Noodles & Company's introduction of Zoodles continues to lift the brand almost six months after its launch. Not only is the healthy menu option attracting customers back into the restaurant, it’s also contributing to a steady and healthy growth in sales for the company.
On October 23, Noodles & Company reported its second straight positive sales quarter after a negative streak that ran back to Q1 of 2015. An increase of $2.5 million in the third quarter, or 2.2 percent, brought total revenue to $116.7 million compared to $114.2 million in Q3 of 2017. The fast casual saw system-wide comparable sales growth of 5.5 percent with a 5.2 percent increase for company-owned restaurants and a 7.6 percent increase from franchise locations. The brand bumped comps 5.4 percent in Q2 to start the positive momentum.
Even though the brand gained $1.1 million in this quarter versus a loss of $8.3 million in the year-ago period, the results dipped shares of Noodles & Co. as much as 20 percent on the stock market, proving that expectations are rising along with sales.
“At company-owned restaurants, comparable sales include 2 percent traffic growth, 2.5 percent of price, and 0.7 percent benefit from menu mix shift,” said Dave Boennighausen, chief executive officer of Noodles & Co. “Our positive menu mix shift is our first in several quarters and is attributable to the success of our zucchini noodle introduction.”
Customers perception of the brand shifted after the introduction of the Zoodle. With the new healthy option in tow, Noodles was able to erase one of its most-pressing veto votes over the years.
“For years, the company struggled with the perception that noodles and pasta are unhealthy for you, due to the relatively high amount of carbohydrates in our core dishes,” Boennighausen said. “The zucchini noodle has allowed us to address this concern, with a platform that tastes great, affirms our authority on noodles and honors the heritage of the brand. We continue to view the zucchini noodle as the first step on our path of creating a platform of better-for-you flavorful dishes, and also believe there remains significant opportunity to build awareness and trial of the zucchini noodle itself.”
“From the decay curve perspective, which you'll typically see with the new item, we have not seen that with zucchini, which is one reason why we didn't pivot away from it,” he said. “We continue to reinforce it during Q4 of this year, and still think there's a lot of legs left in that.”
The company is continuing to test out healthier menu items. Earlier this month, it introduced a new Zoodles dish, Zucchini Indonesian Peanut Sauté.
“Of our 2 percent traffic increase in Q3, we believe that the benefit has resulted almost equally from our culinary, off-premises, and operational initiatives. I'll begin with our culinary initiatives, which of course, have been led by the successful launch of our zucchini noodle this May,” Boennighausen said.
It’s important to remember Noodles & Company swung a net loss of $37.5 million in fiscal 2017 and closed over 55 locations. Boennighausen said the growth in Q3 of 2018 reflects the benefit of comparable sales growth offset by the closures of 14 restaurants since Q3 of 2017, including closures—three shuttered during Q3 of this year. The company is expected to see an additional four or six more locations close this year.
Changes for the overall dining experience are expected to come in the near future as well. Diners will see Noodles & Company shifting into two different restaurant models leading to a better experience for customers and less spending for the brand when opening a new location.
“If you look back to a few years ago, when the company was building 50 to 60 restaurants a year that's not something that I would see in our near future,” Boennighausen said. “So, we'll be pretty disciplined with our approach, don't think you'll see us to have substantial increase in debt, actually I think it'll be free cash flow positive in 2019.”
Restaurants will take up less square footage shrinking from more than 2,500 square feet to less than 2,000 at new locations. Boennighausen said Noodles and Company simply doesn’t need as much square footage in its restaurants. The increase in off-premises dining options is also attractive to the brand. Between delivery and pickup windows at stores, the smaller store footprints make sense for the company.
“I think, that the zucchini has been the most powerful to me, because what it allowed us to do is really bring back a lot of lapsed users that really enjoyed the brand, but they felt like they haven't been able to use us for a while,” Boennighausen said. “That's one I think is ultimately the most powerful [initiative] and redefining the brand. But I don't want to shortchange the impact that off-premises and operational improvements have had on the business.”