Industry News | November 14, 2017 | By Danny Klein | QSR Exclusive Brief

Noodles & Co. Makes Progress on its Path Back to Profitability

Mac & Cheese will play a big role for Noodles & Company. Noodles & Co.
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Last fall, when Noodles & Company embarked on its “comprehensive strategy” to reenergize the brand, the company recognized the immense challenges ahead. The chain had a substantial amount of underperforming restaurants that “were causing a persistent burden on both human and financial capital,” and a menu far too complex to execute without serious setbacks, including unengaged employees and dissatisfied customers.

The path back hasn’t been an easy one, CEO Dave Boennighausen said in a conference call, but Noodles & Company has made substantial improvements it believes will put the 479-unit chain back on the right track.

The brand reported a third-quarter total revenue decrease of 6.9 percent to $114.2 million from $122.7 million in the prior-period, due primarily to the closure of 55 restaurants in the first quarter.

Net loss was $8.3 million or 20 cents per diluted shared, compared to a net loss of $9.8 million, or 35 cents lost per diluted share. Same-store sales decreased 3.5 percent systemwide, 3.8 percent at company-operated units (413 of the 479), and 1.6 percent at franchised stores.

“While we recognize that comparable sales remain a large opportunity, encouragingly, the comparable sales trend improved during the course of Q3, despite lapping a significant amount of marketing and discounting that had occurred during Q3 of 2016,” Boennighausen said.

The first step in Noodles & Company’s strategy was to shutter those 55 restaurants, a move funded in part by two capital raises that improved the chain’s balance sheet. Earlier in 2017, the company also began streamlining its menu and started to simplify operations inside its restaurants.

It also shifted focus to off-premises dining, expanding the brand’s use of third-party delivery programs. Noodles & Company launched a Noodles Reward Loyalty App in July.

“We believe our actions have already yielded improved results, particularly at a time when the restaurant industry continues to be challenged,” Boennighausen said. “We believe the underlying results of our third quarter speak to this improvement, which include adjusted net income of approximately $1 million and adjusted EBITDA of $9.5 million, a 52.9 percent increase over the prior year.”

Restaurant margin also improved 320 basis points over the prior year to 15.6 percent, Boennighausen said.

Noodles & Company is banking on a permanent mac and cheese menu it launched nationwide in October to drive sales. The company brought back three guest-favorite specialty Mac & Cheese options as part of its new World Famous Macs menu. The three macs—Truffle Mac, BBQ Pork Mac and Buffalo Chicken Mac—joined Noodles’ most popular dish, Wisconsin Mac & Cheese.

“We have been extremely pleased with the performance of our improved mac and cheese, with menu mix and taste of food scores for these dishes continuing to improve since our launch,” Boennighausen said, adding that Noodles & Company spent 11 months to increase the sharpness of the Cheddar profile by testing a revised recipe with a higher quality white Cheddar.

In regards to off-premises dining, those transactions accounted for nearly 50 percent of the brand’s sales during the third quarter, up from 41 percent two years ago.

“Remarkably, 75 percent of our guests who order to go currently come into our restaurant, wait in line to order, and then wait for the food to be prepared. This results in a sub-optimal experience for a large percentage of our guests, particularly from a time and convenience perspective,” Boennighausen said. “We believe there is tremendous opportunity to both frequency and satisfaction by continuing to make that visit more convenient.

To improve the experience, and facilitate activation of its app and online ordering, Noodles & Company is installing quick pick-up shelving units in restaurants, as well as testing improved communication and signage.

“Even before we have implemented these changes system wide, online as a whole accounted for 9 percent of sales during the third quarter, an increase of 250 basis points from quarter three of last year,” he said.

Boennighausen added that he expects third-party delivery to expand to nearly 50 percent of all locations within the next few months.

A web-based learning management system was also introduced across the company and will be completely rolled out within the next few months.

“This system allows us to better train all of our team members, validate knowledge, and develop future leaders throughout our organization,” Boennighausen said.

On the leadership front, Noodles & Company hired Brad West as executive vice president of operations, and also announced that Paul Murphy, the CEO of Del Taco, joined as executive chairman. He’s been with the chain four months, and has already been a part of several key changes.

“Our research has indicated that over the years, the brand has become a bit too serious and our communication a bit too broad. We are currently in test with an updated look and feel inside our restaurants that we believe will capitalize on our strengths with families and groups, and develop stronger emotional connections with our guests,” Murphy said in the call.

He added that Noodles & Company is currently testing zucchini noodles, which could potentially launch nationwide in the second quarter of 2018.

“We are completing preliminary work on a line of cold noodle offerings, which had the potential to complement our successful salad line up and bolter our existing menu platforms,” he said. “We believe that collectively, our efforts against the brand, the menu, our operational execution, and the off-premise occasion will provide the critical mass for us to make meaningful progress in 2018.”