This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good afternoon and welcome to today's Noodles and Companies Fourth 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 would now like to introduce Noodles and Companies Chief Financial Officer, Carl Lukacs.
spk05: Thank you, and good afternoon, everyone. Welcome to our fourth 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 during 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 cause actual results to material differently from those contained in our projections or board-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 fourth quarter 2021 earnings release. and our supplemental information. Now, I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.
spk07: Thanks, Carl, and good afternoon, everyone. 2021 was an important year for Noodles & Company as we made significant progress against our growth objectives, validating the resonance of the brand for today's consumer, as well as setting the stage for accelerated unit growth, which is now underway. For the fiscal year, revenue increased 20.7% compared to 2020, to over $475 million. Comparable restaurant sales increased 22.1% system-wide, and digital sales increased 20%, accounting for 57% of total sales. Restaurant-level margin for fiscal 2021 increased 400 basis points to 15.9%, culminating in a 233% increase in adjusted EBITDA to $38.1 million for the year. As we look back at 2021, one important aspect is the underlying AUV momentum that we have seen throughout the system, evidenced by the record AUVs of $1.3 billion that we achieved in Q3 prior to the staffing and Delta variant challenges of the fourth quarter. Even with the impact of Delta and staffing challenges, for the full year, average unit volumes reached an all-time high of $1.3 million, representing approximately 22% growth over 2020 and an increase of over 11% versus pre-pandemic 2019. We saw strength throughout the country, with particular momentum in less penetrated markets where we were able to accelerate brand awareness through targeted digital efforts. As ADP grew in 2021, we're also proud of the efficiencies gained throughout our labor model, particularly with the implementation of steamers that will be completed nationally this quarter. The gains from these efficiency initiatives will manifest themselves throughout 2022, both to reduce labor hours as well as improvements in throughput and cook times, which are critical as we face increased demand both at existing and new locations. Finally, during 2021, our newest vintages of restaurants performed at our highest level in company history, validating our strategy to accelerate grills with a proven model that yields 30% plus cash on cash returns. Turning toward recent results, during the fourth quarter, while the underlying business remained strong, the company was significantly impacted by both staffing challenges as well as the surge of the Delta COVID variant, which was concentrated in our most penetrated markets of the Rocky Mountain West and the Upper Midwest. This resulted in a meaningful amount of temporary closures or reduction in operating hours, which we estimate impacted revenues by approximately $8 million for the fourth quarter. The Delta variant's impact on the full quarter's financials were additionally compounded by one-time costs nationwide related to investments in staffing and continued volatility within our supply chain. It's important to note that this impact was particularly profound during late October and through the month of November. Notably, as staffing improved and the Delta variant subsided, the business quickly regained momentum, as evidenced by our strengthening comparable restaurant sales throughout the quarter. From a fiscal period perspective, system-wide comparable sales grew 6.8% in October, increased to 11.9% in November, and then again to 14.7% during the month of December. As the calendar turned to 2022, clearly the surge in Omicron cases has impacted the beginning of the year. But again, we're pleased with how performance has improved as cases have subsided. During our January fiscal period, comparable sales increased 2.7% at company locations and 4% system-wide. Results have accelerated in recent weeks, with comparable sales in our February period increasing 7.5% at company locations and 8.7% system-wide as of yesterday, February 22nd. These results give us confidence that the brand will again prove its resilience and accelerate both sales and margin expansion quickly as own crowd pressures subside. This belief is also bolstered by the brand's strong value proposition. With the majority of our dishes having entry points of approximately $7, we feel this pricing power gives us the ability to enact additional pricing during the second quarter and potentially beyond to mitigate anticipated margin pressures. As we look to the year ahead, we continue to believe that our three primary strategies will have a profound impact on our ability to become a premier growth story in the restaurant space. These strategies remain, first, the continued differentiation of our concepts to appeal to a broad range of lifestyles, convenience, and dietary needs, which will be best exemplified by a particularly exciting new culinary launch in the second quarter. Second, further activating our brand. particularly through our digital assets and marketing strategy, which ultimately will result in the launch of a new brand building platform that will roll out in the coming months. And third, accelerating our unit growth. To take advantage of an operating model we feel is ideally suited for today's environment, driven by our target of 8% unit growth in 2022 and accelerating to 10% next year. Let me provide a brief update on each of these, starting with our culinary strategy and continued differentiation of the brand. Noodles & Company remains the only national fast-casual restaurant bringing fresh tastes on world flavors with a noodles-and-pasta-based menu. Our fresh, flavorful, and made-to-order approach sets the brand apart, and our variety and the fact our food travels so well makes us perfectly suited for meeting consumer needs around convenience, offering our guests real cooking so they don't have to, whenever and wherever they want. In 2021, we showcased the strength of our menu through continued innovation, particularly with the introduction of tortelloni in June, which continues to be the best performing new menu item in our history. We still feel there's a lot of runway in the tortelloni offering and are particularly pleased with the increase in frequency that we're seeing from those who have tried the dish. Our ability to optimize our menu innovation between healthy offerings and new spins on familiar favorites has been a hallmark of our brand and that will continue in 2022. Just last week, we launched two new salads, refreshing the category in advance of upcoming warmer months, while simplifying our operational execution. And throughout the year, we will additionally be completing testing on new menu items for 2023 and beyond. However, the culinary innovation where we are currently most excited about is Lean Guini, which will launch in a few months. Lean Guini has the taste and the texture of a traditional linguine dish, and gets its name from having over 50% less net carbs and over 40% more protein than a traditional lean noodle. The culinary formula for Linguini is proprietary, first-of-its-kind offering that is a result of almost a year of innovation. We feel that Linguini can have a similar impact to what zucchini noodles had on the brain a few years ago, expanding our market reach meaningfully by redefining traditional expectations of noodles and pasta. As our current organization accelerates in upcoming months, so will our second strategy, which is further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. During 2021, our digital sales grew 20% over the prior year, and both for the full year and Q4, accounted for over 57% of total sales. We continue to be impressed by the strength of this channel, which is bolstered again by how well our food travels for off-premise occasions, strength of our awards program and our resonance with younger, more digital-savvy consumers. We continue to enhance the targeting of our marketing, as well as the capabilities of our digital assets. Introducing a higher level of personalization into our guest engagement, thus enhancing the overall guest experience. Of course, one of the biggest tools for driving digital growth is our rewards program, which has now crossed 4 million members. During 2021, we saw significant increases both in our ability to attract new or last guests, as well as convert rewards members to more frequent guests. For example, 65% of new members who sign up for our rewards program return for a second visit within 60 days, which is faster than revisit rates we've seen in prior years. We believe this points to not only the power of the program itself, but also its ability to inform more effective targeted marketing communications Given the disruptions that the industry has seen in recent months, our marketing priorities in Q4 of 21 and into Q1 of 22 have focused on accelerating a brand-building platform that will roll out in the coming months. This increase in marketing activity will capitalize on the strength of our initiatives and increase insights we have gathered from our rewards program. This provides added confidence in the ability for us to accelerate momentum during 2022 with efficient, targeted activation of the brand. While we look forward to culinary innovation and brand activation throughout 2022, perhaps the most impactful strategy is the acceleration of our unit growth profile, which is now underway. As we've discussed before, the restaurants opened in the last three years continue to perform better than any group of new restaurants in our history, averaging at volumes and restaurant-level margins above company average. This momentum has continued thus far in 2022, which is particularly exciting given the openings thus far include our first franchise location in the New Market of South Carolina, as well as the test of a smaller square footage orderhead drive-thru location outside of Madison, Wisconsin, that is almost an entirely off-premise location. We anticipate approximately 35 openings system-wide for 2022, including seven during this first quarter. While the balance of our 2022 openings will be somewhat backloaded given the current development advice, We remain very confident in the opportunity to accelerate unit growth to 10% beginning in 2023 with a proven 30% plus cash-on-cash return model, again, perfectly suited for today's environment. This model, which incorporates our order ahead drive-through windows and an operating model that reflects the progress made over the last few years in terms of labor efficiencies, continues to gain positive attention from the franchise community as well. As we disclosed earlier this quarter, in January, we closed the transaction with an established 150 plus unit multi-concept franchisee to be our exclusive partner for California. This transaction included the sale of 15 existing company owned restaurants, as well as an area development agreement that provides for the opening of 40 new locations over the next several years. This agreement, the recent strong opening of our newest franchisee in South Carolina, and the previously announced franchise deal to expand into West Texas and Southern New Mexico validate the news and company opportunity, and we are pleased with the current quality and trajectory of our conversations with additional prospective franchisees. As we enter this phase of accelerated growth, the importance of our team cannot be overstated. While we have not been immune to the staffing challenges seen throughout the industry in recent months, we're highly encouraged with both the improvement at our overall staffing levels and our ability to retain the key talent that is critical to the execution of our new unit acceleration. Our management tenure remains extraordinarily strong, and we're on track to open nearly 100% of new units with experienced, proven general managers prepared to introduce the brand to new trade areas throughout the country. As always, my thanks to our team for their incredible dedication towards delivering tremendous execution to our guests during an unprecedented time. And I look forward to joining you on the journey as we accelerate all aspects of the company growth story. I'm now turning over to Carl to discuss in more depth our financial results and expectations within 2022.
spk05: Thank you, Dave. And good afternoon, everyone. We are very proud of our full year financial results, which represents strong upward momentum towards our accelerated growth objectives, even with a challenging market backdrop. For the full year, total revenue in 2021 was $475 million, a nearly 21% increase compared to last year. Underlying our revenue growth, our average unit volumes were $1.3 million for the year, a 22% increase from last year, and an 11.3% increase versus 2019. More specifically on the fourth quarter, total revenue was $114.8 million, an increase of 7.1% compared to prior year. Comparable restaurant sales increased 11.2% system-wide, comprised of a 9.5% increase at company-owned locations and a 20.8% increase at franchise restaurants. Average unit volumes for the fourth quarter were 1.31 million, representing a 14.9% growth compared to 2020 and a 10.8% growth rate compared to 2019. As a reminder, average unit volumes is adjusted for restaurants that have been temporarily closed for a full day, but is not adjusted for temporarily reduced hours As Dave noted, while the business regained significant momentum during the latter stages of the fourth quarter, October and November were particularly challenged, first by staffing issues and then the prominence of the COVID-19 Delta variant in our most penetrated markets. This led to an increase in both temporary closures as well as reduced operating hours, which we estimate negatively impacted the fourth quarter by approximately $8 million in revenue. This increase in temporary closures combined with one-time staffing incentives also impacted our restaurant-level margins during the fourth quarter. Restaurant contribution margin for the fourth quarter was 12.4%, compared to a 13.6% margin during the fourth quarter of 2020. For the full year, contribution margin increased 400 basis points versus prior year to 15.9%. Cost of goods sold was 25.9% of sales in the fourth quarter. an increase of 70 basis points from last year. The increase during the fourth quarter was predominantly driven by ongoing market challenges in supply chain and a volatile commodities environment. Our cost of goods sold inflation was approximately 8% during the quarter, largely driven by our protein basket, specifically the price of chicken breast. Our full year cost of goods sold was 25.2% and roughly flat versus 2020. Labor costs for the quarter was 33.2% of sales, which is 110 basis points above last year. Fourth quarter labor costs include approximately $1.1 million of one-time expenses related to retention, hiring, and COVID-related expenses, such as vaccination and sick pay. In total, our core wage inflation for the fourth quarter was approximately 9%. For the full year, labor costs declined 130 basis points, as a percentage of sales to 31.2%. Other operating costs for the quarter were 18.4% of sales, which was essentially flat to last year, given a similar mix in our delivery business, and with 17.9% of sales for the full year. Delivery fees were 5.9% of sales in the fourth quarter, compared to 5.7% in the fourth quarter of last year. G&A for the quarter was 11.4%, Sorry, $11.4 million, which is essentially flat to last year. G&A includes non-cash stock-based compensation of $700,000 during the fourth quarter, compared to $600,000 last year. Gap net loss for the fourth quarter was $4.7 million, or $0.10 per diluted share, compared to a net loss of $3.8 million last year, or $0.09 per diluted share. We also report net income on an adjusted basis. which adjusts for the impact of impairment, divestitures, and closures. Excluding these adjustments, our fourth quarter net loss was $2.5 million, or $0.05 per diluted share, compared to a net loss of $2.3 million, or $0.05 per diluted share last year. As a reminder, our methodology for calculating adjusted net income no longer includes a tax adjustment related to the valuation allowance and the impact on our effective tax rate. We expect our effective tax rate to remain low at least through 2022, and we do not expect to be a cash taxpayer for the foreseeable future, given our sizable NOL and other tax credit in total of over $150 million. Now, I'd like to take a moment to talk about the first quarter of 2022 with a bridge to our expectations for the full year. As you have no doubt heard, External disruptions have had an impact on many of our peers in the first quarter to date, and we are no different. In addition, it's worth noting that our first quarter is seasonally our lowest due to our geographic concentration in cold weather locations, even without the added impact of Omicron, staffing challenges, and elevated levels of inflation. Despite these near-term challenges, we are extremely optimistic about our opportunities ahead of us this year. We are proud of our successes in 2021, particularly the strength we've demonstrated in our unit economic model, which sets the scene for our strategic focus areas in 2022, including our accelerated unit growth. Now, let's start first with our expectations from a revenue perspective. For the first quarter, we anticipate total revenues to range between $110 and $113 million, inclusive of mid-single-digit comparable restaurant sales growth. As Dave indicated, the onset of Omicron variant during the beginning of 2022 had a material impact on our business in January and, to a lesser extent, in February. However, just as we saw in the fourth quarter with the Delta variant, comparable restaurant sales have rebounded as Omicron has subsided. Comp restaurant sales increased 2.7% at company-owned locations in fiscal January and have increased 7.5% thus far in February. It's also worth noting that with the successful close of our franchise transaction with Order Foods, our prior California locations are no longer included in restaurant revenue as of mid-January, and instead will be recorded in franchise royalties. We estimate that the net impact in the first quarter from a total revenue perspective is $4 million, The impact to EBITDA will be negligible in 2022 and accretive as the territory is built out thereafter. Now let's look at our cost expectations. Today, we reiterated our target of 20% restaurant-level margins by 2024, driven by acceleration of our average unit volume, continued labor efficiencies, and a return to a more normalized level of food inflation. There is no question that the first quarter will be impacted by Omicron and inflationary pressures, compounded by our historic seasonality, and we anticipate Q1 of 2022 restaurant-level contribution margins of 7% to 9%. However, we expect meaningful acceleration of margin as the year goes on, culminating in restaurant-level margins in the high teens during the back half of the year. For the components of restaurant-level expense, we'll start with cost of goods sold. Our cost of goods sold margin is expected to be unusually high in the first quarter of 2022, given a reset in some of our annual food contracts and industry-wide record levels of inflation, particularly in protein. We expect COGS of 28% to 29% this quarter, with a linear progression back to our long-term goal of 25% by the second half of the year. Our cost in the short term is particularly impacted by inflation we're seeing in protein, which accounts for approximately a quarter of our cost of goods sold. More specifically, we are seeing outsized inflation in boneless chicken breasts, which makes up about half of our protein expense. Despite these challenges, we continue to be encouraged by our strong vendor partnerships and ability to opportunistically secure shorter-term inventory at more favorable rates in the spot market. Like COGS, we expect labor to be unusually high during the first quarter, between 33% and 34% of sales, driven by sales deleverage during our seasonally low first quarter and staffing inefficiencies at COVID-related temporarily closed restaurants. We are forecasting low double-digit wage inflation for the first quarter and remaining at elevated levels throughout the year with modest sequential improvements. Even with the anticipated wage inflation, we are forecasting a return to our target labor cost of 30% of sales by the second quarter this year, driven by sales leverage as well as efficiencies gained from our steamer initiative, which will now be complete in its national rollout during Q1. Underlying our margin forecast is the anticipation of an additional price increase to our core menu during the second quarter. we firmly believe the company has meaningful pricing power, particularly as the majority of our pricing actions during the past few years have been confined to the premium paid by our third-party delivery guests. As you can imagine, there are gives and takes as pricing increases roll on and others roll off. But we expect effective pricing to be around 7.5% in the first quarter, increasing to about 9% to 10% during the second quarter, and leveling off between 6 to 8 percent during the balance of the year. We anticipate general and administrative expense of approximately $12 million in the first quarter, inclusive of stock-based compensation. We expect stock-based compensation to be around $1.2 million. Switching to development, we continue to see excellent performance from our new restaurants and anticipate seven openings during the first quarter, primarily company-owned restaurants. For the full year, we expect approximately 35 system-wide openings, with roughly 70% of openings being company-operated. We do expect the pipeline to be somewhat back-loaded, with roughly a third of our 2020 openings occurring in the fourth quarter. From a restaurant closure perspective, while we are confident that we are now at the end of closures related to real estate, that is not well-suited for today's current environment. In the first quarter, we anticipate two closures – one which coincided with the California transaction, and one mall-based location in the D.C. metro area. We continue to believe that our best use of capital is investing in new unit development, particularly given the strong performance of our recent classes, which are on track to support our target of 30% cash-on-cash return at new restaurants. For 2022, we anticipate $30 to $34 million in capital spent. of which roughly two-thirds will support new unit development. Despite the inflation we are seeing in construction and raw materials for development, we expect average net investment for new locations to be at or just above $800,000 per location. We expect the remainder of our capital to be allocated to ongoing restaurant maintenance and continued investment in technology to enhance both our digital business and our guest engagement. Our accelerated unit growth is supported by a strong balance sheet. At the end of fiscal 2021, we had cash and cash equivalent of $2.3 million and a total debt balance of approximately $22.3 million. We anticipate that our 2022 restaurant development needs will be funded through our operating cash flow. However, during our seasonally low Q1, we expect to utilize a portion of our revolver capacity to fund working capital and development needs. With that, I would like to turn the call back over to Dave for final remarks.
spk07: 2021 was an extremely successful year for meals and company, despite the low document and industry challenges related to COVID, staffing challenges, and increases in inflation. While there have been noises since we entered 2022, the fundamental business has never been stronger, with significant improvements in our culinary innovation, digital and marketing capabilities, and operating model efficiency. all bolstered by a value proposition that allows us to mitigate the current inflationary environment. Most importantly, the brand is now embarking on accelerated unit growth with a model perfectly suited for today's environment, which is by the strength of recent classes, the expected opening of seven locations system-wide this first quarter, and increased momentum from our franchise sales initiative. Noodles & Company is well-positioned to be one of the premier growth stories in the restaurant industry, and I look forward to sharing our success with you in 2022 and beyond. With that, Alexander, please open the lines for Q&A.
spk02: Thank you. At this time, I would like to inform everyone in order to ask a question, press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have your first question from Jack Corrigan with Ruiz Securities. Your line is open.
spk08: Hey, guys. Thanks for taking the question. My first one is just on what's implied by your same-store sales guidance with mid-single digits in the first quarter? You know, if I'm doing the math right with 2.7% in January and 7.5% in February, you're sort of already at mid-single digits. So does that imply just mid-single digits in March? And I guess why wouldn't we see an acceleration from here?
spk07: Yeah, Jack, we certainly think that there's the opportunity for acceleration from here. The only aspect that we'd like to keep in mind is the weather. I mean, we saw that the upper Midwest proprietors of our restaurants in the Rocky Mountains had an impact on the business. And just knowing the volatility in weather, I just want to respect that that has the potential to impact March as well.
spk08: Great. I think that's helpful. And then I guess The second question is on your staffing levels. And is there any way you can quantify where your staffing levels are currently versus, you know, maybe versus 19 or versus what you think full staffing would be at this point for these volumes? I mean, I guess how much is that limiting your sales still currently?
spk07: Yeah, I think the limiting of sales is very minimal. So it's a very small percentage of our restaurants that are now critically short of staff. Not out of the woods yet by any stretch, but at the same time, the momentum has been extraordinary and the retention of the team has been great. I think one thing, Jack, that we point to that we're particularly proud of is you look at that recovery from a staffing side. Our cut times actually thus far in 2022 are the best they've been in the history of the company. So we not only have got staffing to a much better level, but we're executing at a very high level. Part of that has to do with the steamer initiative for sure, but a big part of staffing coming Not quite to where we're 100%, but getting much closer.
spk08: Great, thanks. That's really helpful. And then just last one on development. You had elevated store closures in 21, and you said you expect two in the first quarter. Is that the only closures you expect for all of 22? I'm sorry, go ahead, Jeff. Oh, no, you go ahead, sir.
spk07: Yeah, we're finally at the end of this. So there were some sites that, from the financial perspective, it made sense for us to wait until the lease was over before we ultimately closed them. We're now at the end of that. So there's always the potential for one or two where either the developer has something happen or we see a different opportunity, potentially a relocation or something down the road like that. That's always possible. We're finally now at the end of all those closures that were related to really just We reviewed the portfolio and how have trade area dynamics and the consumer needs changed. And as we noted, one of those locations was an example with a mall location that we expect to close here in Q1.
spk08: Great. Thank you. Questions?
spk02: We have your next question from Andrew Strohvick with BMO Capital Markets. Your line is open.
spk09: Hey, good afternoon. My first question, you mentioned some of the inefficiencies as well as some one-time expenses in the quarter. Can you quantify how much the one-time stuff was in the quarter? And then is there any assumption for 1Q and the guidance you gave as well for kind of non-permanent costs?
spk05: Sure. For the quarter, the one-time impact that we had, which particularly showed up in our labor margins, was $1.1 million. That was related to one-time staffing, such as a retention bonus, sign-on bonuses, but also related to the COVID-related sick pay or vaccine pay. From a go-forward basis, in our Q1 guidance, there is no expectation for any of those to continue, no one-time charges, and we don't anticipate that to be throughout the duration of next year. Sorry, this year.
spk09: Yep, got it. Okay, so that's helpful. And then obviously understand the kind of regional pressures in some of your key areas in the upper Midwest and the Rockies. I guess I'm just curious, you know, what are the trends that look like in maybe the rest of the country? I mean, did you see, just as we're kind of thinking about understanding how, you know, temporary this is and those types of things, just kind of maybe more durability in some of the other regions? Could you speak to some of those trends, please?
spk07: Yeah, absolutely. So as you look at the mid-Atlantic, you look at some of the Southwest, those markets that were not impacted by Delta, one thing that was encouraging was that they carry over the momentum, Andrew, from what we've seen in Q3 pretty much throughout all of Q4. And so they didn't actually start seeing any impact to their business until here in the very beginning, which gives us that added confidence in terms of the overall trajectory of the business and that underlying momentum.
spk09: Got it. Okay. And then my last question is just on the menu. So recently here just announced some of the new salads going on the menu. You talked about linguine. Recently we've seen truff mac. It just feels like the menu news pace is kind of accelerating here. Is that right? Is that intentional? Maybe some holdover from the last 24 months where maybe that, you know, the environment wasn't as conducive. I'm just kind of curious how you're thinking about further opportunities across the menu as well, kind of rolling forward here. Thanks.
spk07: Yeah, I mean, let's just start with just the overall power. I mean, we think that one has just great potential similar for the brand in terms of expanding the overall reach into so many different types of occasion and guest profiles. That's one that's been in touch for a long time. That was something that we've been in test for a while as well. This is ultimately a pretty deliberate discipline process where we have lots of different items in test. And you can expect to continue to see that type of innovation really for the foreseeable future, Andrew, in terms of every three or four months, that's us having some good menu news. As we do it, we take things off the menu as well to ensure that we don't sacrifice any of that operational complexity But I will say, they will be pulse. Like, salary-press category, we're excited about. But certainly, we need the one that, as we look at 2022, we think will be a great driver and another reason there's such great confidence that we'll gain momentarily throughout this year.
spk09: Got it. Thank you very much. I'll go ahead and pass it on.
spk02: We have your next question from Andy Barish with Jeffery. Your line is open.
spk03: Hey guys, wanted to just get a sense, excuse me, on the marketing side to clarify, did you say with the COVID surge that you actually kind of pulled back on what you would have expected from a marketing side? And then I think it's the messaging and the creative is supposed to evolve a little bit in 22. Can you kind of let us know how that kicks off in the 2Q beyond just product news?
spk07: Yeah, you'll see things shift from being more transactional, which is what we saw during the first part of COVID. And you are correct. It wasn't that we pulled back significantly from a marketing perspective, but there was a little bit of a muted nature to it, given all the staffing challenges that you saw throughout the industry, as well as the impact of Delta and a little bit of Omicron. What you will see as we look into 2022 is us Part of that full power of all the data insights we've had, the improvements we've made to the digital assets, which you'll see those continue to evolve and improve as well. In general, just making the brand more visible, pointing out all those great aspects from our cooking methodology to how we approach people, to service, to the value proposition, to the variety of the food. This brand has so many great attributes and elements to it. that we still feel we're just scratching the surface in terms of consumers really truly knowing that. And what's great about the data that we've got and the improvements we've made throughout our guest engagement as well as our rewards platform is we're so confident that the activation is going to be not just effective but efficient as well.
spk03: Got it. Thanks. And then, Carl, on the G&A side of things, I guess, Is that $12 million you talked about in the one queue a pretty good run rate? And do you get any noticeable savings from, you know, California now being franchised, you know, with that market kind of probably needing some regional support out here given it was, you know, is not contiguous to some other areas?
spk05: Yeah, that's right. So first from a run rate perspective, I would assume that it's a somewhat – Lower quarter than the full year, if you think about annualizing the quarters, just given some of the cadence of our historical spend. So I would anticipate that to Q and beyond, we'd see a little bit elevated G&A expense. In terms of California, there is a net benefit there, certainly. So I would expect that that is baked into our number. It does help us streamline some of the operations.
spk03: Okay. Thanks, guys.
spk02: We have your next question from James Rutherford with Stevens, Inc. Your line is open.
spk04: Thanks for taking questions. Hey, Dave. Hey, Carl. I want to dig in a little bit on the margin guidance for the 1Q, and most importantly, the ramp through into the back half of the year. Starting on the COGS side of it, I think I heard you say that you're expecting 28% to 20% COGS margin in the first quarter, then back to 25% in the back half of the year. We know your menu price assumptions for each quarter. What are you assuming on the commodity inflation front to get you back to that 25% COGS margin by the back half of the year? Sure.
spk05: James, let me walk you through a little bit. So first of all, we are continuing to see this inflation pressure on our cost of food. It's really driven by the commodity price volatility, staffing pressures, and as I mentioned, particularly protein. In the first quarter, we do see elevated levels of inflation in What we're estimating right now is around 18%. These challenges we're seeing ongoing, and we're still seeing some elevated pricing, even at where we are today, particularly in protein. In terms of the go-forward, there's really two elements here. First, it's the pricing action that we're anticipating to take. We're looking to take about 3% to 4% pricing action in the second quarter, so that's going to be a key offset. But in terms of what getting back to normal looks like in the second half, you can imply about mid to high single digits levels of inflation just in the second half that will get us back to normal levels.
spk04: Okay. Thanks for that. Flipping over to the wage piece of it, if I have my notes correct, I think wage inflation was around mid single digits last quarter. I think you said high single digits, 9-ish percent this quarter, and then guided low double for the first quarter. Correct me if I'm wrong on those numbers, but where do you think we find the top end of that? It sounds like most of your restaurants are fully staffed, based on what Dave was saying earlier. What are you predicting for wage inflation, how that progresses through the year?
spk05: So, first of all, you're correct on those assumptions. That's what we've seen so far, and that's what we're anticipating in the first quarter. We are anticipating that wage inflation, for the most part, continues. There will be some relief as you go throughout the year, but we're anticipating that that remains at elevated levels. A lot of that is due to rehire rates, in addition to increasing our wage bands as we remain competitive in each of these markets. As I think about what's going to get us back to that 30% target by the second half of the year, it's really three things. First, It's ongoing efficiencies that we're now anniversaring and having in full run rate, particularly our steamers, which we're going to complete in this quarter. The second is there were some one-time associated costs with our labor force in 2021 that we are no longer going to be anticipating this year. And then finally, it's our sales leverage. As we look at the continuing growth in traffic and pricing, we're anticipating sales helping to drive that 30% target cost for labor.
spk04: Very helpful. Thank you. If I could slip in one more. Dave, on the unit growth expectation for next year, which I think is still 10%, you know, conceptually, what kind of mix do you think, and, you know, it's probably like numbers, but between kind of company-owned and franchise, and what sort of visibility do you have into that growth acceleration?
spk07: Yeah, visibility continues to strengthen, and we're really encouraged by just the sheer number and the quality that we're seeing come through the pipeline. As you know, obviously, the development environment's a little bit volatile, but we're very pleased with what we're seeing there. The overall mix, I think, is going to be a little bit dependent upon, you know, how we see that the franchise community can change their accelerated growth, because we're seeing some good momentum there. Would expect the majority of openings in 2023. to be company-owned and then shifting in 2024 and beyond to be closer to a 50-50 mix in terms of companies and franchise-owned things.
spk04: Excellent. Thank you, guys. Really appreciate the help. Thank you.
spk02: We have your next question from Nicole Miller with Piper Sandler. Your line's open.
spk01: Thank you. Good afternoon. Just super quick on 4Q. Was the $1.1 million labor investment you're talking about, was that all in 4Q?
spk05: That's correct.
spk01: Okay. And so the question is then on the $8 million of sales impact from Omicron, is the only store-level margin impact that $1.1 million, or did that hit other areas of the store-level margins?
spk05: So first, the $8 million was actually related to Delta. So Omicron is more of an impact that we saw in the first quarter, particularly January to February, but Delta was the impact in the fourth quarter. So to your question, it was both the $8 million and then the associated flow-through, in addition to labor inefficiencies for restaurants that were operating at partial hours, plus the $1.1 million. So there was certainly a compounding margin impact.
spk01: So the $1.1 million translates to 100 basis points. So if you didn't have these COVID variants, you know, store-level margin would have been 13.4% instead of 12.4%. Just to put a finer point on it, you're saying there's other things to take into consideration and it would have been even better than 13.4%? That's right, Nicole.
spk05: So for that $8 million of revenue impact that were related to partial closures, both full day closures and partial day closures, there's labor inefficiencies associated when you're operating just a day part or having to close intermittently. So I agree, there were other factors impacting labor as a result of those temporary closures.
spk01: Okay. I mean, I'm sure it's difficult to tease out, but if there's a number to throw out, you know, let us know. And what was the percent marketing in 4Q specifically?
spk07: So the fourth quarter marketing was just around 1%, which is consistent with what we've seen in prior quarters as well. A little bit lower in terms of the absolute dollar spend versus what we've seen partially, you know, as you saw the impact from the revenue side of Delta.
spk01: And I ask that then in the context of coming forward to 1Q with all the conversation and guidance you've already provided. addressed at this point, and assuming the marketing isn't changing too much in the operating line, then the store-level margin in total for 1Q is barely going to be double-digit. I just want to make sure we're all on the same page before we hang up here. Is that the indication? Because you didn't really address occupancy and other operating costs.
spk07: Yeah, Nicole, that's about right. Yeah, that's right. So we actually guided the 7% to 9%. in terms of Q1 margin. Do want to be very clear to remind everybody of the historical seasonality we have in our brand. It tends to be several hundred basis points lower from a margin perspective than what you see through the balance of the year. So as we talked about on the call, that Q1 margin guides, it incorporates not just a pretty meaningful seasonal impact that we have and have always had, but also kind of that elevated element that we've seen in the inflation perspective and the impact of Omicron. But, you know, as we said, we expect this is going to materially improve throughout the course of 2022 and expect that we'll be approaching 20% restaurant-level margins towards that back half of the year here.
spk01: Just one more last question on the subject, and I realize it's a very challenging question, but, you know, if... we couldn't absorb all the detail and just back up high level and say, gosh, you know, you're making a little bit less here than in any other period, you know, if you want to pick the same quarter or different quarters, but for the same or different reasons, right? It's a little bit of a question mark. Is the delta between like Omicron market or let's say COVID market conditions I think the delta then is just the commodity inflation. Can you slice and dice it that way and say, okay, that 7% to 9% store-level margin should be this if demand had been normalized, and it should be this if commodities, if you could keep pace with price action?
spk07: I think how we articulated it is, odds we expect in a normal environment is around 25%. And due to inflation, we expect that to be 28 to 29%. So significant inflation here during the first part, during Q1. That will alleviate a bit, not just through we expect some improvement in inflation over the course of the year, but also through the price of action that we're taking. From a labor perspective, again, expectations between 33 and 34%. always a bit higher in Q1, again, from the seasonality perspective. So this one is more related to just some of the inefficiencies through Omicron. We would expect that labor line to have some opportunity to actually have leverage over the course of the balance of 2022.
spk01: And just the very last question. It could be a little challenging for franchisees with the sales being inconsistent and commodities being up like this. What kind of conversations are you having with the current potential franchisees and how are you lending support?
spk07: Yeah, very positive, actually. They understand the impact that Delta has had on the business as well as on the product and inflation. These tend to be multi-unit operators that they're encountering all of this on their own in their business as well. They're attracted to us because they see that pricing power and the value proposition. Most importantly, they see the track record of 30% plus cash on cash returns from our most recent classes. That's even before we're able to implement some potential cost savings. So they're encountering the same challenges in their markets that we're seeing throughout the industry. And you look back at 2021 as a whole, extremely strong year for us. margin expansion as well as AUV expansion perspective. And we see the cadence through 2022 being remarkable as well. And there remains tremendous confidence around that side.
spk01: Thank you.
spk02: Again, if you would like to ask a question, please press star 1 on your telephone keypad. Again, to ask a question, that is star 1 to ask a question. We have your next question from Todd Brooks with the Benchmark Company. Your line is open.
spk06: Hey, good afternoon, guys. Thanks for the questions. A couple questions here. One, you've bumped the AUV goal for fiscal 24 by another $50,000 here, so $1.5 million. Can you talk about what percent of the current base is above that hurdle already and what the restaurant-level operating margin profile of those stores look like that are above the 1.59?
spk05: So, Todd, we have our existing restaurant base, I would say it's anywhere from 30% to 35% that's already above that level already. and they're operating certainly above the 20% contribution margin. When we were looking at this at 1.45 million, our prior target, over 40% of our current locations were at that current level also, and again, operating a 20% contribution margin or above.
spk06: So with the increase in the AUV goal, does the 20% goal continuing for contribution margin just reflect inflationary realities or because it sounds like the base that's already north of the 1.5 million is above the 20% target?
spk07: I don't know if we'd say realities versus uncertainties in terms of we feel that this concept has the ability to expand margins meaningfully not just to the mouth of this year but beyond. But just want to reflect that there is uncertainty in terms of what the overall inflation environment looks like in 2023 and beyond. So it really reflects that in terms of the overall confidence level that the brand can lever beyond 20 if it's highest ever.
spk06: Okay, great. And then can you share with us the proceeds to the company from the sale of the 15 units to Warner Foods?
spk07: That's something that we will be disclosing. As Carl mentioned, in terms of the overall impact on the business from an even perspective, relatively not negligible for 2022, what we're excited about in terms of this transaction is such a great established partner that as they build out that territory will be meaningfully accreted. I'm kind of across the board throughout our P&L. The proceeds, very solid deal, but at the same time, not material enough to move the needle significantly in terms of the overall balance sheet.
spk06: Okay, great. And then finally on the franchising pipeline, you talked about maybe a little bit more of a corporate store mix to the 23 openings before getting to 50-50 now in 24. Is that just reflective of some lost momentum with discussions due to Omicron, or how would you talk through that pipeline and the momentum that you would have around initial – additional announcements here in the near term?
spk07: Yeah, actually, that was always our expectation. Just given the realities of as we sign on these new transactions, they'll open in maybe one in 2022, two or three in 2023. As you build more and more momentum, there's a waterfall effect that ultimately that gets to a, you know, roughly 50-50 split. But just the math behind it, it doesn't really happen in We're not going to be able to kind of get to that 50-50 split from a media growth perspective until 2024.
spk06: Okay. And do you feel like Omicron slowed down the ability for us to see more announcements in the nearer term? Is it just pushing out kind of closing deals, the reality that everybody had to operate through?
spk07: We don't think so. We certainly, you know, recognize that during the staffing crisis we talked about a little bit. I think we saw more of it then. Because during the staffing crisis, Todd, our operating partners that we were talking about, that we were talking with as prospective franchisees, they would typically have their own concepts that during that staffing crisis, they wanted to make sure that they had under control. Omercon's a little bit different in terms of it's been relatively short in terms of its impact. We saw a significant spike clearly throughout the industry in January, and that come down materially and almost completely subside here in February. So that impact has been very minimal and people have passed that pretty quickly. So momentum we feel actually is very strong.
spk06: Okay, great.
spk02: Thanks for the questions. I am showing no further questions at this time. I would like to turn the conference back to Dave for any closing remarks.
spk07: Thanks, Alexander. I appreciate everyone's time today and Thank you very much.
spk02: Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.
Disclaimer