Noodles & Company

Good afternoon and welcome to today's Noodles and Company's second quarter 2024 earnings conference call. 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, Mike Hines.

Thank you and good afternoon, everyone. Welcome to our second quarter 2024 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 the call, 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 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 quarterly report on Form 10-Q 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 second quarter 2024 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'd like to turn the call over to Drew Mattson, our Chief Executive Officer.

Thanks, Mike, and good afternoon, everyone. I am pleased that we were able to deliver positive system-wide same-store sales growth of 2% during the quarter and match the fast casual industry benchmark on both same-store sales and traffic, despite the challenging consumer environment. We also improved our restaurant contribution margin by 70 basis points compared to 2023, aided by strong cost management. More importantly, we continue to make meaningful progress on our five key priorities to achieve sustained profitable growth and drive long-term shareholder value. Although the current operating environment may cause some variability in our near-term results, we are focused on what we can most directly impact and continuing to position noodles to capture the significant growth opportunity we believe it has long term. Now let's talk about progress on our five strategic priorities. Creating a foundation of operations excellence is our top priority. Our primary focus is on proving the dimensions of the guest experience that correlate most directly with traffic growth. Overall satisfaction, taste of food, and accuracy. This is especially applicable at dinner, where we have experienced more traffic loss in recent years. Our strategy to achieve this includes biweekly training sessions across the system to review proper execution of a new food execution standard, a new service standard, and a new accuracy standard during each training session. A few examples of training standards we focused on during the second quarter include cooking proteins at saute, caramelizing udon noodles in a sweet soy sauce, table checkbacks, and checking drinks before bagging a delivery order. In addition, we are doing a better job of adhering to our shift staffing standards that require general managers and assistant general managers to be in our restaurants during our busiest dinner day part shifts. These efforts are definitely paying off with guest satisfaction improvement accelerating each month of the quarter on all three of our priority measures, and they improved the most at dinner. In the near term, it's difficult to correlate guest satisfaction improvement with traffic growth, but we are clearly establishing the culture and team member behaviors required for a more consistent and a more satisfying guest experience. and I am confident this will drive stronger guest loyalty and improve traffic over the long term. Our second priority is to stimulate more guest desire for noodles through a comprehensive menu transformation guided by our contemporary Comfort Kitchen Culinary North Star. As our work progresses, we will continue to use compelling limited time offers to bridge the gap until our core menu testing plan has been successfully completed. Phase one of this process involved concept testing to identify the most compelling ideas for both new and improved dishes. During phase two, we placed the new and improved dishes created by the Culinary Edge in a central location taste test with noodles customers to ensure they exceeded the guest satisfaction average on our current menu. These phases are largely complete. We are now starting phase three, where we place the new and improved dishes in test locations to assess real-world guest satisfaction, operational feasibility, and any related financial implications, including menu mix shifts. Our goal is to impact roughly two-thirds of our menu through new or improved offerings over the next year. Given the magnitude of change involved for both guests and operations, we are taking a very thoughtful and strategic approach to testing. And we plan to stagger the national introduction of the complete updated menu over several months. At the end of June, we placed two new dishes and one improved dish in our test locations. Crispy Chicken Bacon Alfredo is a more contemporary version of our current Alfredo Montemore, which it will replace. So far, it sells nearly 50% more and has higher guest satisfaction than Alfredo Montemore. Lemon Garlic Shrimp Scampi will be added to address the need we identified for additional light and fresh menu options. This dish is selling well and has guest satisfaction scores well above our menu average. The third dish, Chipotle Chicken Cavatappi, will be added to address the need we identified for a Latin-inspired flavor profile on our menu. This dish is also selling well and has solid guest satisfaction. Our plan is to introduce all three nationally in October. We also deleted zucchini with roasted garlic cream sauce, linguine rosa, and linguine fresca. Last week, we introduced five more new or improved dishes into the same test locations and deleted one more existing dish. Assuming continued success, these dishes would be introduced after the holiday season during the first quarter of 2025. The timing of additional new and improved dish introductions is dependent on how our guests and operators adapt to the changes already described. But as I said, our goal is to have 2 thirds of our menu either new or improved by next year at this time. As I mentioned earlier, our plan is to regularly include limited time offers as a bridge to bring excitement to our guests and help drive traffic until our menu transformation Our most recent LTO, Baked Alfredo with Grilled Chicken, did not perform as well as Steak Stroganoff, despite having stronger concept test scores and similar media support. Our hypothesis is that three of our last four LTOs, including Chicken Parmesan, Chicken Prosciutto Tortelloni, and Baked Alfredo with Chicken, have all fallen into the classic Italian comfort category and felt too similar to each other to generate special visit interest. With that in mind, we plan to feature an item from our existing menu, spicy Korean steak noodles, starting mid-August. This dish has low awareness but high guest satisfaction and strong appeal among younger consumers. Our belief is that it will be more newsworthy and do a better job of driving special visit interest for noodles. So, with spicy Korean steak noodles featured starting in August, plus crispy chicken bacon Alfredo, lemon garlic shrimp scampi, and Chipotle chicken cavatappi introduced nationally in October, we will have plenty of exciting menu news to effectively bridge to the full new menu introduction in 2025. Our third priority is to drive profitable traffic growth by further leveraging our strong digital ecosystem. As a reminder, Noodles has 55% of total sales from digital channels and 26% of sales from loyalty members, with loyalty members spending twice as much per year as non-loyalty members. During 2023, we invested in a customer data platform that aggregates all information about our known customers in one area. This has enabled us to engage these customers using smart, relevant, personalized offers with fewer discounts to drive profitable traffic growth. In particular, we focused on reactivating lapsed loyalty members because our active members have frequency more than 50% higher, and they have two and a half more visits per year than our loyalty program average. So far, this strategy has worked very well. Through Q2, active loyalty member traffic is up 5%, and loyalty discount spending is down 32%. Third party delivery has also been a strong channel for us this year. Selective investment in sponsored listings, exclusive dishes, and profitable promotions generated double digit traffic growth in the second quarter. We will continue to prioritize marketing investments behind these proven loyalty program and third party delivery opportunities going forward. We will also continue our test and learn efforts with broader reach media to identify the most effective ways to attract more new customers to our digital assets and ultimately into our loyalty program. We're currently trialing connected TV, streaming audio, podcasts, and direct mail. Our fourth priority is to maintain double-digit growth in our catering business while we improve the fundamentals required to drive more aggressive growth in the future. Catering has grown from 1% of sales in 2022 and 1.2% in 2023 to 1.7% year-to-date in 2024. And during the second quarter, system-wide sales were up 42% versus last year. We continue to believe catering has the potential to be at least 4% to 5% of sales in the future. And we believe that catering growth would be incremental and contribute to higher overall margins. Going forward, we will continue to grow profitable sales by unlocking new catering occasions like Teacher Appreciation Day last quarter and adding new menu categories like boxed lunches and other individual grab-and-go items. We will also add new sales building tactics like fractional catering managers in high-potential markets to create strong relationships with local sports teams, schools, and healthcare organizations. Paid LinkedIn advertising that targets the catering occasion decision maker is another tactic we will implement to support continued profitable sales growth. Additionally, we will strengthen our catering operating model by reducing operator friction and increasing throughput in our restaurants. The biggest friction point right now is the need to manually rekey orders from Easy Cater, which is a third-party catering platform, into our point of sale. By the end of September, we will have an integrated ordering solution implemented that will take this friction point away. We are also currently evaluating options to outsource delivery of catering orders placed through our website and a technology-driven solution to transfer catering orders between restaurants when needed. Our final priority is to strengthen our financial foundation with proactive cash management and an increased emphasis on operational efficiency across the business. We have reduced our capital spending from $52 million in 2023 to a projection of $28 to $32 million this year. This is largely driven by the reduction in new unit openings and the completion of our digital menu boards rollout last year. As we mentioned last quarter, during January, we implemented a major cost reduction effort that we projected would save approximately $4 million this year. This included targeted headcount reduction in areas we have deprioritized in the short term, like new unit openings, employee benefit adjustments that save money while still keeping us competitive in the marketplace, and supply chain savings through improved vendor management and product optimization. Our smart cost savings team has continued to look for additional savings opportunities in both restaurant operating expenses and GNA. And we now expect to deliver savings of over $5 million in 2024. Finally, we performed a detailed portfolio review during the second quarter to identify underperforming restaurants with substantial negative cash flows. Through this review, we identified approximately 20 restaurants that we will evaluate closing before the end of their lease terms. Mike will discuss in more detail where we are in the process, but we believe closing underperforming restaurants will allow us to focus more on our restaurants with the most growth potential and provide an increase in company earnings and cash flow post-closure. As you can see, we've made substantial progress on our strategic priorities, and we believe we are positioning Noodles to capture the full growth opportunity we see ahead. Now, I'll turn it over to Mike to review our financial results in more detail.