Noodles & Company is spending approximately $10 million to roll out digital menuboards across its system this year in what CEO Dave Boennighausen called a “transformative investment” for the fast-casual chain.
He illustrated the impact digital menuboards already are having in some stores during the company’s Q4 and full-year earnings call.
“During the holiday season, we leveraged these boards to promote gift cards more actively, resulting in gift card sales at restaurants with digital menuboards that were double of those without,” Boennighausen said. “Additionally, digital menuboards afforded us the flexibility to quickly implement changes to featured menu items and in pricing.”
Stores with digital menuboards are benefiting from a 50 percent lift in “Make it a Meal” orders, where customers add a drink and either a side or dessert item, he added.
“We’re also seeing something similar in terms of LEANguini, because we’re able to be much more compelling with how we communicate that messaging,” Boennighausen said. “Digital menuboards aren’t necessarily new in the restaurant space. It’s all about how you use them.”
The menuboards are just part of the brand’s growing emphasis on digital capabilities. Over 54 percent of Q4 sales came through digital channels, up 11 percent from the same period a year ago. Noodles & Company’s loyalty program has grown to 4.5 million members and now accounts for a quarter of sales across the system.
“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 guests,” Boennighausen said.
He said staffing levels have improved across the system, and general manager turnover rates have improved by 30 percent year-over-year. The labor situation is bolstering guest metrics such as friendliness and taste of food, and average cook times in 2023 are so far around 45 seconds better than they were at the end of 2022.
Noodles & Company also has rehired the consulting firm Profitality to optimize its labor model. It worked with the firm several years ago to examine nearly 500 tasks completed at stores throughout the day. The result of that project was a 10 percent reduction in crude labor hours. Now, it is working with Profitality to reevaluate how it can streamline operations in a post-COVID, off-premises-centric environment.
Noodles & Company had a challenging fiscal year but a strong Q4. It reported a net loss of $3.3 million for fiscal 2022, compared to a net income of $3.7 million in fiscal 2021. Net income in Q4 was $1 million, up from a net loss of $4.7 million in the same period a year ago. Same-store sales in Q4 increased 10.2 percent for company-owned restaurants, 1.3 percent for franchise restaurants, and 8.7 percent system-wide. Company-owned AUVs were $1.38 million.
Margins also improved in Q4 after taking a hit from significant cost increases earlier in the year. While full-year restaurant level margin contribution decreased 200 basis points to 13.9 percent, Q4 restaurant level contribution margin improved 280 basis points to 15.2 percent. Q4 operating margin was 1.3 percent, up from 1.2 percent in Q3 and -3.8 in the same period a year ago.
“This improvement was the result of meaningful leverage in our labor, occupancy, and operating expenses,” CFO Carl Lukach said. “While cost of goods sold increased 100 basis points versus the prior year on a sequential basis, cost of goods sold benefited from more normalized chicken prices and improved 120 basis points relative to Q3 of 2022.”
Higher prices for chicken alone caused a 300 basis-point reduction in margins early last year. Prices soared as an outbreak of avian flu forced many poultry processors to destroy flocks. The company temporarily added a surcharge for dishes with chicken, which typically account for around half of all orders.
Boennighausen said the margin expansion that Noodles & Company delivered in Q4 will extend throughout 2023. The company has contracted the majority of its food basket on either fixed or formula-based pricing, including full-year fixed-pricing contracts for chicken, which accounts for nearly 20 percent of its overall food spend.
“These 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,” Boennighausen said. “For 2023, we anticipate our costs of goods in the high 25 percent area, driven by 2 percent commodity deflation.”
The normalization of cost of goods sold is expected to add around $10 million in EBITDA growth this year, he added.
Menu prices at Noodles & Company were around 9 percent higher in Q4, a result of actions taken earlier in the year. The company took an additional 5 percent of menu pricing in February, which is expected to result in Q1 menu pricing just above 10 percent.
The price increases haven’t had an impact on consumer trends. Boennighausen said traffic was up in Q4 and hasn’t shown any signs of slowing down in 2023.
“Looking at the health of the consumer, we’re seeing that frequency of our guests is stable, if not improving,” he said. “We’re not really seeing any trade down within the menu, In fact, the mix is actually positive.”
Noodles & Company ended the year with 461 units, including 368 company-owned stores and 93 franchised stores. It added 16 new company-owned restaurants and three franchised restaurants in 2023.
Three restaurants have opened so far in 2023, with seven restaurants under construction and slated to open in Q2. The company is targeting approximately 7.5 percent new unit growth for the full year. The majority of the new locations will be company-owned and will open in the back half of the year.
“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,” Boennighausen said.