Noodles & Company Price & Performance (NDLS)

Thank you, and good afternoon, everyone. Welcome to our fourth quarter twenty twenty four 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 annual report on Form 10 ks 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 twenty twenty four 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, would like to turn the call over to Drew Mattson, our Chief Executive Officer. Thanks, Mike, and good afternoon, everyone. We were encouraged by the significant improvement in our sales during the fourth quarter compared to the third quarter and year to date. Especially since it was driven by greatly improved traffic.

As previously announced, system wide comparable sales increased 0.8% and traffic was nearly flat at minus 0.1%. Our improved comp sales trajectory was driven by a number of factors. Including the rollout of three new menu items supported with increased media and a new commercial, called Come Taste the Start of Something Great. Renewed momentum in our third party delivery channel and promotional offers that we ran during the first two months of the quarter. We were especially pleased to see the strongest comp sales performance during the last four weeks of the fourth quarter after our promotional activity had ended. We are also very excited to share that the improving sales have accelerated in the first quarter of twenty twenty five. Through the first eight weeks of Q1, we've delivered comp sales growth over 3% including positive traffic. We've also exceeded the fast casual benchmark on comp sales and traffic each of the last four months. The sustained improvement in our sales trends demonstrates to us that the execution of our previously announced five strategic priorities have started to gain traction. Let me take just a minute and highlight a few of the key dynamics driving our Q1 sales results to date.

Creating a foundation of operations excellence remains our top priority. Building this foundation demands that we be brilliant with the basics of Staffing [indiscernible] and consistently executing the standards that will make us a better competitive alternative. Our restaurant teams have done a great job continuing to make meaningful progress in all three areas. And most importantly, our guests have noticed In January, we achieved our largest single month increase in overall guest satisfaction and as a result have now eliminated almost 80% of our GAAP to the fast casual industry average over the past twelve months. Our second priority is to stimulate more guest desire for noodles Through a combination of compelling limited time offerings, and a comprehensive menu transformation. Our current limited time offering Stake Stroganoff, is really resonating with our guests with menu preference remaining consistently strong since we brought it back in mid January. The premium price point this DISH commands has also helped to build check and maintain margin while we simultaneously reduce discounting well below prior year levels. Additionally, momentum from our three new menu items introduced last October has carried over into the first quarter.

As we prepare for the most substantial portion of our menu transformation in March. The final Q1 dynamic to emphasize is our renewed strength in third party delivery. We are back to double digit traffic growth in this important channel driven by a revised pricing and promotion strategy. Overall, we're very pleased with our comp strength to start the year. This is despite the weather challenges that the industry has faced in February and that we were no exception to. Now let's talk about our continued menu plans for the first quarter. As discussed previously, over the last eighteen months, we approached this menu transformation with equal amounts of innovation and discipline. Phase one 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 developed in partnership with the Culinary Edge in a central location test with both current Noodles customers and non users to ensure their satisfaction with each dish exceeded the average on our current menu. During Phase three, we placed the best new and improved dishes into test locations in three markets, to assess real world guest satisfaction operational feasibility and any potential financial implications.

The first three new dishes from this process were and helped drive the improving Q4 twenty twenty four and Q1 twenty twenty five to date sales trends previously discussed. Next week, we will introduce nine new dishes including five completely new dishes and four reimagine recipes for traditional favorites currently on the menu. In total, nearly two thirds of the menu will be new or improved by the end of the second quarter. Representing the single biggest culinary transformation in Noodles thirty year history. Test market results show a significant across all key dimensions, including overall satisfaction, taste of food, and value In addition, we've been able to extend our reach by attracting new customers at the same time. To ensure our restaurants are prepared to exit [indiscernible] we have also transformed our training process. We added two weeks of additional hands on training before this rollout and two weeks of additional training after the rollout specifically to build confidence and confidence in our frontline teams. New plateware will replace our existing black packaging next week for dine in guests to further elevate their experience. To support the menu launch, we planned significant public relations and earned media outreach starting next week.

While I won't reveal all the specifics of our menu transformation on our call in advance of our comprehensive media loss, I do want to give you two examples. The first example is Mac and Cheese, which is our signature category. Starting next week, we will feature a new mac and cheese menu section on our digital menu boards. Buffalo Chicken Ranch Mac and Cheese is one of the new dishes on this menu. It features elbow noodles and a creamy cheddar and Jack cheese sauce with Parmesan crusted chicken topped with 11 higher than the dish it replaced and 15 points higher than our menu average overall. And nearly 40% more guests ordered the new Buffalo Chicken Ranch Mac and Cheese than the dish it replaced. This is part of a whole new mac and cheese lineup that we will be rolling out in March. The second example is Basil Pasto Cabotapi, which is a fresh new take on one of the oldest and best selling dishes on our menu. We knew we needed to be careful making changes to a dish that so many guests know and enjoy. But we also knew we couldn't settle for good. We need more dishes that are great.

Our in restaurant testing process gave us great feedback on the changes guests really like and the changes we should avoid. This led to multiple recipe revisions leading to a significantly improved dish that both current guests and new guests will thoroughly enjoy. Specifically, we replaced Roma tomatoes with fire roasted tomatoes We also replaced shredded Parmesan cheese with aged Parmesan for a deeper nuttier flavor. We increased the signature basil pesto sauce by 60% and topped it with fresh herbs. The final dish I just described has a Taste of Food score nine points above the current version. In addition, more than 20% of orders for this improved dish are from new guests despite limited marketing support to build awareness. Our new menu does a much better job of delivering against what today's customer wants. And we've developed a new brand strategy and marketing plan to let them know about all of the great changes they can enjoy. We believe we are the only rest across cuisine types. This is what we do and we will do it better than anyone else. This is how we uniquely satisfy our guests' need for craveable comfort food. Which leads to our new brand strategy We Know Noodles.

During the tea phase of our new menu marketing campaign, we are building anticipation and generating buzz about what's coming next. This includes PR, influencer partnerships social media teaser messaging, in restaurant messaging on our digital menu boards, and a countdown clock on our website. During the launch phase, which starts next week, our goal is to make a bold introduction that captures attention and drives immediate engagement. This cross channel approach involves paid media connected TV, Pinterest, digital out of home, and paid social. It will also incorporate a fresh new look to our in restaurant messaging and two new launch commercials that tell the story of who we are as a brand and drive immediate visits to our restaurants. During the sustain phase that starts later in May, we will look to deepen engagement by reinforcing brand affinity through targeted storytelling and also drive repeat visits. To accomplish this, we will double our marketing investment versus last year over the next few months to ensure we elevate awareness and drive both current customers and new customers to our restaurants in our new menu. Finally, we were excited to announce the addition of Joe Cristina as our President and Chief Operating Officer who joined our team in late February.

Joe will succeed Brad West, who announced his retire brand. I especially want to thank Brad for his contributions to our upcoming brand relaunch and ensuring all our teams are ready to execute at a high level. As part of his new role, Joe will oversee operations, and human resources and is our latest investment into the leadership of Noodles following the addition of Scott Davis as our Chief Concept Officer and Steve Kennedy, as our Executive Vice President of Marketing last year. We are excited about the future of Noodles and believe we have the leadership team in place to drive the brand resurgence. With that, I'll turn it over to Mike now to review our fourth quarter results and 2025 guidance. Thank you, Drew.

In the fourth quarter, our total revenue decreased 2% compared to last year to $121,800,000 System wide comp restaurant sales during the fourth quarter increased 0.8% including an increase of 0.5% at company owned restaurants. And an increase of 1.9% at franchise restaurants. Company comp traffic during the fourth quarter decreased 0.1% and average check increased 0.6%. With effective pricing of 1.3% during the quarter. Company average unit volumes in the fourth quarter were $1,310,000 Turning to profitability.

Costs in the fourth quarter was 27.2% of sales a 180 basis point increase from last year.

Our fourth quarter pricing benefit was offset by heavier discounting in the quarter inflation and mix shift.

Labor costs for the fourth quarter 32.3% of sales, which was up 30 basis points to prior year primarily driven by traffic deleverage and discounting. Hourly wage inflation was 2.2% versus prior year which was largely offset by pricing. Occupancy costs were slightly lower versus prior year. At $11,400,000 compared to $11,600,000 in 2023, due to 13 restaurant closures in 2024. Other restaurant operating costs increased by 130 basis points in the fourth quarter to 19.7%.

The increase in other restaurant operating costs was primarily driven by a combination of higher third party delivery fees from higher third party delivery channel sales and higher marketing expenses. Our restaurant level contribution margin was 11.2% down from 14.7% in the fourth quarter of twenty twenty three. G and A for the fourth quarter $11,300,000 compared to $13,900,000 in 2023 primarily due to lower severance and executive transition costs and lower stock compensation expense in 2024. Net loss for the fourth quarter was $9,700,000 or a loss of $0.21 per diluted share compared to net loss of $6,100,000 or a loss of $0.14 per diluted share last year.

Adjusted EBITDA for the fourth quarter was $4,000,000 compared to $7,500,000 in the fourth quarter of twenty twenty three.

In the fourth quarter, we closed six company owned restaurants, One franchise restaurant was opened and three franchise restaurants were closed in the fourth quarter.

Our accelerated rate of closures in the back half of 2024 was a result of our comprehensive portfolio review where we're evaluating closing underperforming restaurants on or before their lease exp [indiscernible] We will continue to negotiate with landlords. And will determine future potential closures on a case by case basis. Our full year capital expenditures totaled $29,000,000 in 2024, compared to $52,000,000 in 2023. The 2024 capital expenditures included capital investments, for 10 new company owned restaurants. Our debt balance at the end of twenty twenty four was $103,000,000 with $19,000,000 available for future borrowings under our revolving credit facility. Turning to our expectations for 2025.

As Drew mentioned, through the first eight weeks of 2025, we have seen positive traffic and over 3% comp sales growth.

We are providing the following full year guidance. Which excludes potential outsized impacts from changes in the macroeconomic landscape including tariffs. For the full year 2025, we expect total revenue of $5.00 $3,000,000 to $512,000,000 including mid single digit comp restaurant sales growth.

Restaurant contribution margin between 12.514% which includes a 100 basis point investment in food costs. As a part of our March menu rollout. G and A expenses of $49,000,000 to $52,000,000 inclusive of stock based compensation expense of approximately $3,700,000 Depreciation and amortization expense of $27,000,000 to $29,000,000 interest expense of $8,000,000 to $10,000,000 We expect to open two new company owned restaurants in 2025.

One new restaurant opened in January with the remaining restaurant scheduled to open in May. We expect to close 12 to 15 company owned and four franchise restaurants in 2025. We estimate total twenty twenty five capital expenditures of $11,000,000 to $13,000,000 With significantly lower capital expenditures in 2025, we anticipate being able to reduce our debt balance.

In the back half of the year. For further information regarding our 2025 expectations, please see the Business Outlook section of our press release. With that, I would like to turn the call back over to Drew for final remarks. Thanks, Mike. It is an exciting time for Noodles Noodles.

As the improvements we have seen through 2024 set the stage for a transformational 2025, Our comp momentum to start the year sets a strong foundation for our brand relaunch As we work to become more relevant to what today's consumer is looking for. We know the strengths of our brand and we are leaning into them. With what we have planned over the coming months, we will leave no doubt that we know noodles Thank you for your time today. Operator, please open the lines for Q and A. Thank you. We will now be conducting a question The first question is from Andy Barish from Jeff Please go ahead. Hey, guys. Good afternoon. Wondering what areas you're kind of seeing the most move [indiscernible] twenty twenty five Drew and how how that's kind of informing some of the upcoming decisions Yes. The main things that we've seen is significant improvement in the areas that are most directly related to driving traffic growth. So we know when we've studied this, that overall satisfaction improvements lead to traffic growth and taste of food in particular drives overall satisfaction. So we've been focused a great deal on overall satisfaction, taste of food and accuracy.

In particular. And all of those have sewn significant improvement in addition to value because we're delivering more of what today's customer wants.

Got it. And then Mike, any help on it sounds like store sales are going to start out around three ish for the current quarter and then obviously the new menu stuff is is kind of ramping here late in the quarter and then in the 2Q, how should we think about kind of getting to the mid single digits for the full year?

Sure. And like you said, first quarter we're tracking it over 3%, which is a great start before our menu rollout. As we go into the second quarter, just not a huge impact, but we do have an Easter shift that will hurt the help the first quarter and hurt the second quarter by about 50 basis points.

The second quarter was our toughest comp or is going to be our toughest comp.

That's when we had stick stroganoff and some really strong sales last year. So we're anticipating that most of the benefit or outsized portion of the benefit for to get to mid single digit same store sales growth will come in Q3, Q4. Okay, very helpful. The next question is from Jake Bartlett from Truist Securities.

Please go ahead.

Great. Thanks for taking the question. My first is kind of a nitpicky question, maybe a follow-up question as well. But it has to do with the coordinate trends. I think over 3% obviously very strong and you made the comment that February and the weather was had a negative impact. How much how if you can maybe quantify kind of where comps were in the last three weeks? I just want to make sure I understand where they need to kind of improve back to. And then also just your confidence that that it was weather. I know that's been the case for competitors, but I think most are also acknowledging that there's a macro environment that's a little bit worse than we thought it might be a month ago. So how can you how are you parsing out weather? And then maybe what is the kind of the actual state of same store sales currently?

Sure. We don't want to get into a month by month breakout. But just as a reminder, January of last year was tough weather for us and we saw like everybody has seen some tough weather in February this year.

Would say we feel strongly that the 3% plus 3% we're seeing in Q1 is a sustainable number. It's not something that's being impacted or aided on a permanent basis by weather So if we look at the non weather weeks, the plus 3% is pretty representative of how the quarter is going.

Okay, great. And then then also just 2025 is doing an interesting year with such a big change to the operations into menu. One part of the question is what the impact on margins is going to be in the near term. In the next quarter or two as well as for the year. And you quantified, I think, 120 basis points of food costs related to the menu rollout. It also sounded like you're going to be doubling advertising, doubling marketing as you there's training that you're investing in kind of before and after What is the all in on the kind of the abnormal impact of the rollout on the margins?

Yes.

And I'll take the marketing side of it. First, we are significantly increasing our marketing investment this year during the launch for a few months for several months compared to the prior year, just to make sure everyone knows what a big change we've made, how excited we are about it, what a difference it's going to make in the guest experience. But for the full year, the increase in marketing investment is is more modest. We're really able to increase a our spending a great deal early on by shifting spending that in 2024 was more related to testing, more related to spending with the culinary hedge, with concept testing, with central location testing, that we aren't having to do this year. We're putting all of that a lot of that into the launch of the menu drive awareness and drive people into our restaurants. But for the full year, It is up, but it's more modest. [indiscernible] Yes.

Just going to address the other items.

We talked about the 100 basis point investment in food costs. We guided a margin in between 12.514%, which shows the mid single digit comp sales growth overcoming that investment and achieving flat to growing margin year over year The other investments on an annual basis don't come close to the 100 basis point food investment in our are not substantial when you look at it on a full year basis.

Got it. And just to understand the 100 basis points in food investment, is that permanent meaning you're investing in quality in the menu and that's going to remain? Or is this something that has to do with the rollout and is kind of more temporary maybe with some don't know, related marketing and giveaways or something like that that would change your impact COGS or is this a permanent kind of investment in the quality of the food?

Yes. No, the vast majority of that is a permanent investment in in the quality of the food. And we believe it's a tremendous investment because we've seen such a big improvement in guest satisfaction across the things that we think are most important. To building loyalty and building the business. So it is an investment, a permanent investment, and we think it's going to be a tremendous one to build excitement, to build guest satisfaction, to build our business going forward in a very sustainable way.

Okay, great. I appreciate it. Thank you.

This concludes the question and answer session and today's conference call. Thank you for your participation in today's conference. You may now disconnect.