Noodles & Company

Good afternoon, and welcome to today's Noodles and Company's fourth quarter 2022 earnings conference call. At this time, 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 and Company's chief financial officer, Carl Loquette. You may begin.

Thank you, and good afternoon, everyone. Welcome to our fourth 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 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 statements 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 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 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 our most directly comparable GAAP measures is available in our fourth quarter 2022 earnings release and our supplemental information. To the extent that the company provides guidance, it did so only on a non-GAAP basis. and does not provide reconciliations of such forward-looking non-GAAP measures to GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable efforts. The corresponding GAAP measures are not accessible on a forward-looking basis. Now, I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.

Thanks, Carl, and good afternoon, everyone. We're pleased with our fourth quarter results as we executed across all three levers of our growth algorithm. resulting in adjusted EBITDA increasing over 100% versus prior year. We delivered strong cap line results driven by a 10.2% increase in company comparable restaurant sales and positive traffic. Restaurant margins increased 280 basis points year over year, driven by significant leverage across the PML, and we successfully opened five new company restaurants. We anticipate the earnings growth trend in Q4 to continue throughout 2023, including a significant reduction in our cost of goods sold line, which given our newly contracted cost, should yield COGS improvement of roughly 200 basis points during 2023 relative to last year, equating to approximately $10 million of EBITDA expansion for that line item alone. As we look ahead, we believe Noodles & Company is well positioned for significant growth in 2023. driven by continued pipeline expansion, supported by strength in digital and loyalty, a normalized cost of goods sold environment, identified efficiencies in multiple expense areas, continued improvement in staffing operations, and our strong unit pipeline. I would first like to start with our strength in digital and our rapidly growing rewards program. As we've discussed in the past, Noodles and Company's resonance with the off-premise occasion, combined with our best-in-class digital ecosystem, results in some of the best digital metrics in the industry. During the fourth quarter, digital sales grew 11% versus prior year and accounted for over 54% of sales, an increase of 240 basis points versus the third quarter. This momentum has continued into 2023, even lapping the impact of Omicron, as digital has accounted for over 55% of sales year-to-date. This growth in digital has broadened access to the brand fostered increased engagement with our guests, and supported meaningful growth in our Noodles Rewards Program. The Noodles Rewards Program now accounts for nearly 25% of our sales, and we completed 2022 with 4.5 million members, a 12.5% increase over 2021. We continue to leverage the Rewards Program to gain valuable insights about guest behavior, become more targeted with our messaging, and develop deeper relationships and loyalty with our guests. We feel there remains significant opportunity in digital, and during 2023, we will bolster this strength through both investment in a full 360-degree view customer data platform, as well as the implementation of digital menu boards and digital marketing signage throughout the system. From a culinary perspective, the innovation from the past two years including last year's introduction of the great tasting, low-carb linguine noodle, has resulted in a menu that offers guests a wide variety of fresh, craveable, made-to-order dishes that meet a broad range of lifestyle needs. Consequently, our focus in 2023 is to leverage our digital assets, both through web and app channels, as well as through digital menu boards, to better highlight and showcase the meaningful strengths in our menu, as well as communicate key marketing opportunities. As an example of the potential for digital menu boards, during the holiday season, we leveraged these boards to promote gift cards more actively, resulting in gift card sales at restaurants with digital menu boards that were double of those without. Additionally, digital menu boards afford us the flexibility to quickly implement changes to featured menu items and in pricing. As we continue to see top-line expansion, We additionally anticipate significant opportunity to increase restaurant level margins in 2023. As I noted earlier, we have entered into fixed cost contracts for the full year for our boneless chicken breast, which accounts for nearly 20% of our overall food spent. These contracted rates are meaningfully below the price that we paid last year and should yield approximately 200 basis points of cost improvement relative to 2022. Additionally, we anticipate continuing to leverage fixed costs throughout the P&L, as well as realizing initial benefits surrounding our initiatives on menu simplification and equipment optimization. Supporting our efficiency initiatives will be the continued strengthening in our people and operations metrics. We remain at full operating hours with staffing at or better than pre-COVID levels. And importantly, during the past four months, general manager turnover rates have been over 30% better than the same timeframe prior year. Improved staffing has yielded meaningful improvement in guest metrics, such as friendliness, taste of food, and overall net promoter score. While average cook times thus far in 2023 are nearly 45 seconds better than what they were just a few months ago. While the strength of our people is essential to maintaining momentum at our existing restaurants, They're also critical in the continued success of our recent new restaurant classes. As we mentioned last quarter, our new restaurants continue to have strong performance. Our 2019 and 2020 cohorts, which have entered our comp base, delivered fourth quarter unit volumes above company average, while restaurant level margins exceeded the rest of the system by over 200 basis points. Finally, on the new unit development. During the fourth quarter, we opened five company restaurants. Thus far in 2023, three restaurants have opened, including two restaurants that had to be pushed into early 2023 because of inspection delays related to poor weather over the last two weeks of December. These restaurants have opened exceptionally well, giving us continued confidence in our unit development going forward. We do not anticipate any further openings during the first quarter and currently have seven restaurants under construction for the second quarter. Additionally, from time to time, we will close underperforming restaurants that are at or near the lease end, where we believe we are not well positioned for current consumer trends or their future relocation candidates. For context, in 2022, we closed five locations, which represented a typical year for lease end closures. Currently, between sites that are open, under construction, or under lease for 2023, Our pipeline remains three times higher than where we were at this point in 2022, supporting our guidance of 7.5% system-wide gross openings in 2023, inclusive of the two restaurants that were delayed from Q4 into this first quarter. We do expect that our openings will be more concentrated in the back half of 2023, driven by extended development schedules resulting from delayed landlord deliveries and longer permitting cycles. As we look to have more balanced openings in future years, encouragingly, we have already 21 locations under lease or in lease negotiations for 2024. Looking ahead to the balance of the year, we feel that the three levers of our growth algorithm all have meaningful tailwinds. Our comparable restaurant sales continue to be strong as we leverage the core strengths of our menu, the ongoing benefit of our digital ecosystem, and the concept's ability to meet the needs of today's consumer. We anticipate the margin expansion that we delivered in Q4 to extend throughout 2023 on the strength of reduced cost of goods sold, including the benefit of full-year pricing contracts for chicken in 2023 and additional sales leverage throughout the P&L. And finally, our new units are performing above our glide path with a pipeline that continues to strengthen to support accelerated unit growth. I'd now like to turn it over to Carl to share some of our financial highlights from the fourth quarter and our expectations for 2023.