Noodles & Company

Good afternoon, and welcome to today's Noodles & Company second quarter 2021 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 would now like to introduce Noodles & Company's chief financial officer, Carl Luchod. Luke Hodge, your line is now open.

Thank you, and good afternoon, everyone. Welcome to our second 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 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 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 risk 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 results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2021 earnings release and our supplemental information. Now, I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.

Dave Benninghausen Thanks, Carl, and good afternoon, everyone. I'm excited to share with you today details of our strong performance in the second quarter and the momentum that we see in the business. For the quarter, we reported total revenue of $125.6 million, a 57 percent increase versus the prior year. Our performance was fueled by record-level company average unit volumes for the quarter of $1.35 million, which reflected a 12.3% increase versus the second quarter of 2019. I'm pleased to report that this strong performance has continued thus far in the third quarter as well, where we've seen sales acceleration relative to 2019. In addition to our strong sales performance, our restaurant-level margin during the second quarter was 18.9%. our highest quarterly restaurant-level margin since Q4 of 2014, and a 180 basis point increase versus the same quarter in 2019. With significantly stronger restaurant-level volumes and profitability and a long runway of unit growth, we continue to be extremely excited with the opportunity ahead of us. To capitalize on this opportunity, 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, further activating our brand, particularly through our digital assets and marketing strategy. And third, accelerating our unit growth to take advantage of an operating model we feel is ideally situated for a post-COVID world. As we think about the differentiation of our brand, I'd like to start with a discussion of our ongoing success in executing a disciplined strategy of culinary innovation that's on trend, resonates with guests, and builds brand loyalty. Noodles & Company remains the only national chain offering global flavors through 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. We execute an elevated approach to culinary, 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. While menu innovation around healthier alternatives has been a key priority for us, exemplified by the launch of cauliflower gnocchi earlier this year, we also leaned into the strengths of our core menu. During the second quarter, we launched our tortelloni offering, which has already achieved menu mix higher than any prior launch at Noodles & Cup. For years, stuffed pasta has been the most requested item from our guests, and we are 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. While it's still too early to determine the ultimate sales-driving impact that tortelloni will have on the business, we have been very pleased with the initial results we're seeing, particularly on the frequency of our core guests. As we continue to differentiate the brand for today's environment, I would like to discuss our second strategy, focusing on further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. Noodles and Company's ability to meet and surpass guest expectations for a variety of occasions has allowed us to recapture over 70% of pre-COVID in-restaurant sales during recent weeks. while retaining over 90% of our digital sales. Consequently, even within restaurant sales returning, digital sales continue to account for 56% of sales during the second quarter. While we've made great progress, we continue to believe that we're still in the early endings of more effectively utilizing our digital assets and data to better engage with our guests and develop deeper relationships and insights into their behavior. One of our best tools to engage with our guests is our Noodles Rewards program, which has grown to 3.8 million members, which compares favorably relative to the industry when normalizing for restaurant count. We saw significant growth in our rewards program during the second quarter, aided by our tortelloni launch, which we introduced for the first two weeks as an exclusive rewards member offering. This allowed us to garner a significant increase in rewards signups at launch, as well as differentiate the value of the company's rewards program relative to the industry. As we bring an increased number of new guests into the brand, we continue to leverage insights from our loyalty program to help drive frequency and brand loyalty. Our communication continues to become more personalized and our utilization of tailored offers to drive specific buying behaviors has resulted in a meaningful increase in frequency amongst our core guests. Ultimately, we feel the strength of the brand, along with our continued focus on targeted and personalized marketing, has created a powerful combination to engage guests at all points in the customer journey. These marketing capabilities are particularly important as we consider 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%. During the second quarter, we opened three restaurants system-wide, two company and one franchise location. I would like to share a bit of insight into two of these locations, as I think they represent the breadth and the depth of the noodles and company growth potential. One of the company locations that opened during the second quarter was our first ghost kitchen. This location opened in a dense residential part of Chicago and is already providing great insight into the opportunity to build the brand in a low-cost and efficient manner. Just as importantly, this ghost kitchen is allowing us to sharpen our digital marketing for an urban delivery-focused landscape. And moreover, due to its small footprint, we are learning ways to be more efficient throughout all of our labor and food operations. We are encouraged by the momentum we are seeing in this location and look forward to our second ghost kitchen, which we anticipate opening in San Jose later this year. The second opening I'd like to focus on is actually a franchise location in a more rural setting in North Dakota. Due to construction delays, this restaurant opened with sales transactions solely coming through our order-ahead drive-through window. Despite this limitation, this restaurant has been posting annualized AUVs of $1.6 million since opening, further evidence of the power of our off-premise capabilities in general and our drive-through windows in particular. While the return we are seeing to in-restaurant sales for the overall system does indicate that in-restaurant dining will continue to be an important aspect of the overall dining experience, these types of successes give us even more confidence in our ability to accelerate growth with a flexible, lower square footage, more off-premise-oriented operating model. While we expect the balance of 2021's openings will be a bit back-loaded, the pipeline for new restaurant development for 2022 and beyond looks very strong. both from a company and franchise perspective. We also continue to expect that at least 70 percent of these locations will feature our order-ahead drive-through windows. The performance of newer units, combined with a more productive economic model from top to bottom, and complemented by franchise growth in new territories, will be a powerful engine for unit growth and earnings growth for several years to come. As we've said before, 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. As we all know, hospitality workers in general and restaurant workers in particular have been some of the true heroes of the past year and a half. I could not be more proud of our team. During the second quarter, this team proved once again that you can have a culture dedicated to caring for each other and caring for your fellow human beings while at the same time delivering incredible growth and financial results. Our industry-leading benefits from mental health to adoption assistance to enhanced paternity leave have provided value and assurance to team members in an uncertain world. Our best-in-class training and development programs, from the use of cutting-edge technology to consistent in-restaurant standard validation, to formal development programs, demonstrate our commitment to team members that when they join Noodles & Company, they have the opportunity to grow a career. And finally, our steadfast commitment to simply providing a great experience for team members and guests alike, from enhanced food and safety protocols to greeting each other with a smile, have allowed us to become even stronger than ever and position the brand to be a clear winner in the years to come. I'm incredibly excited for the balance of 2021 and beyond at Noodles & Company. And with that, I'd like to turn it over to Carl to walk through our financials from Q2.