Noodles & Company Spirals its Way Back to the Top

Despite a challenging year, Noodles & Company expressed optimism throughout the back end of fiscal 2017. Between off-premises, improved brand communications, employee investment, and yes, zucchini noodles, executives saw a path to reroute the 469-unit chain’s downward momentum.

That comeback arrived swiftly in the second quarter.

For the first time since Q1 of 2015, Noodles & Company reported a positive same-store sales quarter, and its best overall performance in six years. But comps didn’t just eclipse a positive threshold, they soared past it. Same-store sales rose 5.4 percent systemwide, year-over-year, including 5 percent at 404 company-run stores and 8 percent at 65 franchised units. Traffic at corporate units was up 3.1 percent, which was also marked the highest growth for the brand in six years. Average-unit volumes hiked $27,000 to $1,092,000 in the quarter compared to the prior-year period. Total revenue increased 4.1 percent to $117.4 million from $112.8 million.

Dave Boennighausen, chief executive officer of Noodles & Company, said in a July 18 conference call that, “Clearly, we are encouraged by recent performance, which was a result of the momentum already seen from the work over the past several quarters, as well as key initiatives that were launched during Q2.”

To grasp the turnaround, here’s a snapshot of recent results for Noodles & Company, a brand founded in 1995 in the Cherry Creek neighborhood of Denver. Even in Q1, when the chain shared a positive narrative, comps fell 0.2 percent across the system, with a 0.3 percent decline at company-run units and a 0.9 percent hike at franchised. This after a fiscal 2017 where Noodles & Company shuttered 55 restaurants in the first quarter alone, and reported a net loss of $37.5 million for the year.

Here’s a comps breakdown for fiscal 2017:

Q4: –0.9 percent
Q3: –3.5 percent
Q2: –3.4 percent
Q1: –2 percent

In discussing the turnaround, Boennighausen went right to those aforementioned zucchini noodles, which hit menus nationwide in early May. The Zoodles ended up performing even better in launch than in pilots, he said. Noodles & Company tested the product for nearly nine months prior, originally at the operational level and then moving it to consumer tests. Baltimore and some smaller areas received positive marks. Not quite to this extent, however.

Boennighausen said guests are ordering the Zucchini Romesco dish, which was the test product, but are also substituting Zoodles into other popular dishes at a significant rate, “testifying to the versatility and the broad appeal of the zucchini noodle.” He added that Noodles & Company didn’t use any significant discounting, “giving us confidence it its ability to sustain strong performance in the coming quarters.”

Paul Murphy, Noodles & Company’s executive chairman, said the company is viewing Zoodles as a platform with long-term, incremental potential. In the fall, for example, expect the chain to reinforce the platform with new dishes that feature zucchini noodles.

“There could be several other items vegetables and even fruit that can fall into that line and taste great, and I think that's one of the main reasons zucchini has been so successful is you're not sacrificing taste in order to have something healthier,” Boennighausen said.

"We will continue to invest in and test potential solutions that elevate our ability to meet the need for convenience in today's marketplace." — Dave Boennighausen, chief executive officer of Noodles & Company.

One of the key goals of the launch was always to erase the veto-vote with guests who didn’t want a high-carb noodle dish. Boennighausen said early data shows an increase in frequency from loyal guests, as well as an influx of lapsed users who “have come back to the brand” since the launch. While gleaning data from the rewards program is still in the early stages, Boennighausen said the heightened social media response has been telling.

“We're seeing that veto vote has been lifted. And I'm also seeing light users that are coming more often that feel they don't have to worry about potentially too heavy of a carb load, if you will,” he said.

Cost of goods sold lifted 20 basis points in the quarter to 26.7 percent due to the success of zucchini noodles, which carry a higher cost of goods sold in the balance of the chain’s menu. The company also had a one-time investment in the initial training and preparation of Zoodles.

“I think it's really beginning,” Murphy added. “We're just … opening doors to people to really kind of re-ID the company and what Noodle stands for. While Zoodles have been, very obviously, very effective and we love the results, we think it's just the beginning of the ability to have a brand that has a better for you but also tastes great at the same time. And we think there are kind of infinite possibilities in the R&D against that.”

When the brand launched the product, it also implemented a fresh look and feel to its menu boards, welcome wall, and digital ordering platforms. Plateware was updated, as were colors and design elements in its communications.

Noodles & Company’s improvements extended to additional areas of the business as well. The chain installed the initial version of its quick pick-up shelving units earlier in the year, which coincided with additional investments in its rewards program and digital marketing strategy. Total off-premises sales during Q2 increased 370 basis points over the prior year to 50.4 percent of sales. Also, sales derived from online ordering, then subsequently picked up in restaurants, hiked 620 basis points to 14.3 percent of sales.

“We will continue to invest in and test potential solutions that elevate our ability to meet the need for convenience in today's marketplace,” Boennighausen said. “From operational procedures that enable execution of off-premises to enhancements to our interior merchandising that will improve and facilitate the guests experience to utilizing technology to remove friction for our guest.” One example is the call center Noodles & Company started to use for off-premises occasions.

Noodles & Company’s has room to grow with delivery. The company went north of 15 percent of onboarded stores in Q2 and believes it can accelerate to 50 percent in relatively short order, Boennighausen said.

As for growth, Noodles & Company closed six company stores in the second quarter due to “normal course of business activities, where we are approaching the end of the lease and believe the trade area has shifted.” Boennighausen said the 2017 class of restaurants is performing better than any class in several years. The company doesn’t expect to open any additional units in 2018, and is “working to develop a disciplined approach to more meaningful unit growth commencing in the back half of 2019.”