Noodles & Company

Good afternoon, and welcome to today's Noodles & Company third quarter 2021 earnings conference call. All participants are now in a listen-only mode. After the speaker's 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 Lukacs. Your line is now open. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to our third 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 means 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 of the company's 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 direct comparable GAAP measure is available in our third quarter 2021 earnings release and our supplemental information. Now, I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.

Thanks, Carl, and good afternoon, everyone. I'm excited to share with you today our strong third quarter results and our progress toward achieving the accelerated growth objectives that we laid out earlier this year. Our third quarter results were highlighted by 16.3% comparable restaurant sales system-wide, allowing us to achieve another company record for average unit volumes at $1.38 million. In addition to strong sales performance, Our restaurant-level margin in the third quarter expanded 270 basis points versus the prior year to 18.1%, despite the impact of the current inflationary environment. Both our average unit volume growth and our margin expansion have been aided by the success of our new restaurants. With our restaurants open from 2019 to 2021, continuing to perform above company averages for both sales and restaurant-level margins. Our success in the third quarter is a result of the three primary strategies that we've been executing to capitalize on the opportunity ahead of us. 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 that we feel is ideally suited for a post-COVID world. As we think about the differentiation of our brand, I'd like to start with the discussion of our ongoing success in executing a disciplined strategy of culinary innovation that is on trend, resonates with guests, and builds brand loyalty. Last quarter, we highlighted the June launch of our tortelloni offering, noting that for years, stuffed pasta has been our guest's most requested dish. Now, four months past its launch, tortelloni continues to exceed our lofty expectations. And we're particularly pleased with the conversion that we are seeing from trial to loyalty and frequency for those who have tried it. While our focus for the balance of the year from a menu perspective will be fully capitalizing on the addition of tortelloni, our teams have also maintained a robust pipeline of innovation for 2022 and beyond. Next year, we anticipate a combination of enhancements to our already strong lineup of healthy alternatives, as well as new twists on familiar favorites. As we continue to differentiate the menu for today's environment, I'd now like to discuss our second strategy, focusing on further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. We have made significant progress with our digital capabilities and their impact on driving new guests, new usage occasions, and increased frequency amongst a broad group of consumers. Digital continues to account for 52% of our sales in the third quarter, even as in-restaurant ordering returned to 70% pre-COVID levels. Of course, one of the biggest tools for driving digital growth is our rewards program, which is rapidly approaching 4 million members. The insights that we have garnered from that program, combined with increased capabilities to develop more personalized, relevant communication, has allowed us to attract new guests to Noodles & Company, as well as increased frequency of our existing guests. As we said, we 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 we expect this strategy to be a meaningful driver of sales growth for years to come. Now I'd like to talk about our third strategy surrounding accelerating unit growth. As I mentioned earlier, the restaurants opened in the last three years continue to perform better than any group of new restaurants in our history, with average unit volumes and restaurant-level margins above company averages. We are particularly seeing strength in our new restaurants that contain our order-ahead drive-through windows, which we estimate on average increase sales approximately 10% to 20% relative to traditional new restaurants. We continue to expect at least 70% of new restaurants to incorporate the order-ahead drive-through windows as they improve convenience for our guests and are easy to execute for our operations teams. While we are excited about our current pipeline for new restaurants, From a development perspective, we have experienced the same short-term challenges that have been present throughout the industry. We and our franchisees have seen delays in construction, landlord building delivery, and equipment availability over the last several months. As a result, we have pushed three company openings and two franchise openings originally slated for 2021 into early 2022. These openings will be incremental to our prior outlook on unit growth for 2022 and we now anticipate at least 8% system-wide unit growth next year. At the present, we would expect our 2022 openings to be somewhat back-loaded given the delays which exist in today's environment. However, our overall pipeline remains robust as we execute our strategy to achieve at least 1,500 units nationwide. A significant contributor to our unit growth will be our franchise community, and we were excited to announce during the third quarter the signing of a new franchise deal to introduce the brand in the El Paso, Texas and Las Cruces, New Mexico markets. We're also pleased with the quality and trajectory of our conversations with additional prospective franchisees for both new territories as well as potential re-franchising of select company markets. While we do anticipate further franchising progress to the balance of this year, we also recognize that our prospective franchise partners, most of whom are established restaurant operators currently running additional brands, are also laser-focused on navigating the last topic I'd like to discuss today, the restaurant staffing environment. As we 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. Our team has done a simply amazing job rising to the challenges of the last 18 months. But even with the strength of our team and better than industry turnover metrics, we have not been immune to the well-documented staffing difficulties seen throughout the country. During the last half of Q3, these challenges, combined with the impact of the Delta COVID variant, became more pronounced, resulting in reduced store hours across a number of restaurants in our system. Normalizing for staffing challenges, our sales growth thus far in the fourth quarter remains on par with our record-setting Q3, and we're taking a number of actions to address the current labor environment. We've implemented meaningful increases in our restaurant management compensation as well as instituted thank you and retention bonuses throughout our restaurant organization. Additionally, we've eliminated many time-consuming tasks executed in our restaurants, some on a temporary basis and others that we will believe make our restaurants more efficient both in the short and the long term. From recruiting to retention to development, we have piloted or implemented a wide variety of new approaches to aid in combatting the current staffing environment, from sharing best practices amongst our operators to offering sign-on retention bonuses for areas with particularly tough labor markets. While we believe staffing will remain a significant challenge in the near term, including in the fourth quarter, based on trends from the last few weeks, we feel that the worst is behind us, and I'm optimistic that our efforts will allow us to mitigate the impact as well as make us even stronger in the long term. I also am optimistic given the overall strength and commitment of our teams throughout the country. This commitment, evidenced by the tangible progress we have made across all aspects of the business, has allowed Noodles & Company to successfully navigate an unprecedented environment during the past 18 months. And it gives me great confidence that we will successfully navigate the current environment as well and build off of the record-setting sales results that we saw during the third quarter. I'll now turn it over to Carl to discuss in more depth our financial results.