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spk01: 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.
spk06: 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.
spk04: 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.
spk06: Thank you, Dave, and good afternoon, everyone. In terms of the financial highlights, total revenue for the second quarter increased 57% to $125.6 million compared to last year. Comparable restaurant sales versus 2020 increased 56.8% system-wide, comprised of a 55.7% increase at company-owned locations and a 63.8% increase at franchise restaurants. Average unit volumes for the second quarter were 1.35 million, representing a 12.3% growth rate compared to the pre-COVID second quarter of 2019. As Dave noted, we have been encouraged by the continued momentum into July, where we have seen our sales trajectory accelerate relative to 2019. Total revenue was partially offset by temporary COVID-related restaurant closure days. These closure days improved significantly throughout the quarter and have remained at lower levels through the third quarter to date. I will note, however, that uncertainty still exists with the potential impact of the COVID-19 Delta variant. And we will, of course, prioritize the health and safety of our guests and employees. We continue to follow requirements by local jurisdictions with regards to social distancing and mask wearing. On a restaurant contribution basis, our restaurant-level margins were 18.9% in the second quarter, compared to 6.7% last year. Relative to the second quarter of 2019, which we believe to be a more relevant comparison, contribution margin increased 180 basis points from 17.1%. We are proud of our achievements in contribution margin. particularly around labor efficiencies and managing our food costs, which have now fully offset the expense related to third-party delivery fees. Our performance gives us further confidence in our ability to meet or surpass our accelerated growth objective of a 20% company-wide contribution margin by 2024. Reviewing margin drivers in a bit more detail, for the second quarter, our cost of goods sold was 24.9%. which represents a 10 basis point improvement from last year and a 70 basis point improvement from 2019. The improvement was due primarily to menu pricing and efficiently managing our promotions, in addition to lower contracted food costs. During the quarter, we saw minimal financial impact as it relates to commodity inflation and have been particularly encouraged at our ability to navigate a challenging supplier environment. Having said that, As we head into the third quarter, we are not alone in navigating industry-wide inflationary pressures and overall staffing shortages with our food vendors and other suppliers. In light of these headwinds, we are taking an additional 3% pricing increase to our core menu beginning next week. At an average per-person spend of just over $10, Noodles continues to provide a tremendous value proposition to our loyal guests. which affords us with pricing power to offset these future costs. Our anticipated 3 percent pricing increase would take our year-to-date pricing to 5.5 percent, which we expect to offset the expected commodity inflation we are forecasting for the back half of the year. Keep in mind, this offset will be on a dollar basis, and we would expect to see an impact to our normalized cost of goods sold margin by an additional 60 to 80 basis points. We will continue to track the financial impact closely and make changes to our business as appropriate. Labor costs for the quarter were 29.8 percent of sales, a 410 basis point improvement from last year, and a 290 basis point improvement from 2019. Our performance was primarily driven by realized labor model efficiencies through our Kitchen of the Future initiative, particularly a reduction in front-of-house hours, in addition to sales leverage. These drivers more than offset an increase in restaurant-level incentive-based compensation, given our sales-out performance this quarter. Overall, we are pleased with our continued execution against our labor hours management and remain encouraged by turnover trends, which have resulted in lower training costs compared to last year. A further driver of labor efficiency continues to be the rollout of our steamer equipment, which we are targeting a reduction of approximately two labor hours per restaurant per day We have completed 162 installs to date, which represents 43% of the company, and we expect over 90% of steamers to be rolled out by 2021, assuming no further supply chain disruption. We remain encouraged by the positive results demonstrated by improved cook times, reduced labor hours, and better taste of food scores. Operating costs for the quarter were 17% of sales compared to 19.7% last year, due primarily to sales leverage. Operating costs were 280 basis points higher than 2019 due to an increase in third-party delivery fees, as this channel remains a critical avenue to drive brand awareness for new guests and ultimately convert guests into brand loyalists. Our guests are returning to in-restaurant orders and dine-in, which has now increased to 73% of pre-COVID levels. Even with the growth we're seeing in the in-restaurant channel, we remain encouraged by the strength of our off-premise and digital business, which has performed consistently on an absolute dollar basis through the second quarter and into July. As a result, we expect other operating costs to be in the mid-17% area for the second half of the year, as absolute delivery fees are expected to remain somewhat flat going forward even as the growth of in-restaurant ordering has evolved our overall digital mix. G&A for the quarter was 13 million compared to 10 million last year. As a percent of total revenue, G&A decreased 220 basis points compared to last year. The growth in G&A dollars was driven by investments to support our growth strategy, in addition to a more normalized compensation structure, including an increase in bonus accruals relative to 2020. G&A includes non-cash stock-based compensation of $1.6 million during the second quarter, compared to $1.1 million last year. We anticipate that stock-based compensation going forward will be approximately $1 million per quarter. GAAP net income for the second quarter was $5.7 million, or 12 cents per diluted share, compared to a net loss of $13.5 million last year, or 30 cents per diluted share. We also report our net income on an adjusted basis, which normalizes for a statutory tax rate because our effective tax rate is impacted by our evaluation allowance on deferred taxes. Additionally, our adjusted net income normalizes for the impact of impairments, divestitures, and closures. On an adjusted basis, our net income was $4.6 million, or 10 cents per diluted share, compared to a net loss of $8.1 million, or 18 cents per diluted share. Going forward, we estimate that our statutory tax rates used in our adjustment to net income will be between 25 percent and 27 percent. And as a reminder, at year-end 2020, we had approximately 150 million of federal NOLs and federal tax credits. As such, no federal tax payments are expected in the near term on a cash basis. Switching to the 2021 outlook, we remain very encouraged by our sales performance through July. For the third quarter of 2021, we anticipate total revenue of around $122 million to $126 million, which would assume a similar trend in average unit volumes that we saw in the second quarter when compared to 2019. From a unit development perspective, our real estate and construction teams continue to do an excellent job of building our pipeline for the remainder of the year and beyond We continue to anticipate 10 to 15 new restaurant openings system-wide in 2021, including 8 to 11 new company restaurants, although we anticipate that some of our 2021 new restaurant openings could push into the earlier part of 2022, driven in part by landlord delays. We remain optimistic about our 2022 pipeline, in which we expect at least 7 percent unit growth on a system-wide basis, quickly accelerating to 10 percent thereafter. From a capital perspective, we continue to expect full-year capital expenditures of approximately $20 to $24 million. Turning to the balance sheet, we feel very good about our current liquidity position. At quarter end, we had cash and cash equivalents of $17.3 million and a total debt balance of approximately $37.3 million. Our net debt of $19.9 million was $14.3 million below our net debt balance at the end of fiscal 2020. We anticipate that we will produce positive free cash flow through the remainder of 2021, and our ability to maintain strong liquidity will provide ample room to meet our growth objectives. With that, I would like to turn the call back over to Dave for final remarks.
spk04: Thanks, Carl. While there remain challenges and uncertainties in the current environment, particularly regarding the impact of the Delta COVID variant, our performance the past several months, and in particular, our off-premise digital and menu strengths, just bolsters our confidence in Hewlett & Company's ability to navigate and thrive in any environment. The brand remains differentiated with a menu that is on trend and resonates with a wide variety of guests and needs states. Our digital and off-premise strengths are perfectly suited for today's consumer environment and continue to improve as we establish deeper engagement with our guests. And our operating and economic model continues to strengthen as we capitalize on the significant expansion opportunity both for company and franchise development. I'd like to reiterate my thanks to our teams throughout the country. Their tireless efforts have allowed the company to set new internal records in the short term, but more importantly, create an incredibly powerful culture and economic model to drive outsized growth for the years to come. With that, Lee, please open the lines for Q&A.
spk01: Certainly. Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, to ask a question, simply press star 1 on your telephone keypad. And your first question comes from the line of Jake Bartlett from Truist Securities. Your line is now open.
spk02: Great. Thanks for taking the question, and congratulations on the momentum of the business. My question was about the same-source sales, how they trended throughout the second quarter, and maybe if you can get more specific on what kind of momentum you're seeing in July this My notes are that I think your April fame for sales were up 13% versus 19%. It looks like it might have decelerated from that. But if you could just give us the cadence throughout the quarter, more specific on the trend in July. And then I think that last comment or towards the end of the script was that you expect similar trends in the third quarter versus the second quarter, yet you also made the comment that momentum has accelerated in July. So maybe you can square that for us.
spk04: Yeah, absolutely. I mean, I think we're excited to report, Jake, that actually we saw momentum increasing from a two-year growth perspective as we exited Q2, as well as thus far during the third quarter. From an average unit volume perspective, one reason why, you know, still talking about that $1.35 million is from a seasonality perspective, you do have two holidays that fall into the third quarter, the 4th of July, as well as Labor Day. Those tend to be seasonally a little bit lower for us. So we actually do expect to see some momentum from an overall growth relative to 2019, while our junior volumes might stay a little bit consistent or increase a bit. But we're very excited overall with the momentum that we saw both as we exited in June as well as through thus far in July and then ultimately into the beginning part here of August. Great.
spk02: And then also, if you could talk about – What do you expect to be the primary drivers of same-store sales in the back half of the year? The stuffed pasta was a big hit. Anything more that we should expect from the food news perspective and then whether there's any kind of more specific marketing plans you have? What should give us confidence that you can accelerate from where we are today?
spk04: Yeah, I mean, I think just the momentum that we're seeing actually in the last few weeks gives us a good amount of confidence, Jake. But Tortelloni just getting started really just launched nationally in June. So you didn't really get to see the momentum impact Q2 results very much. So as we look at the momentum, we've kind of gained and exiting Q2 and going into Q3. I feel like tortelloni, we're seeing in particular, Jake, a lot of increase in frequency from the core gas. Super early, so it's hard to really put the finger on exactly what that impact could be, but we're very bullish on what the overall opportunity is with tortelloni. Mathematically, the price increase that Carl mentioned, we'll be layering on 3% of price here later on this month, so that should have a nice benefit as we look through the balance of the year from a sales perspective. Actually, still a lot of runaway overall on digital and marketing in totality. I mean, we're seeing some great results from all of our metrics, whether it be engagement with our guests from a social media perspective, to email open rates, to just overall engagement with the brand. And we still feel like we're just getting started, and you'll continue to see us make the brand even more visible than it is today. So between, you know, some mechanics around the price increase, but also still a significant amount of runway growth, from both the tortelloni perspective as well as marketing, we feel very confident with what we're going to see in the back half of the year.
spk06: Jake, one point I'll just add. Yeah. Sorry, Jake, if I could just add one point on the day part trend. We've seen outperformance in dinner through the past several quarters. We're beginning to see outperformance in lunch as well. We're narrowing the gap. Lunch was a wider variance versus 2019, and we're beginning to see that business come back. So that's an additional revenue driver we can look for.
spk02: Great. Great. That's helpful. And then last question, I just want to clarify the comments on margins for the back half of the year. You know, the comment on COGS being down as a percentage of sales on, what, 60 to 80 basis points, was that versus the first half of the year, or was that kind of versus 19? I just want to make sure I understand that. And then... I think you did give us what you expect for the other restaurant operating expenses, but I think the missing piece here is labor. What do you expect on labor for the remainder of the year in terms of leverage or deleverage? Will that price increase fully offset the wage inflation, or how should we think about labor for the remainder of the year?
spk06: A couple things. So on the cost of goods sold side, the 60 to 80 basis point is a comparison to the first half. So when we think about the normalized level of cost of goods sold, around 25%, we could see that from 60 to 80 basis points higher in the back half due to some of the expenses we're offsetting. And, again, that would be offset from a dollar perspective from our 3% price increase, but you will see the impact on the margin side. In terms of labor, a driver of labor has been on the sales leverage side. So we're going to continue to see that slow through down on the labor margin. We're feeling very encouraged by this. And keep in mind, I did mention that the second quarter there was a partial offset by incentive compensation relative to our outperformance in the second quarter. So that's just one area that going back into the second half, we would expect to see as a potential opportunity with respect to the margin.
spk02: Great. I appreciate it. Thank you.
spk01: Thank you. Your next question comes from the line of Nicole Miller from Piper Sandler. Your line is now open.
spk07: Thank you. Can we go back and revisit the, I guess, dine-in to go versus digital business? So I think retention was 70% and 90%. How did that compare? I think, you know, last quarter I did it in dollar amount, to tell you the truth. So I'm wondering what the base is. Like, you know, so when we want to factor or tie to the 1.35 million AUV in dollars, just kind of how to think about the base. for the digital and non-digital to kind of reconcile that.
spk06: Go ahead, Carl. Sure. So for the breakout of the digital and in-person, the digital mix for the quarter was 56% total digital, and that would represent about $750,000 on total AUV. And the in-person was about 44% mix of the total. That would represent about $600,000 total AUV for a total of $1.35 million.
spk07: Okay, perfect. And then we can back in from the retention to what the base was. So that's helpful. Thank you. On the ghost kitchen, you know, I don't think I've asked, When you look at future development, how many ghost kitchen stores are there, and is there anything we need to understand from a CapEx requirement or a unit-level economic model point of differentiation that we should take into consideration?
spk04: Still, ultimately, Nicole, very early. As we look at the overall earnings growth algorithm for Noodles & Company, we're not relying on the ghost kitchens to be a meaningful product. contributor to that overall accretion. What we do like about the ghost kitchens, you can generally get in to a new site for less than $100,000. What you miss certainly is that you don't have as wide of an audience to draw from. It's primarily a delivery only type of building. It's still early enough that we don't want to put a target on how many we think they could be. We'll know a little bit more as we open the second one in San Jose later this year. What we do love about it, though, is we are learning so much about how do you be more efficient with labor, with food, how do you market in a very targeted way in a more urban fashion. So still a bit early. It's not necessarily part of our overall algorithm, but we're pretty excited with what we're seeing in the last few weeks in particular in terms of momentum.
spk07: And then just last question. I was in some stores this, I guess, recently, and I the steamer I think is pretty promising at two fewer labor hours per unit per day. I think if I've done some math properly, it can shave like 30 seconds off ticket time. Is that the point? I mean, does it unlock throughput? Does it help with labor and hiring? And I guess that would be the operational like employee point of view. The second part would be from the consumer point of view. I could also imagine like people coming back, and being willing to kind of sit and linger, but maybe this, you know, can speed up the off-premise for those that can continue to consume that way. Thank you.
spk04: Yeah, absolutely. We feel like the core operating model, Nicole, already hits most of the guest needs states in terms of speed and throughput and so forth. However, given the increased volumes, given, you know, further opportunity in urban settings, whether it be nontraditional, still want to make sure that the concept gets faster where we can. So the steamers, for those that don't know, what it allows us to do is for those dishes that are sautéed, which is the majority of our dishes, allows you to bring them up to temperature quicker through the utilization of the steamer before you put it into the sauté pan. So you still get that same quality, that same taste, that same texture that people know and love from meals and company. It just comes a bit quicker. The benefit is, as you know, Nicole, that the math's about right in terms of about a 30-second improvement on cook times. It does take less labor to go through it. And by virtue of being faster, the food's actually hotter. So you actually get a better experience from the guest perspective. Additionally, you can particularly appreciate this given the current labor environment. Our approach to cooking and everything being made to order is much more complex than a lot of other concepts. And we have done, I think, a very strong job from our team of simplifying that and making consistency be a hallmark of our brand. What this allows you to do with the steamers is instead of potentially a 17-year-old, 18-year-old who is there on the saute line having to learn what au sec means and having to learn to see when the liquid bubbles, that type of methodology, we don't sacrifice any of it when we go to a steamer, but a steamer allows it to be 100% consistent. You don't end up having that human judgment that can ultimately lead to training challenges and can lead to inconsistency. So one reason we love the steamer so much, very high ROI from a labor savings perspective. So labor savings is a big piece of it, but there's throughput, there's temperature of food, there's training, there's consistency. It really is one of the best initiatives I've seen in my years of noodles and company that really hits customers. everything you would want from a team member perspective, a financial perspective, as well as a guest perspective.
spk07: Thank you.
spk01: Thank you. Again, at this time, if you would like to ask a question, simply press star 1 on your telephone keypad. Again, to ask a question, please press star 1 on your telephone keypad. Your next question comes from Andrew Strelzyk from BMO Capital Markets. Your line is now open.
spk03: Great. Thank you. Good afternoon. My first question, I wanted to ask about the 20% restaurant margin target. And I apologize if I'm parsing your words too closely, but I think you said, you know, either getting there sooner or meeting or beating that level now. So it sounds like you're getting a little bit more optimistic about the pathway and the potential of the margins there. So I'm just curious what, about kind of the margin math it is that you're getting more optimistic on, maybe which line item, what it is specifically that you're seeing that's driving that increased optimism.
spk04: I think more than anything, and Carl should weigh in as well, Andrew, is just the sales and the average unit volume increases we're seeing. So as a reminder for everybody, during the February earnings call, we laid out accelerated growth objectives to meet $1,450,000 in average unit volumes, 20% restaurant-level margin, And then 7% unit growth in 2022, quickly going to 10% in 2023 and beyond. As we see today versus what we saw in February, clearly a significant amount of momentum. As that momentum has occurred on the average unit volume side, we're seeing the flow through that you would want and need in the margin level as well. So as we look at 2024, it's still early. I mean, it's still an uncertain environment. So we're not going to revisit necessarily those long-term targets yet, Andrew, but we're seeing that that averaging of volume going to $1.3 million and what we see as continued expansion opportunity there in the short-term, medium-term, and long-term with the associated flow-through, that gives us a ton of confidence in the overall meeting and surpassing of those numbers. Additionally, we're continuing to do continuous improvement when it comes to looking at kitchen design, looking at operations procedures, looking at how we bring food into our restaurants. There is still opportunity beyond just sales leverage for us to continue to improve that economic model. So really on all fronts, we feel like the momentum we've seen between February and where we're at today gives us great confidence in not only to mention the sheer percentage of restaurants we already have that are at 1,450,000 or that are at 20% restaurant level margin. it's a significant portion of the population already. So we absolutely know that we can do those.
spk03: Okay, that's helpful. And then a question on the pricing and the food inflation. So what level of food inflation are you expecting now in the back half of the year? Maybe if you can compare that to the front half of the year, the second quarter, however you want to do that. And then, you know, why is 3% price the right level where would that put you for the back half versus where you've been? I think you gave a year-to-date number. And it sounds like maybe you're open to more pricing. I don't know if that's this year or beyond, maybe to recover the full extent of the margin percent. So if you could just help put some color around that, that would be helpful.
spk04: Yeah, let me touch on a little bit more of the price increase, and then Carl can weigh in on the overall inflation numbers. So 5.5% of what we're running today, once we have 3% price incorporated, Keep in mind the vast majority of the price that we've seen thus far this year has actually been in third party. So that's where we've got about a 17% price premium for those that are going through the third party. We don't necessarily have plans to revisit pricing and to have further price increases during the balance of this year, Andrew, but we do feel that we have some dry powder left that we still have a significant amount of pricing flexibility if we needed to flex it, but we don't necessarily expect there's no plans to do so any time in the near future.
spk06: And on the inflationary side, I would start off by saying we have a very strong network of suppliers. We've been working with them very closely, primarily to ensure that our restaurants are able to meet the demand of our guests. But there is no doubt in inflationary pressures and challenges in the industry. Despite these factors, we feel very good about our supply relationships, our ability to manage these costs, and to maintain supply in the restaurant. So more specifically on the inflationary pressures, we're seeing it in our business on protein and on to-go containers. For the most part, we're maintaining our contracts with our suppliers. we have them in place through the remainder of the year. In some cases, we've had to move away from a particular producer or supplier, but we've been able to secure the supply.
spk04: From an overall inflation perspective, we expect the high point will actually be Andrew in Q3. So that's where you can potentially see 4% to 5% overall inflation, but we would expect it to hopefully moderate from that point forward.
spk03: Okay, great. And if I could maybe squeeze one more in just on the development pipeline. How far out are you now? I'm just curious about the visibility. And then if you could just kind of describe how the conversations with the franchisees and how that program is going as you want to accelerate that piece of the development pipeline. Thank you.
spk04: Sure. On the company pipeline, we are very happy with where we're seeing the pipeline develop. Right now we're working through primarily deals for 2022 and working kind of the back half of the year deals for 2022, but feel very comfortable working then we'll be at least at that 7% overall unit growth. From the franchise side, I'm pretty excited with what we're seeing both from our existing franchisees who have just thrived through the last several months, and they're very excited with the economic model, the drive-through window. As I mentioned, that restaurant, My Now, which is a franchise in North Dakota, which is a franchise location. So we're seeing good momentum from our existing franchisees who are looking for deals From the new franchisee perspective, a very strong pipeline. We're very selective, and we want partners that will be with us and grow with us for decades, really. So it's a pretty diligent process, but I think you'll see some good news on that as we go through the rest of this year in terms of building out some of those new ADAs. Great. Thank you very much.
spk01: Thank you. Your next question comes from the line of Todd Burke from CL King and Associates, your line is now open.
spk05: Hey, thank you. Good afternoon, everyone. Just a few leftover questions here. On the unit side, there was a comment, and I may have misinterpreted it earlier in the call, just talking about the development calendar looking a bit back-end loaded. Is that the 21 calendar, or is that how the 22 is? calendar is shaping up and what should we think about for cadence of openings in 22?
spk04: Sure. So it is referring to 2021. I would estimate, though, at the same time, Todd, that some of the challenges that we're currently seeing from an actual control of the timeline, and to put some perspective behind this, we're finding great sites. We're finding great deals that we feel very comfortable underwriting that are going to be great news for companies. restaurants for 20 plus years. So the pipeline itself is getting full very quickly and we feel good about that. What we are seeing that's a little bit unique versus prior years is that the inflation that you're seeing in lumber, the availability of steel and other raw materials, we are seeing the timeline from when we approve a deal and start working on the lease to when we actually get delivered the site. That has been longer than what we have traditionally seen. So that has caused, in a few instances here in 2021, that pipeline to be a little bit backloaded. 2022, the way the pipeline shapes up today, looks like it would be more balanced, but pragmatically, you know, think there's still a bit of time before we get to a more normal developer cycle, if you will. So I want to be a bit cautiously optimistic as we talk about the balance from a timing perspective of 2022.
spk05: Okay, great. Thanks, Dave. That's helpful. And as we start to look out to 22, you talked about 70% of the units having the pickup window. But what are you doing as far as footprint with that class? Is this that progression from 2,600 square feet down to 2,000 kind of cost of construction and what you think the returns of that opening class year will be based on maybe a more efficient box?
spk04: Sure. So if you think of 2019 and up to the restaurants that we've opened thus far this year, Todd, we're hitting that 30% restaurant-level margin or 30% cash-on-cash return, I apologize, even with development costs that didn't necessarily incorporate some of the savings opportunities that we've identified, the lower square footage, et cetera. So it's been, kind of to your point, some of the phased movement towards our ultimate prototypes. As we maintain the same type of volumes and restaurant-level margin for future classes, which we absolutely intend to do, we expect to be doing that off of a reasonably smaller development cost. So instead of the $850,000 to $900,000 that we averaged from 2019 up until the first few restaurants this year, we would expect that to get into the mid-700s. and you see the cash-on-cash return capabilities there, we feel very comfortable with it. Those are sites that would be 2,000 square feet. The drive-thru window itself, since we're not doing true ordering through there, it's digital order ahead. Impact on development costs is de minimis. So we're feeling very excited about the overall cash-on-cash return profile of that new class, which will be smaller square footage, more off-premise oriented, and incorporate a lot of the savings opportunities that Carl mentioned and the team have found from the construction side.
spk05: That's great. That's great. And then one final one for me. I know, Carl, when you were talking about just some of the inflationary pressures and talking about hiring pressures up the supply chain, I wonder if you or Dave could talk about staffing levels at Noodles and tie it to kind of the culture that you've been building out, the additional benefits that you've laid in, the better retention. How are you feeling staffing-wise relative to this continued increase spike in demand that you're seeing at the restaurant level?
spk04: You know, the reason, Todd, and I'm glad you asked that question that, you know, I've been with this industry as long as I have, is the impact that restaurants have on not just our guests, but our team members. I think over the last year and a half through COVID, restaurants have really shown how important they are to the fabric of society and how many important events happen over a meal. Similarly, at the restaurant level itself, you can have a great career as you start with noodles and company, just from the restaurant industry in general. And our initiatives over the last few years, really, it's been for a long time around paying fairly, first and foremost. You know, we're at a point where our typical team member, inclusive of tips, is around $15 on average. putting groundbreaking benefits in terms of enhanced maternity leave, surrogacy, you name it, mental health, as well as just having a culture of people that care for each other and, you know, realize that standards and coaching and development and accountability is part of personal growth. We've got a heck of a team right now. And we shared with it on prior calls and it continues today, our retention is, and our turnover metrics relative to the industry is something we're extremely proud of, one of the metrics we're most proud of over the last couple years. It's allowed us to navigate this hiring environment much better than we feel, you know, many others probably have had to do, what they've had to deal with. And we did see a hop in turnover kind of the early part of Q2. It's starting to come down. So we feel that the worst of the staffing challenges are definitely behind us. The team is still laser-focused. These are focused on providing just an excellent environment, making sure that everybody is really focused on hiring the right people, training, coaching, developing them through their career at Noodles & Company. So we've navigated it pretty well. There's still a tough environment to play, but I'm very happy that we've seen very, very little disruption in our restaurants relative to some of our competitors.
spk05: That's great. That's good. So it's not that same – situation where you're still looking to hire thousands of people to meet the demand? You've got the teams where you want it, you're retaining them, and really no operational hiccups from staffing then?
spk04: Yeah, it's the restaurant space, so you're going to have, you know, a natural level of transience in the industry itself, so you're always hiring, and we're very happy with the applicant flow that we're seeing, and, you know, fortunately we didn't start this staffing challenge or crisis, however you'd like to name it, we started from a better position than I think we would have otherwise due to that culture and our training and development. So, yes, we're still hiring, you know, all the time. We still, you know, are very, very focused on it, but I think we're in better shape than many than we could have been. Okay, great.
spk05: Thanks, Dave.
spk01: Thank you. Your... Next question is a follow-up question from Jake Bartlett from True Real Securities. Your line is now open.
spk02: Great. Thanks for taking the follow-up. You know, I just wanted to make sure I understood the dynamics of menu pricing and the food cost inflation. You know, I think so if you're adding about 3% price, and I think just from the commentary, you're roughly 2.5% before. So, you know, for the full quarter, I think you'd be roughly, what, 4%, 4.5% on pricing for the third quarter. If we expect deleverage of 60 to 80 basis points, my math is that food cost inflation would be up near the kind of the 7%, 8% range. And so that doesn't, I don't want to jive with Dave, your comment about, you know, 4.5% to 5%. So just run through again what you specifically expect for pricing in the third and hopefully in the fourth quarter would be helpful, you know, maybe assuming no additional pricing just so we understand what's rolling off and what you keep. And then really just specifically what you expect for food costs, inflation in the third and fourth quarter.
spk04: Yeah, the other aspect of COGS, which isn't necessarily incorporated into that inflation number, is actually the to-go packaging and just the sheer amount of it, given that we're still an off-premise dominated society as well as we continue to serve in our restaurants, even for in-restaurant dining, in to-go packaging. So that's the other element that I wouldn't necessarily capture as Raw inflation, we are seeing some inflation in those areas as well. So that's part of the gap. Carl, if you can kind of just clarify on some of the pricing side of the equation.
spk06: Yeah, for the pricing, we've taken about 2.5% year-to-date. So the additional 3% would take us at 5.5% year-to-date total pricing. We're taking the 3% next week. So we're going to see that impact for the rest of the third quarter.
spk02: And nothing rolls off in the fourth?
spk06: No plans for the fourth quarter pricing increase right now.
spk04: There will be a little bit that will roll off actually in early December on the delivery. So as a reminder, we went from 10% third-party delivery price premium to 15% last December. So that will roll off. So that's roughly a percent of price. Got it.
spk02: And then the last quick question is, you know, the mix of your in-app and online kind of white label delivery versus third parties. And I think that should try, you know, if that is increasing, it should be helping that other restaurant operating expense line. But it doesn't seem to be. At least the expectation is not in the back half of the year. But how is that going in terms of trying to migrate, you know, consumers to your channels versus a third party?
spk04: You know, we still see opportunity there. I mean, candidly, it's not moving fast. as quickly as we would like to see it move. We like the third parties in terms of it certainly brought a lot of people into the brand. It's how a lot of people have been introduced to noodles and company, particularly in some of our less penetrated markets. But we still have a lot of movement that can be done in terms of bringing the percentage of delivery that's through our native channels. It still is just in that kind of 12%, 13% range. It's gone up modestly. Seeing some benefit is we did tortelloni because we did create some exclusivity with rewards program. We brought more people into our own channels. We are starting to see some movement here in the last couple of months, but Jake, to your point, we consider that a good upside opportunity as we continue to engage that guest in a little bit better way to get them to move towards our network channels. Great. Thanks a lot. I appreciate it.
spk01: Thank you. I am showing no further question at this time. I'd like to turn the conference back to Dave for any closing remarks.
spk04: I appreciate everybody's time today and still a lot of uncertainty throughout the world, but I think Noodles Accompanies performance, particularly in the last three months, but even throughout the last 15 to 18 months, we have so much confidence in our ability to navigate this environment and continue to thrive. As we said earlier, with record level average unit volumes, margins in our best place since 2014, and a significant unique growth opportunity ahead of us. We're just extremely excited for 2021, the balance of it as well as beyond. So appreciate your time and everybody stay safe.
spk01: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation.
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