Noodles & Company opened seven new units, five of which are company-owned, during Q1, bringing the brand one step closer to its goal of 1,500 units systemwide.
It’s the largest number of new openings in a quarter since 2016.
Despite seasonal and pandemic-related pressures, the brand is producing figures better than pre-pandemic comps. AUVs during March came in at $1.35 million, $170,000 above pre-COVID 2019 levels. CEO Dave Boennighausen expects the new units to eventually settle at $1.5 million in AUV.
“We continue to be a differentiated category leader with proven mass appeal in a wide variety of trade areas, both urban and suburban, as well as strong residence in both college and small towns,” said Boennighausen during the fast casual’s Q1 earnings call. “We feel this growth opportunity is supported by our proven success in a wide variety of geographies, with our top 30 restaurants spanning coast-to-coast among 20 different MSAs with representation from urban, suburban, collegiate, and small-town locations.”
Menu innovation has been a major factor in the brand’s success. Because of additions such as Zucchini Noodles, healthy items now represent 13 percent of sales, up from 10 percent several years ago. The recently introduced Tortelloni mixes 7 percent. Boennighausen said these types of innovations have allowed the brand to resonate with diverse audiences.
Noodles has been testing LEANguini at several stores and is almost ready to introduce it systemwide. The item has the taste and texture of traditional linguine, but has 56 percent fewer carbs and 44 percent more protein than a traditional wheat noodle.
The LEANguini will be available to rewards members first before being rolled out nationally several weeks later. The loyalty program has more than 4 million members, and continues to fare favorably against competition on a per unit basis, the CEO said. Digital sales represented 58 percent of sales in Q1.
“While LEANguini will be featured with our new Light Lemon Parm Sauce with our made-to-order approach to culinary, it can be substituted into any one of our dishes, allowing guests to have the same great flavors they've come to love from Noodles & Company with significantly fewer carbs and much higher protein,” Boennighausen said. “We believe LEANguini could be a transformational new menu introduction that could significantly expand our reach, encourage more repeat visits, and provide a great option for the growing lunch occasion.”
Nearly all of Noodles’ units are back to normal operating hours after staffing levels improved dramatically over the last several months. Equipment upgrades have enhanced throughput and reduced necessary labor. Cook times have been cut by 30 seconds, and sales per labor hour have increased 15 percent.
“These efficiencies will be particularly advantageous as we navigate the current inflationary environment,” Boennighausen said
Total revenue for Q1 grew 2.7 percent ($112.6 million) compared to the same period last year. Comp restaurant sales lifted 6.4 percent systemwide, with company-owned units rose 5.3 percent and franchised units up 11.9 percent. Noodles earned $1.25 million in AUV in Q1, a 6.8 percent increase year-over-year and 13.3 percent growth from 2019.
Although most numbers for Q1 were positive, Noodles was not able to escape inflation, which resulted in cost of goods sold rising to 28 percent compared to the brand’s historical average of 25 percent.
“The inflationary environment has pressured many areas of our commodity basket,” CFO Karl Lukach said.
Proteins have been hit hardest by inflation, specifically chicken. It’s the number one spend item for the brand, and 50 percent of guests choose chicken breast to go with their orders.
Lukach said the chicken market has proven to be particularly challenging over the last several months, leading to Q1 cost being nearly 70 percent higher than the previous year. The expectation is the increase in price will carry over to Q2.
“We anticipate that the back half of the year will include meaningful relief from these unprecedented cost levels as we have already seen green shoots in the non-breast chicken meat market in addition to pricing benefits from normal seasonality during the summer,” Lukach said. “We are continuing to make strong progress in identifying and executing operational efficiencies with the support of our long-standing vendors to reduce food costs within our restaurants.”
To help offset the rising cost of chicken, Noodles has implemented a $1 surcharge on menu items containing the protein. A 3.5 percent price increase will also be added to core items.
Labor costs for Q1 were 32.3 percent of sales, which is 50 basis points higher than the previous year. Operating costs were also up, coming it at 19.9 percent compared to 18.8 percent last year. Lukach said the increase in operating costs was mainly driven by delivery fees, which increased 50 basis points. Temporary closures also impacted operating costs.
Looking toward the rest of the year, Lukach expects AUV growth to remain strong and projected between $130 million and $133 million in Q2 revenue.
Noodles intends to open 35 units this year, which would be 8 percent growth. Seventy percent of those will be company-owned. Boennighausen said he doesn’t expect any issues as it relates availability of materials as the chain moves through these openings.