Noodles & Company

Good day and thank you for standing by. Welcome to the Noodles & Company fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Hines, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2023 earnings call. Here with me this afternoon is Drew Mattson, 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 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 GAAP measures is available in our fourth quarter 2023 earnings release. To the extent that the company provides guidance, It does so only on a non-GAAP basis and does not provide reconciliations of forward-looking non-GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable efforts. With that, I would like to turn the call over to Drew Madsen, our Chief Executive Officer.

Thanks, Mike, and good afternoon, everyone. Over the past four months as interim CEO, I've gotten a chance to work closely with our team and begin the process of reigniting this one-of-a-kind brand to drive sustainable top-line growth, improve profitability, and ultimately create long-term shareholder value. As you've likely already seen, the company announced today that I've decided to stay on full-time, and the board has appointed me as permanent CEO. While I initially only agreed to be the interim CEO and help with the transition, once I got under the hood of Noodles, I became increasingly excited about the opportunity to lead this company through a new stage of growth. I'm thrilled that the board concluded that I was the best person to become Noodles' permanent CEO, and I'm honored to assume this role and will be all in on leading Noodles with the expectation of being here a minimum of three years. I wanted to remain CEO because I believe that Noodles is a differentiated brand with substantial opportunity ahead of us, and I believe I have the ability to align the organization behind the strategic priorities necessary to achieve it. Before we discuss our priorities for the year, let's start with Noodles' unique positioning within the restaurant industry that we will leverage going forward. First, we compete in very attractive segments. Fast casual has outperformed both QSR and casual dining on traffic for the last few years because it offers a more compelling combination of quality, price, and convenience. Pasta and noodles as a menu segment is affordable, broadly appealing, and very durable. And the emotional need our customers have for comfort and comfort food is timeless. Second, we have a meaningful point of difference compared to others competing in these segments. No one else offers a scaled perspective on all things noodles with a variety of flavors from around the world like we do. And third, our brand is aligned with current consumer preferences. They want fresh food. Our restaurants don't have freezers. We prepare a dozen fresh vegetables daily. And as I said, we don't hold our vegetables, proteins, or noodles in hot steam tables. We cook your meal as you order. Today's increasingly diverse customer also wants more interesting flavor profiles, more spicy, smoky, and tangy flavors from regions all over the world. Our menu is full of globally inspired noodle bowls and dishes, from classic dishes like Wisconsin mac and cheese to penne rosa, and more elevated but still approachable dishes, like Japanese pan noodles and spicy Korean beef noodles. And third, today's consumer wants more convenience when they choose to eat out. Guests can access noodles by ordering through our mobile app, website, or third-party delivery services, and can choose to receive their food via in-restaurant quick pickup or delivery to their home or office. Approximately 54% of sales originate digitally, creating a strong platform for us to build upon. And lastly, our food travels very well, which makes noodles a great choice for off-premise occasions. Despite these competitive advantages, our business has not performed well recently. To capture the opportunity available to us, I believe we need to take better advantage of the platform we have. We need to do some things we haven't done for a long time, and we need to raise our standards across the entire business. Accordingly, I focused our organization on the following five priorities. First, we need to strengthen our culture of operational excellence. Operations is the foundation of our business and it starts with people. The general manager position is the most critical role in our business and we are proud to share the general manager retention is the best it has been in almost 10 years and is better than industry average. And we're delighted that virtually all of our restaurants are fully staffed. But there are other areas that require increased focus and higher standards, most critically in the dimensions of our guest experience that correlate most directly with traffic growth. Specifically, we are focused on three key areas. First, order accuracy and taste of food, Second, the dinner day part, where we've seen more traffic loss than during lunch. And third, our lowest quartile restaurants, where we have the most opportunity to make meaningful improvement in the near term. To monitor progress and drive change, we have instituted schedule changes for managers and hourly team members to allocate our best workers to our highest volume time periods. Biweekly training sessions, and multi-unit supervisor restaurant visits focused on reinforcing the critical behaviors highlighted in our training sessions. Our second 2024 priority is to increase desire for our brand through a multi-phase menu transformation guided by our new contemporary comfort kitchen culinary identity. While Noodles has consistently introduced new limited time offering menus in recent years, it has been a long time since we updated our core menu. As a result, our menu looks dated compared to newer fast casual competitors. While we still offer familiar and comforting dishes that many of our existing guests love, we are not currently a compelling alternative for lapsed guests or for new guests. We are in the process of changing that as we use the contemporary comfort kitchen framework to transform our menu. Let's break this framework down to its parts. Contemporary means we're going back to our roots as the ultimate curators of contemporary comfort. We need to do more than offer Italian dishes living beside Asian dishes. We need to offer dishes that are creatively fused. dishes with classic profiles, bold flavors, and signature twists that make them our own. We also need to offer dishes that interpret modern trends in approachable ways that resonate with our guests. A reimagined LTO program that better leverages trending flavor profiles and seasonality will also be part of our menu transformation work. Comfort means food that is creamy, cheesy, craveable, and satisfying, But increasingly, it also means food that's wholesome, homemade, nostalgic, and nourishing. Going forward, our menu will embrace both definitions of comfort and also feature ingredient-forward menu descriptors that conjure craveability. Kitchen means we will continue to make each dish to order and cook where it counts, blanching pasta, prepping fresh vegetables daily, finishing in our custom saute station, garnishing with fresh herbs, and designing recipes that bring more texture, color, and garnish to every plate. We are working with the Culinary Edge, one of the preeminent food innovators and culinary consultants to the restaurant industry, to help bring this menu transformation to life. It is a very ambitious program that involves new concepts, recipes, prices, and a new layout across our menu. I believe the opportunity is significant, and we all want these improvements in our restaurants as soon as possible. That said, given the magnitude of change, we also want to avoid any major surprises. Accordingly, our plan is to evaluate each of these changes independently. We will then bring them together for an in-market test in at least 25 restaurants And finally, we will gradually introduce improvements that are exciting for our guests and that our operators can execute consistently. So where are we in this process? The new dish concept work is complete, and we are preparing to test the first phase of new menu recipes later this month. Our goal is to start an in-market test of the first phase of changes early this summer with a phased rollout anticipated to begin later in 2024 and into early 2025. Our new menu architecture will be amplified by utilizing our digital menu boards. Our third 2024 priority is to broaden our guest base by increasing active membership and frequency in our loyalty program, leverage guest data to grow our digital business, and extend our reach by expanding our digital marketing touchpoints. Noodles has one of the industry's top performing digital ecosystems, consistently generating over 50% of sales through digital channels each year. This is driven by our more than 5 million loyalty members who spend more than double that of non-loyalty members on average. Our loyalty members represent approximately 25% of our total transactions and more than 90% of all app orders. A key area of focus for our loyalty program is to win back lapsed loyalty members by leveraging personalized data in our new customer data platform to provide a more relevant message to each lapsed member at the right time. Our digital app provides a convenient way for guests to order their favorite noodles dishes with over 1.7 million active app users. Over the past year, we've better leveraged this strong platform as we have achieved a 200 basis point lift in conversion rates by reducing friction in the ordering process. A focus on growing the number of app users and further increasing conversion utilizing our new tools will support traffic growth going forward. We are also further optimizing our digital media buys to more efficiently reach our target guests. We are currently in the process of testing multiple spending levels across media channels that, if successful, would be implemented in the second half of the year. We will also continue to invest in third-party marketplaces to reach a new guest and expedite their return visit. Lastly, we successfully implemented digital menu boards across all company-owned units during 2023. As we've discussed before, these boards will allow us to better trial proposed menu changes by allowing quicker test iterations and more precise conclusions of the impacts we would expect to see across the system, and also greatly assist in changing the menu architecture at our restaurants. We are testing a variety of ways to drive check without hurting value perception and plan to feature signature dishes that showcase our culinary expertise and strengthen brand relevance. Our fourth priority is to develop a long-term strategy to grow our catering business. And to help spearhead that effort, we recently hired a new director of catering who is most recently with Panera. Our fifth and final 2024 priority is to increase our financial strength. For 2024, we plan to strategically slow short-term new unit growth to approximately 10 to 12 new company restaurants relative to the 18 new company restaurants in 2023. In addition, we're focused on driving increased efficiencies across the business, which we believe will have a material positive impact on our future financial results. Successful execution of these priorities will position us for stronger new unit growth in the future, including new franchise locations and opportunities to re-franchise company locations. I'm very excited about the future of the Noodles brand and believe these priorities I discussed today will improve our operations foundation, strengthen the relevance of and desire for our brand, support long-term traffic growth, and lead to sustainable top-line momentum and profitability growth. I will now turn it over to Mike to discuss our results and expectations in more detail.