Noodles & Company (NASDAQ:NDLS) Q4 2022 Earnings Call Transcript

Noodles & Company (NASDAQ:NDLS) Q4 2022 Earnings Call Transcript March 8, 2023

Operator: Good afternoon and welcome to today’s Noodles & 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 & Company’s Chief Financial Officer, Carl Lukach. You may begin.

Carl Lukach: Thank you and good afternoon, everyone. Welcome to our fourth quarter 2022 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 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 statement 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 risk and uncertainties related to the company’s forward-looking statements. I’ll refer you to the documents and the company’s 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. Each documents contain and identify important factors that could cause actual result 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 reconciliation of such forward looking non-GAAP measures to GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable effort. The corresponding GAAP measures are not acceptable on a forward-looking basis.

Now I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Dave Boennighausen: 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 top-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 P&L, and we successfully open 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 cause improvement of roughly 200 basis points are in 2023 relative to last year, equating to approximately $10 million of EBITDA expansion for that line item alone.

As we look ahead, we believe that it’ll the company is well positioned for significant growth in 2023, driven by continued top-line expansion, supported by strength and digital and loyalty, a normalized cost of goods sold environment, identified efficiencies and multiple expense areas, continued improvement in staffing operations, and our strong unit pipeline. I would first like to start with our strengthened digital and our rapidly growing rewards program. As we’ve discussed in the past, news and company’s residence 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 grow 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 broad access to the front end fostered increased engagement with our guests, and supported meaningful growth and our newest rewards program. The news rewards program now accounts for nearly 25% of our sales. And we completed 2022 was 4.5 million members a 12.5% increase over 2021. We continue to leverage the rewards program to gain valuable insights about guests behavior, become more targeted with our messaging, and develop deeper relationships and loyalty with our guest. We feel there remain significant opportunity in digital and during 2023, we will bolster the strength through both investment and 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 linguini noodle has resulted in a menu that offers guests a wide variety of fresh craveable major order dishes that meet a broad range of lifestyle needs. Consequently, our focus in 2023 is to leverage our digital assets, both through webinar channels, as well as through digital menu boards to better highlight and showcase the meaningful strengths on menu as well as communicate key marketing opportunities. As an example of the potential for digital menu boards. During the holiday season, we leverage 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 afforded 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 spend. He’s 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 are many simplification and equipment optimization.

Supporting our efficiency initiatives will be the continued strengthening and our people in operations metrics. We remain in 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 the prior year. Improve staffing has yielded meaningful improvement in guest metrics such as friendliness, taste of food, and overall net promoter score. While average cup times thus far 2023 are nearly 45 seconds better than what they were just a few months ago. While the strength of our people is essential to maintain momentum at our existing restaurants. They’re also critical in the continued success of our recent new restaurant classes.

As you mentioned last quarter, our new restaurants continue to have strong performance. Our 2019 and 2020 cohorts, which have entered our cost 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 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 competence and 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 lease end where we believe we’re not well positioned for current customer trends, or their future relocation candidates. For contacts in 2022, we close five locations, which represents a typical year for the center 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% of 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 and future years, encouragingly, we have already 21 locations under lease or at 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 tail winds. Our comparable restaurant sales continue to be strong as we leverage the core strength of our menu, the ongoing benefit of our digital ecosystem and the concepts 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.

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Carl Lukach: Thank you, Dave, and good afternoon, everyone. During the fourth quarter system-wide, comparable restaurant sales increased 8.7%, including 10.2% at company owned restaurants and 1.3% at franchise locations. On a two-year stack basis, fourth quarter company owned and franchise restaurant sales increased 19.7% and 22.1% respectively. Entering 2023 we’ve continued to see top line strength, even as comparables have become more difficult following the Omicron lap in January. Overall, we anticipate company comparable restaurant sales of high single digits for the first quarter of 2023, driven by the momentum we have in the business and our strong January results. Pricing during the fourth quarter was approximately 9% related to pricing actions taken during the first half of 2022.

In February of 2023, we took incremental price of approximately 5% across our core menu, which we expect to result in first quarter pricing just above 10%. We do not anticipate any additional pricing this year unless there is a meaningful change in the economic environment. Our fourth quarter revenue increased 18.9% to $136.5 million compared to last year, driven by strong comparable restaurant sales growth and revenue generated from units open since 2022. We estimate that revenue was favorably impacted by approximately $9 million related to the 53rd week in the fourth quarter with the extra week of sales mostly offset by an extra week of cost and expenses. Average unit volumes grew to $1.38 million for the fourth quarter. For the first quarter of 2023, we anticipate total revenues to range between $125 and $128 million.

For the fourth quarter restaurant level contribution margin was 15.2%, a 280-basis point increase compared to last year. This improvement was the result of meaningful leverage in our labor, occupancy and operating expenses. While cost of goods sold increased a hundred basis points versus the prior year on a sequential basis, cost of goods soul benefited from more normalized chicken prices and improved 120 basis points relative to the third quarter of 2022. Looking ahead, we have contracted the majority of our food baskets on either fixed or formula-based pricing, including full year fixed pricing contracts for both grilled chicken and parmesan chicken. For 2023, we anticipate our cost of goods sold percentage in the high 25% area driven by 2% commodity deflation, and including cost of goods sold in the 26% area for the first quarter.

Labor costs for the fourth quarter were 31.2% of sales improving 200 basis points compared to last year. During the quarter the benefit from labor efficiencies and the rollout from steamers was partially offset by wage inflation of nearly 11%. While wage inflation is moderating, we anticipate elevated levels will continue throughout 2023. As a result, we expect our labor expenses as a percentage of sales in 2023, including the first quarter, to be fairly consistent to slightly higher than the labor costs we saw in 2022. Other operating costs for the quarter were 17.9% of sales compared to 18.4% last year, reflecting strong sales leverage throughout our restaurant expenses. We anticipate that restaurant level expenses will remain relatively consistent versus prior year in 2023.

Occupancy expense for the fourth quarter was 8.9% of sales compared to 10.1% last year driven by sales leverage. We anticipate continued leverage in our occupancy expense throughout 2023 to further support margin expansion. Overall, we expect our contribution margin in the first quarter to be in the range of 12.5% to 12.8%, roughly 300 basis points higher than prior year, driven by improvements in cost of goods sold, and leverage and occupancy expense. As a reminder, the first quarter is our seasonally lowest quarter of the year. So, we expect higher quarterly margins for the balance of the year relative to Q1. For the full year 2023, we anticipate restaurant level margins between 16% and 17%. G&A for the fourth quarter was $13.7 million, compared to $11.4 million in 2021 with the increase driven by the 53rd week.

G&A included noncash stock-based compensation of approximately $1 million during the fourth quarter, compared to approximately $700,000 last year. For the first quarter of 2023, we anticipate G&A up $13.5 million to $14 million, including stock-based compensation of $1.4 million. This compares to G&A of 11.8 million last year, including stock-based compensation of $1.2 million. The largest driver of the increase is the assumption of an accrued bonus at Target, following reduced bonus expense in 2022. GAAP net income for the fourth quarter was $975,000, or $0.02 per diluted share, compared to a net loss of $4.7 million last year, or negative $0.10 per diluted share. Non-GAAP diluted earnings per share was $0.03, compared to a negative $0.05 last year.

Please refer to our earnings release for reconciliations of non-GAAP measures. For the full year 2023, we expect adjusted EBITDA of approximately $45 million to $50 million and adjusted EPS of $0.10 to $0.20. Our 2023 guidance is based on a more normalized commodity environment, where we have contracted fixed rate prices on chicken. The commodity environment alone is expected to support nearly $10 million of EBITDA growth compared to 2022. Additionally, our guidance anticipates continued sales leverage across the P&L, particularly in occupancy. It is also important to note that our guidance assumes no material changes in consumer behavior, or broader macroeconomic trends. For further detail on 2023 expectations, please refer to the supplemental information in our fourth quarter earnings release.

Turning to the balance sheet, at quarter end, we had cash and cash equivalents of $1.5 million and a total debt balance of approximately $47.7 million. We maintain nearly $75 million of incremental liquidity available for future borrowings under our amended credit facility. For the full year, we expect $53 million to $58 million of capital expenditures, which includes approximately $9 million to $11 million during the first quarter. We anticipate a majority of our capital investment or support new unit growth. In addition to continued innovation of our website, mobile app and digital capabilities. Our capital plan also includes the investment of a full digital menu board rollout and upgraded network capabilities in all of our locations by year-end.

With that, I would like to turn the call back over to Dave for final remarks.

Dave Boennighausen : Thanks, Carl. We’re proud of the progress that we’ve made in the fourth quarter of 2022, including double-digit company comparable sales 280 basis points of margin expansion, and a $5 million increase in EBITDA year-over-year. As we look at the three levers of earnings growth, comparable sales growth, margin expansion, and unit growth, we feel confident that each of these have meaningful tailwinds as we’ve entered 2023, and we look forward to sharing with you our progress throughout the year. Thank you for your time today. And please open the lines for Q&A.

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Q&A Session

Operator: And our first question comes from Joshua Long from Stephens. Your line is now open.

Joshua Long: Great. Thanks for taking my question. Exciting to see the momentum in the brand and hear that it has continued thus far into 1Q. You mentioned strong January trends. And just as we work through kind of the high-level thought process of just the pushes and pulls over the last couple years. Is that something that you’d be willing to quantify it at this point in time?

Dave Boennighausen: I’m sorry, I actually miss the question to push the what Josh?

Joshua Long: Yeah, just trying to get some sense of how strong January was. You call that the strength into the beginning of the year? And obviously, you’ve got some good high single digit comps on Dec for 1Q. Just curious if you should be willing to add a little bit more texture to January trends?

Dave Boennighausen: Yeah, absolutely. What was I think exciting, Josh, is that the faster sales, even as you go back through Q4 was actually pretty consistently strong, all the way across the full Q4 from October all the way through December and then into January. What’s certainly we’ve seen it through the industry, that there was the lap of Omicron, which led to particularly strong results in January. But as we look at the momentum in the business today, it hasn’t skipped a beat as we look at February. And while it’s still premature to say what ultimately the assumptions will be for the balance of the year in terms of economic conditions. We’re very pleased with what we’ve seen, even as we’ve laughed Omicron, not just in our performance, but in the current health of the consumer.

And I’ll tell you a few areas we look at Josh from you know how we expect trends to go forward. Looking at the health of that consumer, we’re seeing that frequency of our guest is stable, if not increasing. Second, we’re not really seeing any trade down. So as the consumer potentially would be under pressure, we’re not seeing any trade down within the menu. In fact, what’s next is actually positive. And even in the consumer channels, another avenue we look at to see the health of the business even as we lap some of the benefit of Omicron, we continue to see really good momentum across all those channels, including higher price channels such as delivery. So overall, yes, January was a little bit stronger than you saw maybe through the full Q4 as well as in February, but overall the health of the business extremely strong.

Joshua Long: Thanks, very helpful. When we think about kind of the components of the comp, perhaps you mentioned it in your section, Carl, if so I missed it. But could we walk through kind of the price mix I mean Dave you just called out, that that mix was positive but can you talk through the price mix components there what you saw kind of on the traffic piece in the quarter and then as we think about the pricing you have in place for, that you’re going to take here in February, if you didn’t take any more, which is in line with the plans you outlined, how does that pricing flow over the course of the year? Or how does that fall off as we get to the back part of 2023?

Carl Lukach: Sure, Josh, I’ll start with the fourth quarter. So fourth quarter pricing was approximately 9%. Most of that was relative to actions that we took during the first half of 2022. And you are correct, as you pointed out in February, we did take an incremental price of 5%, across the menu. So when you think about the pricing decisions that we made last year and that rolling off, the back half of 2023, we expect that to be in mid-single digits from a pricing perspective.

Joshua Long: Got it. That’s helpful. And then one last one for me. When we think about some of the strength in the new unit performance that you called out, how do you think about that? I mean, is that a function of just knowing where that consumer is, what the sites are that you like? I mean, talk about some of those recent classes, the strength you’ve seen there and what you’ve learned as you have optimized new unit development as the variant?

Dave Boennighausen: Yes, so as a reminder, what we discussed was that the class of 2019 and 2020, as they’ve entered the central sales base, their average unit volumes in Q4 were above company average. Their margin was actually 200 basis points below are above — I’m sorry, above the company average. So what that’s done is it’s validated that a lot of the work we were already doing, even before pre-COVID, before COVID environment, whether it be the smaller square footage, pick up windows, incorporating digital into many of our new restaurants, those are all paying dividends in terms of that overall shift towards off-premise and digital that we were doing even as we entered COVID. As we’ve now gone through COVID and seen how the brand has been able to be resilient and showcase its strength, actually give us even more confidence in terms of — the learnings we’ve had certainly you see continually less reliance on office generators, on retail generators, more so on residential.

And that’s right in the heart of where the Noodles Company portfolio is and where our straits are. So suburban restaurants, higher income, little higher education with that smaller square footage, off-premise oriented footprint, most of which have that order head pickup window just gives us continued confidence that the pipeline that we have, which is now considerably strengthening, for sites for the back half of €˜23 and beyond, will continue to be a very strong high return on investment class.