Noodles & Company

Good afternoon, and welcome to today's Noodles and Company's first quarter 2021 earnings conference call. All participants are now in a listen-only mode. After the presenter's remarks, there will be a question and answer session. As a reminder, this call is being recorded. I will now introduce Noodles and Company's chief financial officer, Carl Lukacs. You may begin.

Thank you, and good afternoon, everyone. Welcome to our first quarter 2021 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 performance of our 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 2020 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 2020 fiscal year and subsequent filings we have made. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial performance prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our first quarter 2021 earnings release and our supplemental information. Now, I would like to turn it over to Dave Beninghausen, our Chief Executive Officer.

Thanks, Carl, and good afternoon, everyone. We are so excited to be here today to share with you our strong start to 2021 and provide an update on the progress we have made towards the accelerated growth objectives that we outlined in our prior earnings call. In summary, we're very pleased with our first quarter results. Our financial performance improved sequentially throughout the quarter, allowing us to surpass the comparable restaurant sales expectations that we laid out during our prior earnings call. We're also pleased with our restaurant contribution margin expansion, which improved 290 basis points during the quarter relative to 2020. This also represented a 100 basis point improvement relative to Q1 of 2019, even as the company absorbed a significant increase in expenses related to delivery fees. Perhaps more telling of the health of our business were our averaging volumes, which increased 6.1% in our company-owned restaurants compared to 2019, and 12.7% when compared to 2020. And the momentum that we experienced during the first quarter has continued into Q2, with all-time record high company average unit volumes for the past four weeks of 1.35 million, a nearly 13% increase versus the same timeframe in 2019. Importantly, in our fiscal month of April, digital accounted for 57% of sales, even as we recovered a meaningful percentage of sales in restaurant. While we recognize that there remains uncertainty surrounding COVID and that the industry has likely benefited from recent government stimulus, we continue to feel very confident about our trajectory and remain convinced that we are an even stronger business coming out of the pandemic than we were a year ago entering it. As most of you are aware, in late February, we laid out our accelerated growth objectives. which include annual system-wide unit growth of at least 7% annually beginning in 2022 and quickly reaching 10% annually on a path to at least 1,500 units nationwide, average unit volumes of $1,450,000 by 2024, and in that same year, restaurant-level margin of 20%. To meet those objectives, we remain focused on three main strategies. The first is the continued differentiation of our concept to appeal to a broad range of lifestyles, 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 that we feel is ideally situated for a post-COVID world. I would like to start with our ongoing success in executing a disciplined strategy of culinary innovation that is on trend, resonates with guests, and builds brand love and loyalty. Noodles & Company remains the only national chain of flavors for noodles and pasta, and our menu is perfectly suited to meet the needs of today's consumer. As we've noted in the past, our food travels extremely well, and we have a considerable strength with the variety inherent in our menu, as we offer favorites from kids to adults, healthy to indulgent, and flavors both familiar and new. During the first quarter, we introduced our low-carb, gluten-free cauliflower gnocchi nationwide. We've been very pleased with the results thus far from this launch, as the Miyoki has outperformed its results in tests and reinforced noodles and company's ability to meet the varied dietary preferences of our guests. As you know, beginning with the launch of zucchini noodles in 2018, we have made significant strides in delivering a great lineup of lower-carb, lower-calorie alternatives. And our mix of healthier items on our menu is now at 14% of guests, a significant increase from just a few years ago. We continue to believe there remains meaningful upside to our healthier platforms and are currently innovating around improvements to our salad and vegetable noodle offerings. As we innovate around healthier alternatives, we also continue to lean into the strengths of our core menu. As we discussed last quarter, our current test of tortelloni has been our best performing test in the 17 years that I've been at Noodles & Company. For years, stuffed pasta has been the most requested item from our guests. and we're extremely excited to meet that request through our three-cheese tortelloni with specialty ingredients like caramelized onions and a blend of ricotta, mozzarella, and Parmesan cheeses. During the past few months, we've been optimizing the offering, operational procedures, and marketing strategy for tortelloni, and we'll be introducing it nationwide later in Q2. As we continue to further differentiate the brand for today's environment, I would like to discuss our second strategy, focusing on activating the brand. particularly through our digital capabilities and improved marketing effectiveness. Our results thus far in 2021 give us great confidence that we will be able to retain the digital sales growth that we have earned during the COVID pandemic, even as guests return to in-restaurant dining. We achieved record digital sales in March, and we set a new record again during our April fiscal month, particularly impressive given that in April, In-restaurant sales recovered to 60% of pre-COVID levels. We're also elevating our digital properties, including the recent introduction of Google Food Ordering in select markets. As we strengthen our digital assets, we're reaping the benefits of increased data and guest insights from our rewards program. Frequency amongst our rewards members is growing, and we are seeing increases in both our overall brand awareness as well as conversion from trial to repeat guest. We still believe we are in the early innings of utilizing data to create more personalized, targeted engagement with our guests. And we are excited at the opportunity to further harvest these insights to optimize our marketing strategy on our path to $1,450,000 of junior volumes. Next, I'd like to touch on our delivery strategy, which showed 30.9% of our sales in the first quarter of 2021. While delivery as a percentage of total sales is beginning to decline, Absolute daily volumes from delivery remain steady through the first quarter and thus far in Q2. We continue to see great upside and opportunity in the delivery occasion, particularly as it relates to introducing the brand to new guests in markets where we may not have as much brand awareness. Restaurants and markets that have seen a larger percentage of delivery than average continue to see outsized overall sales growth. With our increase in delivery sales, there of course remains increased pressure to the P&L through delivery fees. We've been able to mitigate much of that pressure through the balance of the P&L, particularly in labor, and we expect that the impact of delivery fees on our overall margin will moderate as delivery normalizes as a percentage of sales. On the whole, we see delivery and digital strengths as a great opportunity to increase awareness in newer trade areas and less saturated markets. giving us even more confidence in our third strategy, which is to accelerate unit growth. We continue to believe in our opportunity to ultimately operate at least 1,500 restaurants domestically, supported by at least 7% system-wide unit growth in 2022, and soon thereafter reaching an annual growth rate of at least 10%. Our restaurants opened in 2019 and 2020 remain the best performing classes in the history of the company, with performance well above the company average, both in average unit volumes and in restaurant-level margin, supporting our target of at least 30% cash-on-cash return for new units. As we've discussed in the past, many of these restaurants include order-ahead drive-through pickup windows, which are instrumental in meeting the increased need for speed and convenience from today's consumer. Our new restaurants also operate in a lower-surface footprint with a more efficient seating layout, perfectly suited for today's environments. We continue to anticipate 10 to 15 openings system-wide 2021, not including two ghost kitchen restaurants that will open later in Q2. These ghost kitchens will open in dense residential urban areas and give us great insights in the opportunity to build the brand in a low-cost, efficient manner that can be particularly effective in expanding our footprint for both company, infill, and franchise markets alike. Over the last few months, we've made significant progress in our company pipeline for 2022, and we expect to meet or exceed our target of at least 70% of these units being equipped with our order-ahead drive-through pickup window. From a franchising perspective, we're pleased with the progress we're making in building our new franchisee pipeline. We anticipate two to four franchise restaurant openings in 2021, including one in South Carolina this summer, which will mark our first new franchise market in several years. That said, as we build the franchisee pipeline, we do expect company restaurants to do the majority of openings during the next few years, with a target of at least 50% of our new units being opened by franchisees beginning in 2024. We believe the brand's improved menu, digital, and off-premise strengths, evidenced by the performance and economics achieved by our most recent classes, have meals and company well-positioned to attract prospective franchisees as well as achieve our company growth objectives. and we are extremely excited with the unit growth opportunity ahead of us. For each of our three strategies, continued differentiation of our unique brand strengths, activating the brand through our digital and marketing channels, and accelerating unit growth, the importance of our team cannot be overstated. Before I turn it over to Carl, I would like to thank them for their efforts and dedication over the past 12 months. Our metrics across all aspects of the organization continue to improve. And I'm convinced that the significant common denominator has been our people-oriented strategy, resulting in a servant leadership culture that supports each other as well as our guests. Our turnover continues to decline, and the gap between our people metrics and the industry benchmarks continues to widen. We've also built a dedicated, robust pipeline of future leaders who will be instrumental in helping us achieve our targeted goals for 2024. I've never been prouder of our team or more excited at what the future will bring. And with that, I'd like to turn it over to Carl to walk through our financials.