Noodles & Company
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Good afternoon and welcome to today's Noodles & Company's First Quarter 2021 Earnings Conference Call. I would now introduce Noodles & Company's Chief Financial Officer, Carl Lukach. You may begin.

[Carl Lukach:]

Thank you and good afternoon, everyone. Welcome to our first-quarter 2021 earnings call. Here with me this afternoon is Dave Boennighausen, 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 performance of our company. As such, 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 statement in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for 2020 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.

[Dave Boennighausen:]

Thanks, Carl and good afternoon, everyone. We are so excited to be here today to share with you our strong start to 2021, and provide an update on the progress we have made toward the accelerated growth objectives that we outlined at our prior earnings call. In summary, we're very pleased with our first-quarter results. Our financial performance improved sequentially throughout the quarter, allowing us to surpass the comparable restaurant sales and expectations that we laid out during our prior earnings call. We're also pleased with our restaurant contribution margin expansion, which improved 290 basis points during the quarter relative to 2020. This also represented a 100-basis-point improvement relative to Q1 of 2019, even as the company absorbed a significant increase in expenses related to delivery fees. Perhaps more telling of the health of our business were our average unit volumes, which increased 6.1% in our company-owned restaurants compared to 2019 and 12.7% when compared to 2020. And the momentum that we experienced during the first quarter has continued into Q2. With all-time record high, company average unit volumes for the past four weeks of $1.35 million, a nearly 13% increase versus the same timeframe in 2019. Importantly, in our fiscal month of April, digital accounted for 57% of sales, even as we recovered a meaningful percentage of sales in restaurant. While we recognize that there remains uncertainty surrounding COVID, and that the industry is likely benefited from recent government stimulus, we continue to feel very confident about our trajectory and remain convinced that we are an even stronger business coming out of the pandemic than we were a year ago entering it.

[Carl Lukach:]

Thank you, Dave and good afternoon everyone. In terms of the financial highlights, total revenue during the first quarter increased 9.2% to $109.6 million. Comparable restaurant sales increased 10.7% systemwide comprised of a 10 and a half percent increase at company-owned locations and 11.7% increase at franchise restaurants. Compared to 2019, we recorded average unit volumes of $1.17 million for the quarter, representing a 6.1% growth rate. Average unit volumes grew throughout the quarter, particularly in March, where the first half of the month saw a 5% growth rate relative to 2019 and the second half of the month grew 10%. As Dave noted, our momentum has continued into April, where we are seeing company record average unit volume of $1.35 million month-to-date, representing a growth rate of nearly 13% compared to 2019. Total revenue was partially reduced by continuation of temporary COVID-related restaurant closure days for health and safety. These closure days declined relative to the fourth quarter of 2020, but did show a slight increase at the end of March and into April, coinciding with increases in COVID cases seen at a national level. On a restaurant contribution basis, our restaurant-level margins were 13.6% in the first quarter compared to 10.7% last year, representing an increase of 290 basis points. Relative to 2019, which we believe to be a more relevant comparison, contribution margins increased 100 basis points, which is particularly encouraging given 460-basis-point increase in third-party delivery fees versus 2019. The first quarter historically is a lower restaurant margin level quarter for the brand and we saw sequential improvement throughout the quarter, culminating in restaurant-level margins above 18% during the final fiscal period of Q1. These levels are much more indicative of where we would expect restaurant level margins in the second quarter and throughout 2021. As we execute against our accelerated growth target of 20% contribution margins by 2024. Reviewing margin drivers in a bit more detail. For the first quarter, our cost of goods sold was 25%, which represents a 50-basis-point improvement from last year. The improvement was driven by our increased menu pricing and more efficient promotional strategies.

[Dave Boennighausen:]

Thanks, Carl. Noodles & Company is uniquely positioned to be a clear winner in the post-COVID environment, which we feel is reflected in our results thus far in 2021. The brand remains differentiated with a menu that is on trend and resonates with a wide variety of guests and occasions. Our digital and off-premise trends are perfectly suited for today's consumer environment with continued upside as we increase our personalized engagement with our guest. And there is a significant expansion opportunity both for company and franchise development as we have an operating and economic model well suited to support strong return on investment. The company is intensely focused on achieving our accelerated growth objectives and I would like to reiterate my thanks to our teams throughout the country, I continue to be humbled with the opportunity to work with them and look forward to taking the next step of our journey together. With that, Amanda, please open the lines for Q&A.

[Operator:]

And your first question comes from Jake Bartlett with Truist.

[Jake Bartlett:]

I wanted to start with current sales trends and try to understand the acceleration you're seeing in April. And I guess how much of the current trend do you think is due to a temporary lift from stimulus checks, first pent-up demand as the economy reopens and some of your own sales initiatives like the Gnocchi?

[Dave Boennighausen:]

Certainly, I think acknowledge that many of us in the industry have seen that the industry has seen an increase in dining out due to the stimulus, at the same time four things give me great confidence in terms of where we will head from here. First, we were receiving momentum even prior to the stimulus and even now they were a few weeks beyond that. We're not seeing any slowdown in momentum in brackets increasing a bit. Third thing, metrics across the board for us, all of the leading indicators are extremely positive. So whether it be turnover and tenure at the restaurant level, cook times, guest satisfaction, all the operational people, brand metrics look so great across the board that we think even as you potentially have a little bit of a waning off from the benefit from stimulus or pent-up demand, noodles would be a clear winner. And finally it is those initiatives, so with Tortelloni coming in later this quarter with several of our other initiatives, particularly around digital, we feel the brand is extremely well positioned. So difficult to assign an exact number on what the benefit of the stimulus and pent-up demand has been, we feel extremely confident that we'll be able to continue our outperformance.

[Jake Bartlett:]

And then, I guess as - you're used to having the dining rooms open and it seems like you're seeing a sales mix shift back into the dining rooms a little bit from digital even as digital is growing, but is that having an impact on higher average check as that mix is shifting back?

[Dave Boennighausen:]

We're seeing overall check continue to be roughly the same as what we saw during the initial parts of the COVID pandemic, so certainly a little bit higher than expected or than what we had historically. Secondly, what we're super excited about is the fact that those digital sales continue to break records even as we recover 60% of the dine-in sales. So I think it will still be a while before we understand what the long-term check dynamics will be from the consumer, but what is encouraging is that we're seeing that that digital occasion has been very sticky.

[Jake Bartlett:]

Great. And just one last one on unit growth. Can you give any update on the progress you're making with franchisees and building the pipeline there?

[Dave Boennighausen:]

Yes, as we said, we do have a franchisee opening restaurant in South Carolina later this summer, it will be our first new franchise market in a few years, actually. We're really excited with the momentum that our Head of Franchise Sales, John Ramsay, we brought on a few months ago, he's bringing some great candidates that are really excited with performance of our most recent restaurants as well as the overall trajectory of the business. So it will take time. As always, we ensure that it's a pretty robust process in terms of ensuring it's the right fit between ourselves as well as that franchisee, but we're very encouraged with the momentum that we're seeing, particularly in the target markets that we have or that which are primarily in the South and Southwest.

[Operator:]

And your next question comes from Nicole Miller with Piper Sandler.

[Nicole Miller:]

I think you said 57% in the quarter, can you break that down to pieces of digital and in particular, delivery direct versus indirect in the marketplace, please?

[Dave Boennighausen:]

Sure. Go ahead, Carl.

[Carl Lukach:]

Yes, Sure. So the 57% for the total digital, if I break that down, that number is actually more indicative of the fourth period, so what we saw into April. And as we look at that, we saw the third-party mix is around just a little over 25% with the direct delivery closer to 4%. So the remainder there, the total delivery around just over 30% and I think the remainder, it's still our quick pickup and curbside that takes us to around 57%.

[Dave Boennighausen:]

What we're seeing, Nicole, is that delivery occasion still continues to be just over half of digital sales. I'm seeing some progress in terms of needing people to direct delivery, still a lot of upside there, but in general, we're seeing current growth across all channels of digital from an absolute dollar perspective.

[Nicole Miller:]

And then you had mentioned margins benefiting - my words not yours, but less discounting, what was kind of an average discount back in the day and what is it today, because it sounds like yourself and most other brands don't need the same discounting efforts in this environment?

[Dave Boennighausen:]

From - so how we look at discounts, I know it differs a little bit depending on the restaurant concept. It ultimately end up hitting your cost of goods sold. However, what we look at it as a percentage of retail sales and what we are running right now is kind of in that 2.5% to 3% sales, so think of it as a 70, 80-basis-point impact to COGS, back to almost half of what we were a few years ago. So you're seeing a definite decline in the amount of promotional activity that we have and it's actually more so, Nicole, that it's just more targeted, more effective, much more efficient as we utilize that rewards program versus historically, where you weren't able to engage in that personalized or target it on the level.

[Nicole Miller:]

That makes a lot of sense. That's very helpful. A last question, EBITDA margin numbers are awesome, it sounds like we can think about 18% as a run rate, in terms of the pieces on labor in particular when you hit a 100% of, let's call it pre-pandemic sales, did you have the staffing you need and probably, more importantly, up 13% are you running a little short and you need to do some hiring and make it up? And should we be careful about the pieces like how we model the margin going forward or is labor not a concern in that way of staffing?

[Dave Boennighausen:]

Sure. I would - I'll let Carl talking a bit about where we expect having the overall labor and line item to go. No question we're seeing one of the most competitive labor environments that I've seen in my 17 years at Noodles & Company. At the same time, our people metrics, our culture. I think, Nicole, is stronger than ever. So our turnover is down significantly versus where we were a year ago. Management turnover and it's almost half of what it was a few years ago. So we feel like we've got a great pipeline and a culture that supports a lot of retention. That said, as we continue to add new units coming through the pipeline, as we continue to have increases in our average unit volumes, we're certainly focused on ensuring that we continue to have a significant application flow to support those restaurants. We definitely feel we're in more - in a better position than most of the industry given just the strength of our team below. Overall, as you look versus the pre-COVID pandemic, certainly having the staffing environments even more challenging than it was then, but I think the brand itself is better positioned than it was before. Specific to numbers, I don't know what you'd add, Carl.

[Carl Lukach:]

Yes, sure. And Nicole, as you think about the Q1 margin level and a bridge to 18% and where we would expect go-forward, it's really three factors and increasing, important, it's start with sales leverage, is the most important one, then, labor and then shift to a higher margin channel. So the sales leverage is going to impact all of the margin expense lines going down, the labor is probably going to be the most impactful, reason being that we took a lot of efficiencies in 2020 and we're expecting further in 2021 with steamers. That's going to be - going to get more eliminated as we start seeing that sales leverage shine through. So really that specific line item that you're going to see is most of the improvement. And then, finally, as we shift to higher margin channels. As we mentioned, third-party remains to be an important channel for us and the third party fees are going to stick, but as a percentage of sales that margin is going to get a little bit tighter because we're going to see some sales leverage offsetting them and we're shifting to more higher margin channels like dine-in.

[Nicole Miller:]

Thank you very much.

[Operator:]

Your next question comes from Andy Barish with Jefferies.

[Andy Barish:]

Actually, just on the labor during the first quarter, I thought it ran a little heavy at least versus my model, obviously, it sounds like you got a lot better in March, was there anything going on early in the year ramping up with dining rooms reopening or some incremental training with Gnocchi just to kind of put the overall quarter in perspective?

[Dave Boennighausen:]

Yes. Honestly, Andy, I would not be nervous at all about what you saw from the Q1 perspective with labor. So if you go back historically with Noodles & Company, Q1, as Carl alluded to, significantly lower volumes from a seasonality perspective, particularly, January and February, but overall effectiveness and efficiency of the team even as we reopened the dining rooms and increased the labor models to incorporate that part of the business, it's one of the best labor percentages we've brought probably in Q1, since I've been here. So what you will see is just naturally as we move into a time frame, where we will have better leverage on that volume, our labor will come down meaningfully.

[Carl Lukach:]

And Andy, the only thing I'll mention is, as we bridge, that's what we saw at the end of Q1 that posted a 18% total contribution margin. A lot of that's going to come into the labor model, the labor line specifically, that's where we see most of the leverage.

[Andy Barish:]

And then, can you give us an update on, the rewards number is kind of where you are on the journey, personalization and anything you have as other fast casuals have done where maybe there is a digital-only product or something like that, that you're thinking about to activate more rewards members?

[Dave Boennighausen:]

Yes, so one thing we're excited about Andy is, we are seeing increases both in the number of guests that are in the program, which is now above 3.6 million, about 20% above, where we were a year ago. But also, we're seeing increases in the frequency of those guests as they just become more and more engaged and active with the brand. Specific to any type of activities, I actually think there is a good opportunity that with our upcoming introductions, that you might see a particularly good reason for you to be a rewards member of Noodles & Company. So it's something that we definitely think as a vehicle for us to continue to engage with our guests and give them great reasons to be loyal to our brand and look for something I think in the next couple of weeks that maybe fulfills your prophecy.

[Operator:]

And there are no further questions. I would now like to turn the call back over to the management team for any closing remarks.

[Dave Boennighausen:]

Thanks. We appreciate everybody's time. We know, it's an extremely busy earnings season. Very excited with where the Noodles & Company brand is today and even more excited about where we're going in the future. So thanks again for your time and look forward to catching up soon.

[Operator:]

That does conclude today’s call. Thank you for your participation. You may now disconnect.