CEO Dave Boennighausen believes Noodles & Company is uniquely positioned to be a clear winner in the post-COVID environment.
But you don’t have to take his word for it—the brand is literally putting its money where Boenninghausen’s mouth is. In Q1, company-owned AUVs finished at $1.17 million, good for a 6.1 percent increase compared to 2019 and a 12.7 percent lift versus 2020. The trend amplified even further to begin Q2 as company AUVs rose to a record-breaking $1.35 million in the first four weeks of April, a nearly 13 percent increase compared to 2019.
Same-store sales increased 10.7 percent systemwide in the first quarter—10.5 percent at company-owned locations and 11.7 percent at franchises.
“While we recognize that there remains uncertainty surrounding COVID and that the industry is likely benefiting 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,” Boennighausen said during the chain’s Q1 earnings call.
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In late February, Noodles released accelerated growth objectives, including annual unit growth of at least 7 percent beginning in 2022 and quickly reaching 10 percent annually thereafter. That leads Noodles on a path toward at least 1,500 stores nationwide. The chain is also seeking AUVs of $1.45 million and restaurant-level margin of 20 percent by 2024.
There’s three main strategies fueling those objectives, one of which is a continued focus on digital channels. Noodles achieved record-high digital sales in March, and proceeded to reset the mark again in April. Digital sales grew 110 percent in the first quarter compared to last year, and accounted for 62 percent of sales. The brand maintained a digital mix of 57 percent in April, which is even more impressive considering dine-in sales recovered to 60 percent of pre-COVID levels during the month.
Additionally, the brand’s rewards program now includes 3.6 million users—a 20 percent bump year-over-year.
“As we strengthen our digital assets, we’re reaping the benefits of increased data and guest insights from our rewards program,” Boennighausen said. “Frequency among our rewards members is growing and we are seeing increases in both our overall brand awareness as well as conversion from trial to repeat guest. We still believe we are in the early innings of utilizing data to create more personalized, targeted engagement with our guest and we are excited at the opportunity to further harvest these insights to optimize our marketing strategy on our path to a $1.45 million of unit volumes.”
Delivery mixed 30.9 percent in Q1. Roughly 25 percent of that is from third-party delivery and about 4 percent comes through Noodles’ native channels. While the channel declined as a percentage of sales, absolute daily volumes remained steady through Q1 and the first part of Q2. The increase in delivery sales continues to put pressure on the P&L through delivery fees, but Boennighausen said the company has mitigated much of that pressure by balancing the P&L, particularly in labor. Noodles expects the impact of delivery fees on its overall margin to moderate as delivery normalizes as a percentage of sales.
The company views delivery as a way to increase awareness in newer and less saturated markets, which feeds into another key strategy—ramping up unit growth. Restaurants that opened in 2019 and 2020 are still the best-performing classes in the history of the company and are well above the company average in terms of AUVs and restaurant-level margin. Much of that group features drive-thru pickup windows on a slimmer footprint, which have met the growing demand for speed and convenience.
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“We believe the brand’s improved menu, digital and off-premise strengths, evidenced by the performance and economics achieved by our most recent classes, have Noodles & Company well-positioned to attract prospective franchisees as well as achieve our company growth objectives, and we are extremely excited with the unit growth opportunity ahead of us,” said CEO Dave Boennighausen.
Noodles expects 10 to 15 systemwide openings in 2021, including two to four franchises. More restaurants are coming to South Carolina, which will mark Noodles’ first new franchise territory in several years. Company restaurants will comprise the majority of openings during the next few years, with a goal of at least 50 percent coming from franchisees starting in 2024.
The brand anticipates that at least 70 percent of its 2022 pipeline will include an order-ahead window. Additionally, two ghost kitchens are scheduled to debut later in Q2. Boennighausen said the ghost kitchens will open in “dense, residential urban” areas.
Noodles ended Q1 with 448 stores systemwide, including 372 company-run restaurants and 76 franchise stores. Six corporate units closed in Q1. Each shuttered unit was underperforming even as sales recovered across the system, and many of them were in undesirable locations. The company currently anticipates only one additional permanent closure through the rest of 2021.
“We believe the brand’s improved menu, digital and off-premise strengths, evidenced by the performance and economics achieved by our most recent classes, have Noodles & Company well-positioned to attract prospective franchisees as well as achieve our company growth objectives, and we are extremely excited with the unit growth opportunity ahead of us,” Boennighausen said.
Noodles’ third strategy toward its accelerated growth objectives is rooted in menu innovation. Boennighausen noted that the chain’s current test of Tortelloni has been the best-performing test in his 17 years at the company. The brand has used the past few months to optimize the offering, operational procedures, and marketing strategy behind Tortelloni. The innovation is expected to roll out nationwide later in Q2. In the first quarter, Noodles introduced the low-carb, gluten-free Cauliflower Gnocchi nationwide, and so far, the item is outperforming its results in test.
The restaurant’s mix of healthier menu items is now at 14 percent, a significant uptick from a just a few years ago, the CEO said.
“We continue to believe there remains meaningful upside to our healthier platforms, and are currently innovating around improvements to our salad and vegetable noodle offerings,” Boenninghausen said.
The biggest potential obstacle appears to be labor pressures, but Boennighausen said Noodles has that under control. Labor was 31.8 percent of sales in Q1, a 290-basis-point improvement year-over-year. That was driven by labor model efficiencies through Noodles’ kitchen of the future initiative, particularly a reduction in front-of-house hours.
Management turnover is roughly half of what it was a few years ago, as well, the CEO noted.
“We feel like we’ve got a great pipeline and a culture that supports a lot of retention,” Boennighausen said. “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 a better position than most of the industry given just the strength of our team below.”
Total revenue was $109.6 million in Q1 compared to $100.3 million last year. Net loss was $2 million, or $0.04 per diluted share, compared to net loss of $5.8 million, or $0.13 per diluted share, in Q1 2020. Adjusted EBITDA was $6.3 million compared to $1.8 million last year.
