Noodles & Company

Good afternoon, and welcome to today's Noodles & Company third quarter 2022 earnings conference call. All participants are now in a listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, this call is being recorded. I would now like to hand the call over and introduce Noodles & Company's chief financial officer, Carl Lukasz. You may begin.

Thank you, and good afternoon, everyone. Welcome to our third quarter 2022 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 meetings 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 2021 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portion of each that sets 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 2021 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 measures is available in our third quarter 2022 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 the momentum that we have seen in our sales trajectory, as well as our outlook concerning the state of today's cost environment relative to just a few months ago. I would like to start by sharing some of the highlights from our third quarter results, which were punctuated by accelerating sales trends through the quarter and improvements in some of our key input costs, notably chicken, that will manifest themselves in improved cost of goods sold during upcoming quarters. Importantly, we are finalizing a fixed cost contract for chicken for 2023 that we expect will yield approximately 200 basis points of savings relative to Q3 of this year. Our third quarter revenue of $129.4 million was above the high end of our guidance range, reflecting company comparable restaurant sales of 3.4% and nearly 17% growth in company average unit volumes relative to 2019. Company comparable restaurant sales, as well as our three-year average unit volume growth, accelerated through the quarter, including comparable restaurant sales of 6.8% during fiscal September. This trend has continued thus far during fiscal October, with comparable restaurant sales of 10.5% and three-year AUV growth of nearly 18% through the end of October. Of note, we expect comparable restaurant sales to moderate modestly through the quarter as we lapped the height of Delta variant-related closure activity last year. Still, we expect continued momentum in our three-year AUV growth and comparable restaurant sales to remain strong in the high single digits for the full fourth quarter. Our accelerated sales trends are a testament to the great value and extensive variety that we provide in Noodles & Company. With regard to value, we've been highlighting seven offerings for $7, featuring the entry-level price point for some of our most popular made-to-order dishes. We've received strong response from this messaging, showcasing our commitment to providing uncommon value to our guests in this challenging environment. We're also excited about the rollout of our plant-based protein alternative, Impossible Panko Chicken. which reinforces the company's ability to meet a wide variety of dietary preferences. While it's only been offered nationally for a few weeks, we're very pleased with the early response to Impossible Panko Chicken, which is resonating with both vegetarian guests in addition to more environmentally conscious younger generations. Finally, we continue to be thrilled with Linguini's broad appeal. Spurred by the fact that it has roughly half the net carbs and nearly 50% more protein, with the same taste and texture of a traditional wheat noodle. This proprietary first-of-its-kind offering has been a hit with our guests from day one, recently reaching its highest mix since launch and resulting in increased frequency from guests who have tried it. Additionally, we are excited to announce that we have commenced the implementation of digital menu boards across our system. We feel that digital menu boards are particularly meaningful for the Noodles & Company brand for several reasons. First, given our great variety, digital menu boards allow us to better communicate key features of our menu, such as the great health benefits of linguine. Second, with our increased strength and guest engagement, we'll have more flexibility in terms of communication that is more relevant for consumers, including the ability to change messaging based on trade area dynamics or day part. Third, digital menu boards allow us greater pricing flexibility. both in our ability to test various scenarios as well as in speed to market. Finally, as digital menu boards increase flexibility in all aspects of the organization, they also reduce costs associated with physical menu boards. As our digital presence inside the restaurants improves, we are also pleased with the digital sales that originate outside of our restaurants. Even as our in-restaurant dining continues to increase, Digital sales still accounted for nearly 50% of revenue during the third quarter, and our rewards program saw an increase in membership to 4.4 million members, 16% above prior year. Our strengthening rewards program continues to give us the ability to better personalize our communication with our guests, which has been supported by recent enhancements to our web and app interface to make it easier for guests to engage with the brand. Additionally, we've begun implementation of a comprehensive customer data platform to give us a more complete single view of our customers from a behavioral, transactional, and demographic perspective. Turning to restaurant-level margin. During the third quarter, our restaurant-level margin of 14.4%, which was impacted by continued inflation in the vast majority of our input costs. While CAR will address our margin trends in more detail, again, we are seeing significant declines in certain key ingredient costs, notably chicken. While the inflationary environment remains volatile, we are also beginning to see signs of stabilization across other key input areas as well. And we believe we are well positioned to expand margin meaningfully as we exit 2022 and enter 2023. Additionally, we've continued our work with a third-party industrial engineering firm on the Next Kitchen of the Future initiative, which in its prior iteration yielded significant labor efficiencies throughout the system. While it's too early to quantify what the potential opportunities will be, we're confident that with enhancements in equipment technology and revisiting our processes for a post-COVID world, we will find meaningful efficiency opportunities throughout the operating model. An improved margin profile will also enhance our strategy to accelerate our unit growth with a model that supports 30% plus cash on cash returns. We continue to be very pleased with the performance of our new restaurants, as well as the maturation of recent classes. We expect new restaurants to initially open at approximately 90% of company average and reach maturity in three years. Our recent openings continue to outperform that target, and restaurants that opened between 2019 and 2020 have reached maturity, with AUV of $1,450,000 quarter to date, above the company average. While the well-documented challenges of the development environment did cause us to pull back from certain restaurants in 2022 that we felt would compromise the discipline in our capital underwriting model, we have already opened more restaurants this year than we have in any year since 2016 and continue to expect 5% unit growth for the year. Moreover, the 2023 pipeline for company restaurants continues to be very strong, with the vast majority of our pipeline either already under lease or in final stages of lease negotiation. Although the company pipeline remains very robust, we have seen challenges in the current development environment as it relates to the signing of new franchisees. While interest remains high, economic uncertainty, the present inflationary environment, and rapidly rising lending rates have caused prospective franchisees to move more deliberately than our prior 2023 expectations assumed. As a result, while we remain confident in a 7% to 10% unit growth rate long term, we believe it is prudent for us to assume that the development and lending environment for franchisees will remain challenging. And consequently, we now anticipate unit growth system-wide of at least 7% in 2023, with the vast majority of those restaurants being company-owned. As the inflationary environment improves and ultimately the lending environment, we're confident that the brand will be well-positioned to accelerate franchise growth in the years to come. Finally, I'd like to make note of our incredible team members who are a large part of our accelerating momentum and an incredible representation of our brand's commitment to uncommon goodness. Staffing continues to be strong, and this past month we had two particularly special events concerning our general managers. First, we had our first all-manager meeting in four years, and I came away in awe at the energy, commitment, and talent of our general manager team. Second, a few weeks ago I was proud to welcome the inaugural class of 57 general managers into our GM Equity program. We believe strongly in the value creation opportunity at Noodles & Company, and we feel it is important to align that opportunity with the general managers in our restaurants who are so critical to achieving our objectives. These 57 general managers achieved strong financial and operational metrics over the past six months. And through this program, after three additional years at the company, they will have vested equity that could have a meaningful impact in their lives. While I'm immensely proud of these general managers who qualified for this inaugural class, I look forward to welcoming additional members in future classes who aspire to share in the value creation opportunity at Noodles & Company through this unique program. While it has been a challenging environment during the past 12 months, and inflationary programs persist, particularly in labor, We feel strongly that the brand is positioned well to expand profit meaningfully versus 2022. Our sales have accelerated, and our cost of goods sold should improve significantly relative to the pressures of this year. I look forward to sharing with you our progress and future calls, and we'll now turn it over to Carl to share some of our financial highlights.