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spk00: Good afternoon, and welcome to today's Noodles & Company second quarter 2023 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 & Company's Chief Financial Officer, Mike Hines.
spk04: Thank you, and good afternoon, everyone. Welcome to our second quarter 2023 earnings call. Here with me this afternoon is Dave Beninghausen, our Chief Executive Officer. I'd like to start by going over a few regulatory matters. During our remarks, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items 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, including those referred to in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for its 2022 fiscal year and subsequent filings with the SEC. 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 gap measures is available in our second quarter 2023 earnings release. To the extent that the company provides guidance, it does so only on a non-gap basis and does not provide reconciliations of forward-looking non-gap measures, specifically forecasted adjusted EBITDA, adjusted EPS, and contribution margins. Quantitative reconciling information for these measures is unavailable without unreasonable efforts. The corresponding GAAP measures are not accessible on a forward-looking basis, and such information is likely to be significant to an investor. Now, I would like to turn it over to Dave Binninghausen, our Chief Executive Officer.
spk03: Thanks, Mike, and good afternoon, everyone. In the second quarter, Noodles & Company's revenue decreased 4.5% versus prior year to $125.2 million, and adjusted EBITDA decreased 17% to $9.3 million. As we discussed in our last earnings call, during the last portion of Q1 as well as the beginning of Q2, we began to see softness in our guest trends, particularly surrounding the lower-income consumer. We believe our larger-than-historical price increases which included an additional 5% increase in the first quarter and therefore peaked at an overall 13% year-over-year in late Q1, ultimately led to a degradation in our overall value proposition, which manifested itself in a sudden and significant double-digit decline in traffic during the first portion of Q2. As we noted during the most recent call, we pivoted quickly to more prominent value messaging during the second quarter, including an effective 3% decrease in our menu pricing starting at the beginning of May. With this pivot, our traffic decline steadily improved from a negative 14% in April to a decline of 5.8% during July, the first month of Q3. Comparable restaurant sales, which was also impacted by lapping of price from 2022, fell 7.7% system-wide in May, before improving to a decline of 3.8% in July. Additionally, we're seeing an increase in our average unit volumes, which were $1.35 million during July, a 14% increase over the same period pre-COVID. We feel our strengths with off-premise and our suburban-oriented footprint remain long-term tailwinds. And as such, we feel we are well-aligned to benefit from longer-term macro and consumer trends. However, we do feel from a year-over-year perspective they've put more pressure on our near-term comparable sales trends. To put this in perspective, our comparable sales decline in the second quarter at company restaurants was 5.9%. However, our dine indication, which represented 22% of sales in the second quarter, saw a 14.2% increase in comparable sales growth. Similarly, while they represent a small percentage of our portfolio, On a year-over-year basis, our collegiate and urban restaurants outpaced our suburban locations. That said, our overall challenges during the second quarter have caused us to react and focus on opportunities to improve our overall competitive positioning, as we clearly do not believe the results represent the potential of the noodles and company brand. We are focused on the five following initiatives to drive our sales performance well above the current reset of revenue that we saw in the second quarter. First, price optimization with a balance of appropriate discounting and promotions. Second, advancement in our technology platform to increase guest engagement and analytics. Third, the introduction of a highly recognizable consumer favorite into the fast casual world, chicken parmesan. Fourth, a complete evaluation and assessment of our culinary offerings. including our approach to our menu layout, utilizing a leading industry third-party consulting firm, and fifth, a significant expansion of our catering program. The first area that we've been actively addressing has been around value and optimizing our pricing strategy. Our Q2 shift toward communicating our low entry-level price point and the introduction of a mac and cheese meal deal helped lead to an improvement and stabilization of traffic trends. As we look ahead, we're in the process of completing third-party research to enhance our overall pricing strategy, as well as how our menu is presented to guests, both online and in person. Our second area of focus to drive sales is improvements that we have made to our technology and data platforms. Nearly 50% of our guests experience the brand in restaurant, including dine-in and orders to go. We expect digital menu boards to be installed in 75% of company restaurants by the end of Q3. With our continued rollout of digital menu boards, we will be able to quickly incorporate any findings from the current pricing and extensive menu research across the majority of our system for our in-restaurant guests. We're already seeing the power of digital menu boards. As an example, when we introduced our mac and cheese meal deal in May, Restaurants that have digital menu boards achieve sales of that deal 24% greater than those with physical menu boards. In July, we completed the implementation of our CDP, our Customer Data Platform, which will now allow our marketing team to have a more complete and thorough understanding of our guests and the ability to communicate with them in a more personalized and effective fashion. Similarly, we have made enhancements to our online and app ordering systems, including launching a new product recommendation engine driven by machine learning. During the testing period, we saw 50% increase in recommended items purchased from this engine. Additionally, we recently have enhanced the flow of our web checkout page, which has driven a 220 basis point increase in our web order conversion. Finally, as we think about digital activation, our rewards program continues to strengthen. Our rewards membership grew 14% year-over-year during the second quarter to 4.8 million members. And importantly, we saw 2% growth in frequency amongst our rewards members during the quarter versus prior year. As a reminder, over 50% of our sales come through digital channels, and 25% of our sales can be attributed to rewards members. Consequently, we have a very strong technology foundation to build from. And with the further installation of digital menu boards, increased learnings from our customer data platform, and third-party work around optimizing our menu pricing and layout, I'm excited at the potential to positively impact the business both in the short and long term. We're also aggressively looking at our culinary and menu strategy, including menu design, to identify opportunities to assess and improve our positioning while still capitalizing on our strength. Noodles & Company continues to have a differentiated menu, bringing together made-to-order, globally-inspired dishes that meet a wide variety of tastes and preferences. Historically, we've had great success for much of our menu innovation, from being the first national chain to offer zucchini noodles to our popular tortelloni that was launched a couple years ago. Our newest menu activation will be the launch of chicken parmesan, a staple of Italian cuisine. We're very excited about Chicken Parmesan, given its broad appeal, guest familiarity, and our opportunity to provide a casual dining favorite at a fast, casual price point and speed. As we launch Chicken Parmesan, we're also in the process of engaging with an industry-leading, third-party culinary consulting firm to comprehensively assess and evaluate our current menu to ensure that every dish exceeds consumer expectations and is crafted to deliver exceptional taste and satisfaction in every bite. We anticipate this work to be completed by the end of the year, with the results being integrated into our strategy over the course of 2024. Finally, Noodles & Company has unique strengths for the growing catering market. The variety inherent in our menu, which eliminates the veto vote, combined with how well our food travels for the catering occasion, provides the opportunity to substantially grow this part of our business. Our catering program is easy for our restaurant teams to incorporate into their operations, and with staffing and turnover now at levels better than pre-COVID, we feel it's the appropriate time for our teams to be more focused on building catering sales. The company's catering represented 1.4% of sales during the second quarter, 40% growth from the second quarter of 2022. But we believe the opportunity is meaningfully larger. We've begun more aggressive promotion of our catering opportunity both inside and outside our restaurants to develop a business that we believe can be mid-single digits as a percentage of sales over the long term. Notably, our top 10% of restaurants already drive nearly 4% of sales from catering. An appropriate catering menu and offerings will also be incorporated into the work of our culinary consultant for further growth opportunities. Similar to our guest engagement strategies, we feel our menu and catering program have strong foundations to build from. And I look forward to sharing our progress to optimize sales and profitability as a result of our initiatives. As we execute our five sales driving initiatives, we additionally have taken actions to improve our overall financial position. These actions have been centered around three key areas. First, continued but moderated new restaurant growth, second, the streamlining of certain administrative functions to reduce G&A costs, and third, the return of shareholder value, including share repurchases. One of our primary objectives going forward is to achieve positive free cash flow in 2024. Through the combination of revised unit growth, the completion of our customer data platform and digital menu board investments, and a corporate restructuring effort to align our organization with our growth objectives. In support of our free cash flow objectives and considering continued delays in the development and permitting process, as well as construction inflation, we are revising our targeted annual unit growth rate to 5% for the coming years, including 2023. We continue to be pleased with the performance of our new units, but believe this slower growth rate will allow us to achieve long-term sustainable growth and achieve positive free cash flow next year. Combined with the completion of our customer data platform and digital menu board investments, these actions are driving factors in our revised capital expenditures guidance of $45 to $50 million for 2023, down from our prior guidance of $53 to $58 million. Additionally, earlier this quarter, we reviewed our needs as an organization to meet our long-term growth objectives. As a result of this review, we implemented a corporate restructure that we anticipate will yield nearly $2 million of G&A savings annualized. These actions allow us to continue to invest in areas such as our digital experience and technology initiatives while streamlining our administrative functions. Finally, today we announced that our Board of Directors has authorized a share repurchase program, giving the company the opportunity to purchase up to $5 million of common stock as part of our strategy to increase long-term shareholder value. Before I turn the call over to Mike, while we are disappointed in the results of the second quarter, I want to reiterate my belief that the core of the Noodles brand is well positioned for success, and there's significant upside potential over our current results. You have heard today our plans and strategies to address our current shortcomings, build upon our strengths, and deliver sustainable shareholder value. We are excited to provide you an update on our progress in the quarters to come. As we execute these strategies, I'm excited to welcome Mike Hines to the team as our Chief Financial Officer. Mike brings nearly 25 years of finance, accounting, and investor relations experience to the team, and I look forward to working with him and for Mike to have a significant influence with our team and company to achieve our full potential.
spk04: Thank you, Dave. It's great to be here. I'd like to thank the Noodles team for welcoming me into the business. I have only been with the company a few short weeks. I'm energized by the opportunity ahead of us and excited about what our team can achieve. Turning to results for the second quarter, total revenue decreased 4.5% to $125.2 million compared to last year driven by a decline in comparable sales. partially offset by revenue from new restaurants. System-wide comparable restaurant sales during the second quarter decreased 5.5%, including a decrease of 5.9% at company-owned restaurants and a decrease of 3.4% at franchise locations. A recently completed July fiscal period included a system-wide comparable sales decline of 3.8%, including declines of 4.5% at company-owned restaurants and 0.3% at franchise locations. Company average unit volumes in July were 1.35 million, 14% above pre-COVID July of 2019 AUVs. Company comparable traffic during the second quarter declined 9.1%. As Dave mentioned, traffic was especially challenged during our April fiscal period with a decline of 14%, followed by sequential improvements to declines of 8.7% in May and 5% in June. Pricing during the second quarter was 6.1%. Although given the lapping of pricing from 2022, as well as strategic actions taken in May, pricing year over year came down meaningfully throughout the quarter. We entered the quarter carrying 13% of price, but during the last half of the quarter, pricing decreased to 3.2%. we anticipate this level of price to carry forward through the third quarter. For this current third quarter, we anticipate total revenue of between 125 and 130 million and comparable restaurant sales to decline mid-single digits. Turning to the P&L for the second quarter, restaurant level contribution margin was 14.8%, a 70 basis point decrease compared to last year. Our restaurant contribution margin included meaningful improvement in our cost of goods sold line, offset by deleverage across other areas of restaurant expense. COGS in the second quarter was 25.1% of sales, a 270 basis point improvement from prior year. This improvement was the result of continued favorability in normalized commodity markets relative to last year. as well as the impact of initiatives executed over the last 12 months. We continue to expect overall low single-digit food deflation for 2023, led by chicken, which is contracted for the full year. Labor costs for the second quarter were 32.4% of sales, compared to 30.3% in the prior year. Wage inflation continues to moderate with year-over-year hourly inflation growth of 7.7% for the full quarter, but only 6.1% during the recently completed July fiscal period. While we continue to expect deleverage across the labor lines for the balance of the year, we expect that deleverage to moderate as wage inflation subsides and we implement initiatives from our recent menu and operations simplification efforts. Due to deleverage, other operating costs and occupancy costs both rose 70 basis points over prior year to 18.5% and 9.3% of sales, respectively. DNA for the second quarter was $12.5 million, $300,000 less than prior year, due primarily to reduced cash incentive compensation. G&A also included non-cash stock-based compensation of approximately $1.5 million during the second quarter in line with prior year. For the current third quarter, we anticipate G&A expense of between $12 and $13 million, including $250,000 of restructuring expense and approximately $1.5 million of non-cash stock-based compensation. Inclusive of the impact of the restructuring Dave noted, we anticipate full year GNA to be between 50 and 53 million. GAAP net loss for the second quarter was 1.3 million, or a loss of 3 cents per diluted share compared to net income of 1.3 million last year. Non-GAAP diluted earnings per share was a loss of 2 cents compared to earnings of 5 cents last year. Please refer to our earnings release for reconciliations of non-GAAP measures. Turning to the full year, I would like to provide an update to the 2023 guidance. As Dave mentioned, although the company has gained traction relative to our performance at the beginning of the second quarter, we have revised certain expectations given the current performance. For the full year 2023, we are providing guidance of $500 to $510 million for the full year revenue, inclusive of negative low single-digit comparable restaurant sales. we anticipate full year restaurant contribution margin between 14.5 and 15%, with our current guidance reflecting margin expansion of 60 to 110 basis points versus prior year. For the current third quarter, we anticipate restaurant margin just north of 15%. We now expect adjusted EBITDA between 35 and 40 million, with the upper end of our guidance reflecting EBITDA growth of over 20% versus 2022. Included in our full-year guidance is expected adjusted EBITDA for the third quarter of $9 to $11 million. Our adjusted EPS expectations for 2023 are now between negative 11 cents and zero. For the third quarter, we anticipate adjusted EPS between negative 3 cents and positive 1 For further information regarding our 2023 expectations, please see the business outlook section of our press release. Turning to the balance sheet, at quarter end, we had cash and cash equivalents of 3.1 million and a total debt balance of approximately 64.7 million. We currently have nearly 60 million of incremental liquidity available for future borrowings under our amended credit facility. During the second quarter, the company opened six new restaurants, and as discussed at the last earnings call, we closed two restaurants. In the third quarter, we expect three to four new company openings and no company closures. For the full year, we now expect approximately 20 new restaurant openings system-wide, including one to two franchise openings in the fourth quarter, representing 5% gross unit growth for the year. As we complete our one-time investment in digital menu boards across the system, we expect to be able to support our ongoing 5% unit growth target, primarily through operating cash flow. With that, I would like to turn the call back over to Dave for final remarks.
spk03: Thanks, Mike. Clearly, we face disruption in the momentum that we have been experiencing leading into the second quarter. Although we've made traction since the initial challenges that we saw during the early part of Q2, we are aggressively executing strategies to enhance our competitive positioning and financial performance. Again, from a sales perspective, these initiatives include price optimization, improved guest engagement analytics, introduction of chicken parmesan, a third-party supported evaluation and assessment of our menu, and a significant expansion of our catering program. Meanwhile, to improve our financial performance, we're leveraging our operational initiatives to improve productivity and to achieve our goal of positive free cash flow, we've already enacted the following. Continued but moderated new restaurant growth, streamlining our G&A infrastructure, and the authorization of a share repurchase program. Fortunately, we have a strong foundation to build from. with a differentiated brand, robust digital and rewards program, and the culinary and pricing flexibility that we will garner from the upcoming completion of our digital menu board rollout. Average unit volumes have stabilized and are growing, and the cost environment remains favorable. We have great confidence in both our short-term and long-term strategies to address opportunities we see both in our value proposition and our overall competitive positioning, and I look forward to sharing our progress in upcoming quarters. Thank you for your time today and please open the lines for Q&A.
spk00: Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from Jake Bartlett with Tourist Securities. Please proceed.
spk01: Great. Thank you so much for taking the question. Dave, I wanted to start with just the diagnosis of what's caused this really sharp deceleration. I know you talked about the menu pricing that you took in February. As you've dug deep into this, is there any other explanation, whether it's service levels, customer satisfaction, Maybe it's delivery has been a headwind. Anything else that can just help us understand such a sharp deceleration in the trend here with traffic?
spk03: Yeah, Jake, certainly we feel that pricing has been the dominant factor. We've not been alone in raising prices. We obviously know that. But we do feel that ultimately we were more aggressive with pricing than many of our peers. At its height, we were running 13% year-over-year pricing and nearly 20% two-year pricing. While we've remained strong with rewards members, higher-income guests, we needed to and we're continuing to work to win back some of those more price-sensitive guests. That says you look at all of the other metrics to your point about what the diagnosis is. We feel very comfortable with the people metrics improving, cook times, operational metrics improving, But one thing we noted today is that we do think it is time for us to take a fresh look at our overall menu. We feel the menu has a strong foundation. Our internal analysis research gives us a lot of confidence in the potential of chicken parmesan as well as other optimization opportunities. But that said, we think it's an appropriate time for us to take a comprehensive, fresh look at the overall menu and culinary strategy because we know the upside AUV potential of this brand is much higher than where we are today. From a channel perspective, again, we've seen strength in dine-in. We've actually seen a rebound in part of the delivery program as well. Some of the digital and the to-go area is an area that, again, we think will be specifically benefited by digital menu boards. Those are some opportunities we have as well.
spk01: Great. And just to follow up on that, I just want to make sure I understand that the pricing, you know, commentary, you know, correctly in the 13%, you know, increase year over year, How much of that was on the in-store menu? I know 20% two-year, 13% one-year, but my impression was that a lot of the menu pricing you've taken has been on the delivery side. So just if you could isolate that to the in-store menu, that'd be helpful.
spk03: Yeah, actually the 13% year-over-year really was across all channels. So during the course of COVID, when we did implement price increase, and as you look at the two-year, there was a significant amount that had to do with the delivery price premium. But really over the last year or so, that price increase has been kind of across all channels, including in restaurant. To put just some more texture behind it, as a reminder, we implemented 8% of price in Q2 of 2022 and an additional 5% here in February of 23. Those were across all channels, not just on the delivery side. As we lapped the 8% price increase from last year, we didn't replace it, and as we introduced the 7 for 7 menu during our pivot, that effectively dropped our price another 2% or so, so our run rate as we sit today, again, is approximately 3%. So we've gained some good traction, winning guests back from a value perspective, but it's going to take some time, and we continue to be focused on improving that value perception.
spk01: Great. And then my last question is just on the cost side. And you've taken some pretty solid measures to decrease your GNA. I want to make sure that the level that you're cutting it to is the right kind of level to grow from in 24, just to kind of make sure we understand how GNA grows from here on out. And then also, I didn't hear you mention, I know you kind of had been going back into the kitchen of the future sort of thinking efforts to try to find efficiencies. But is operating cost efficiency a big focus for you at the store level in 24 as well?
spk03: Yeah, so I'll start with the G&A expense items. As we said, we completed a G&A, kind of an overview of our entire structure. Really wanted to ensure that as we continue to grow at a pretty solid rate, that we have the right level of resources to invest in areas such as unit growth, technology, digital enhancements. So we absolutely maintained the integrity of those aspects of our GNA structure. What we saw is that over the course of the last few years, as we've implemented new systems, new technologies, there were certain administrative functions that we felt we'd probably just gotten a little bit too heavy from. So we feel very comfortable that as you look at the core GNA rate, where it sits today, that that should be a good spot for very modest, just more inflationary type increases as we go into the future. From a labor cost perspective, we have made great progress over the last several years. We have reduced roughly 10% to 15% of hours out of our system on a per-restaurant, per-day basis. That continues with some of the work that we did last year from an operations venue simplification perspective. We are incorporating some of those initiatives here into the model, just even as we sit today. We'll continue to look hard at that, everything from how the management team is structured, are there efficiencies we can gain there, continued enhancements in technology, as well as just looking at equipment overall flow. So certainly we've made great progress on labor. We'll continue to do so as we go forward. also buttress by the fact that we're now not seeing the wage inflation rate that we have been seeing in prior quarters.
spk01: Great. Thank you so much.
spk00: Thank you. Please stand by for our next question. Our next question comes from Joshua Long with Steven Zink. Please proceed.
spk05: Great. Thank you for taking my question. Mike, welcome on board. Looking forward to working with you in this next chapter. Dave, following up on some of the comments you made in terms of just the guests that you lost during the quarter, it makes sense that it might be that more economically sensitive guest, but just curious what you've been able to see in terms of that specifically. And then as you think about going forward, can you talk about some of the digital systems or marketing messaging systems that you have in place to be able to go back and target that guest? As you start to see traffic start to improve, how do you know... if it's that guest that you lost coming back in or maybe just your core guests coming a bit more frequently?
spk03: Yeah, sure. I think one of the exciting things has been a key message, I think, for us as we look forward, Josh, is just the overall flexibility that we are going to have based on our technology investments from an in-restaurant perspective with the digital menu boards, as well as with the customer data platform and just overall our ability to target guests. One thing that has been extremely encouraging is that when you think of flexibility, as we started to diagnose and see a value issue, we were able to, first off, touch those rewards members. Rewards members are people we're able to quickly and easily access. We're able to give them specific promotions or specific messaging, maybe not even tied to promotions. We saw, as we talked about in the earlier remarks, we actually saw an increase in frequency from our rewards members. of 2%, as well as overall growth in the program. So that gives us quite a bit more information, and we've been able to maintain and retain that guest, partially because we've been able to act quickly against them. Now you incorporate a CDP. So a CDP, our team has already made tremendous strides in being more targeted with how we approach our guests. This allows us just to have a significantly more surgical approach to segmentation, to messaging, to just overall how we communicate with our teams. And that really just went live a couple weeks ago. So we're just starting to reap some of the low-hanging fruit when it comes to that technology. Another aspect as we continue to evolve from a technology perspective, as we said, we're starting to use machine learning in terms of recommendation engines. The testing of that has been very successful. So we're implementing that as we speak. That should be another nice tailwind So the overall infrastructure from a rewards program perspective, as well as the technology that drives our digital programs, continues to improve and become best in class. Now you layer on top of it digital menu boards. Digital menu boards for us, one reason why they're so, so powerful is that it just gives us flexibility across nearly every aspect of the business, whether it's how the menu's laid out, the pricing structure, new culinary items, messaging. Traditionally, we couldn't pivot or test very quickly because we always had to wait on the physical menu boards to kind of catch up to the digital assets. This even impacted some of our flexibility when it comes to things like pricing because we didn't want a disjointed experience. So we feel digital menu boards, combined with all of the enhancements we've made from a technology and data perspective, you know, really allows us, we're frustrated with the reset from a revenue perspective. But as we go forward from here, feel that we have extremely strong foundation that's just going to continue to strengthen.
spk05: Very helpful. And when we think about that target for, I think you said 75% by end of year on digital menu boards, correct me if I'm wrong there, but just can you walk through just maybe high level bullet points? I think a question would be in our minds and just sounds amazing. Why don't we roll it out faster? Obviously it never works that way. There's you know, implications, you got to make sure we get it done right. Can you talk through what that, you know, the pushes and pulls are there in terms of rolling that out across the system and when you think you could be at 100%?
spk03: Yeah, so we'll actually expect to be, Josh, at 75% by the end of Q3. So 75% by the end of Q3, expect to be in all company restaurants by the end of this year. As we implement digital menu boards, certainly to your point, it's not just simply, you know, plug in the screen, and there you go. We're upgrading all of the network within every single one of our restaurants to enable us to not just execute digitally perfectly from a menu perspective, but any further network and technology enhancements we'll be able to execute as well. So there's a network upgrade that happens, a little bit of construction, and then setting up and ensuring we have the right cabling, all the electrical components as well. As we do that, one thing that's exciting is we're already seeing good results from leading indicator perspective, check average, some of the messaging being really responded well to. But we haven't even started really to implement things like price optimization where we're really looking at the interplay of pricing throughout the menu. We haven't been able to test some of the aspects of that as well as menu layout until really just in the upcoming quarters. so it's really expect some good step change from that perspective. Moving quickly, but we're also obviously ensuring that we have the right network infrastructure and the right systems enabled to execute and really garner as much of the benefit as possible.
spk05: That makes sense. I appreciate that. And then one last one for me. When we think about the new menu work, and I mean, on one hand, definitely makes sense. You've done a lot of innovation over the years, and so maybe a good time to maybe stop, take inventory of what you have, what works, and understand that the research is not complete yet, but expected to be done by the end of the year. Can you talk a little bit more about why now is the right time, what you expect to find, and then maybe any sort of early research in terms of what supports the idea of chicken parm? Obviously, it sounds delicious, and it's a favorite of mine, but just curious if that's something you've tested in the past or any sort of overarching strategy you might be able to offer up in terms of kind of that next leg of culinary innovation?
spk03: Yeah, I mean, I'll first start with chicken parm. And one reason we absolutely love it is it's a staple of Italian cuisine. It's not something that you're able to really see in any format from a fast casual perspective. So it will be really on the front edge there. So we're excited to bring it in the fast casual environment. It just, right down the middle of the fairway, extreme breadth of appeal, great familiarity. Over the years, we've typically tried to, as you know, Josh, balance kind of more familiar items, such as the tortelloni that we launched a couple years ago, with a bit more innovative, unique items, such as linguine. This is kind of the natural sequencing of our overall culinary innovation toward chicken parm, which is something that we have seen with all of our research has as much potential as as tortelloni did which was extremely successful this is just the natural progression from that perspective that says you look overall at the menu the world has changed in the last several years we all know that the shift towards more off-premise catering is now coming back we want to ensure that we are not missing some potential big opportunities in terms of our menu and we're open to Understand we're working with one of the best out in the business to really evaluate it and say, what are we potentially missing from a guest perspective that could really meaningfully have legs? So the fact that we've gained a lot of traction in our overall traffic trends but are still not comfortable with where we're at, we know we have tremendous upside. We think this is a really good time for us to step back now that there's more normal guest behavior and identify where there's some opportunities.
spk05: Appreciate it. Thank you.
spk00: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from Andy Barish with Jefferies. Please proceed.
spk02: Hey, guys, and welcome, Mike. Just trying to contextualize the diamond sales increase with You know, the off-prem challenges. I mean, last quarter, you know, you kind of focused on the delivery channel, you know, seeing the most weakness. I imagine just given, you know, the numbers that has continued, but I'm not exactly sure kind of by how much or, you know, kind of where that, you know, starts to flatten out.
spk03: Yeah, we've actually, interestingly enough, Andy, as we did pivots, In our overall value messaging one of the areas that we looked at specifically is in digital is in delivery And really put some focused attention on that both from a marketing perspective and a bit on the promotion side We've actually seen a nice rebound in the delivery business So from a perspective of you think about the channels where people maybe are the least price sensitive which would be when they're going out to eat they're looking for a good experience and or is the part of that delivery occasion where they recognize they're paying a premium, but they ascribe a significant value to that. Those are areas we're actually seeing strengthening. Where we are seeing a little bit more weakness is kind of that off-premise occasion where somebody, maybe the alternative would be bringing something at home that could be a little bit less expensive than our offerings. So one reason we're really, again, focused on that value proposition as well as focusing on just improving our overall competitive positioning including looking at the culinary aspect, because delivery has come back a bit. Dine-in, again, is strengthening. It's that kind of to-go area, as well as the digital quick pickup where we're seeing a bit more softness.
spk02: And just a quick follow-up there. Did you actually take your menu premiums down on third-party delivery, or are you just responding with promotional activity?
spk03: That was more marketing as well as promotional activities. So marketing could also include how you're featured on a website as an example.
spk02: So we did not reduce the pricing on the third-party delivery side. Okay. And then, yeah, on the culinary, I mean, you've been working on actually kind of streamlining menu and kind of focusing. What is the consumer – sort of telling you, you know, in this pivot to, you know, kind of looking at more variety potentially or, you know, wherever the culinary assessment is going to take you. What's kind of been the, you know, the consumer feedback in your research?
spk03: Yeah, certainly internally of the research that we've already done, Andy, we're seeing the opportunities that we talked about with chicken parm. as well as some optimization of our existing dishes. So looking at really ensuring that they're able to travel. Our food generally travels great, but there are certain areas that we feel we could optimize potentially with additional increase in sauce or looking at the recipes of those items. So that's what our internal research is showing that we're already activating against. In terms of overall where there potentially are culinary holes, what should be the right size of the menu, Are there areas right now where we should double down or maybe areas where we don't necessarily need a dish? Those are areas that we're really going to be very open as we're working with that third-party consultant to really evaluate the menu in its entirety to ensure that every single dish is delivered to where it surpasses our guest expectations. So we're honestly pretty open. We have some good ideas for our internal research, but want to be able to have somebody else take a fresh look at it.
spk02: Gotcha. And then, I'm sorry if I missed it, but when does Chicken Farm launch and do you have a price point or a price point range that you're considering?
spk03: It'll be in early fall is what we're targeting at the moment. From a price perspective, hoping to be around $10.95. So what we think is a very attractive price point for what should be a very, very popular dish.
spk02: Got it. Thank you. Thanks, Andy.
spk00: Thank you. Please stand by for our next question. Our next question is a follow-up from Joshua Long with Steven Singh. Go ahead, Joshua.
spk05: Great. Thanks for taking my follow-up. Just wanted to throw one over to Mike. I realize it's been relatively recent that you joined. We're excited to have you. Curious if you could give a little bit of perspective just on early days, what you've seen and learned from the team, the structure that's in place, any sort of observations there. And then secondarily on the COG side, I know you said you were locked in on chicken for the year, but curious if you could give us a little bit of a peek into the rest of the basket and kind of how things are positioned as we've started to hear more about on the food side moderating from Pierce.
spk04: Sure. Thanks, Josh. You know, it's just been a couple of weeks, as you know, and really excited to join the team off to a good start with the team. As far as the support office here, it's an impressive group of people that are supporting the restaurants, and I have been impressed with how energized and focused everybody is leading and driving towards the initiatives that Dave talked about today. So off to a great start and looking forward to getting more entrenched and getting involved with the initiatives Dave talked about. As far as COGS goes, you're right, we're locked in for the rest of the year. Chicken, with chicken and a lot of our primary commodity basket items You know, one area we're looking at as we start to talk to our suppliers about pricing for next year is we're seeing the same thing everybody is seeing around beef, which that's very familiar to me, and it's a familiar story about the beef roller coaster. And so we're seeing that go the wrong way in the market right now, and we're talking to our suppliers and doing some things to try to get ahead of that. But outside of that, it's pretty early to talk about 24 for the rest of the year. we are anticipating very consistent COGS as a percentage of sales for the balance of the year. Thank you.
spk00: Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.
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