots, six of them are taken up by snow, and that maintains for a significant amount of the season. So continuing to reduce friction for curbside, certainly the drive-through windows, as we continue to build those out in new restaurants, the few percent that we'll be able to retrofit from a company side those will all be huge benefits. And to put some tangible aspect about what we'll do with curbside, we have a good program right now, Todd, that you can order digitally, select curbside, say what kind of car you're at. But we do have the friction of when you get to the restaurant, you actually have to call a number and call the restaurant. That is the type of friction that we're going to be eliminating in the next several weeks to allow that that that particular channel, that particular experience to be even more improved, even better than it is today.
spk01: Great. And then a final question. You talked about third-party delivery fees and the pricing actions that you're taking, but the platforms being an important source of noodles customers, and that's an introduction to the brand. If you look at your digital platforms and kind of coming into maybe let's hopefully have the second half of the pandemic here. What are the thoughts around efforts to drive these new-to-brand customers to noodles-native digital platforms or online platforms so that the service fee burden isn't there? What's the trigger duration that you need to see out of the behavior before you try to migrate them?
spk02: I think we want to migrate them from the time that they discover the brand, we want to migrate them over immediately. So what you see is us take the opportunity to message those particular guests in the ways that we're able to. We do offer, as an example, free delivery. We currently are launching purely through our own channels, so you can do free delivery if you go to our app or through our website, but not if you go through the third-party aggregators. We do feel the third-party aggregators, as I said, are extremely important in terms of getting people to discover the brand. And there certainly will be guests that that's how they continue to use restaurant brands for delivery. But the combination of different price premiums, different delivery mechanisms or promotions, the rewards program itself, and just communicating them, we want that process to start immediately.
spk01: Will you message more aggressively against it when the premium on the menu price becomes greater later this year?
spk02: That is not currently part of the plan to aggressively promote the price disparity. We don't think that's necessarily the right path to do it, but they will see significant benefits of just the overall rewards program. And clearly that does show up for those that are ordering that there is a a better economic answer for them than going to the third-party aggregator.
spk01: Okay, great.
spk02: Thanks, Dave.
spk06: Thank you. I'm sure no further questions in the queue at this time. I would now like to turn the call back over to Mr. Dave Bionikhausen for closing remarks.
spk02: You know, I appreciate that, Tawana. I appreciate everybody's time. I've said it to several folks before that, I do think as challenging as 2020 has been, in a couple of years, we will look back at this from a noodles and company perspective and say, yes, 2020 was challenging. Yes, it was scary at times early on in the pandemic, but it really will become an inflection point and an ability for us to accelerate growth from a brand awareness, average unit value, margin, unit growth perspective faster than we probably would have otherwise. And so extremely proud of the team for how they positioned us to be able to say that and look forward to finishing off this year and then 2021 and beyond. Thank you again for your time.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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