The abrupt departure of Noodles & Company CEO Dave Boennighausen earlier this month comes on the heels of a challenging year for the fast casual, which saw sales and traffic slide over the past two quarters as consumers pushed back against aggressive price hikes.
Taking a look back, same-store sales decreased 5.5 percent in Q2, with traffic falling 9.1 percent and year-over-year revenue declining 4.5 percent to $125.2 million.
Noodles made some progress on closing those gaps in the subsequent quarter, but there’s still plenty of work ahead as the chain looks to strengthen its financial performance. Comps were down 3.7 percent in Q3, including a 4.3 percent decrease at company-owned restaurants and a 1.2 percent decrease at franchised restaurants. Total revenue was $127.9 million, down 1.2 percent from $129.4 million in the same period a year ago. The company reported net income of $700,000, versus a net loss of $1.3 million in the prior quarter, with adjusted EBITDA increasing sequentially to $11.7 million from $9.3 million. One key bright spot was restaurant contribution margin. It improved by 200 basis points year-over-year to 16.4 percent, driven mostly by improvements in the costs of goods sold.
Traffic was down 6.7 percent in Q3, an improvement from Q2 as well as from the double-digit declines the company saw this spring when it was running 13 percent pricing on a one-year stack and nearly 20 percent pricing on a two-year stack.
Noodles moved to more prominent value messaging in Q2 after a “sudden and significant” decline in traffic, taking a 3 percent decrease in menu pricing and reintroducing its 7 for $7 menu, which effectively dropped prices another 2 percent or so. It also lapped an 8 percent increase from last year. The run rate, as it sits today, is approximately 3 percent.
“We have gained some good traction on winning guests back from a value perspective, but it’s going to take some time, and we continue to be focused on improving that value perception,” CFO Mike Hynes told investors during the company’s Q3 earnings call.
Drew Madsen, a board member at Noodles and the former president of Panera Bread, is serving as interim CEO while the search for a permanent replacement is underway. Whoever takes the helm will be tasked with leading the company through a period of significant change. Noodles reported its Q3 results just three days before announcing Boennighausen’s departure. During the November 7 earnings call, the now-former CEO said the company is in the midst of a turnaround effort that touches on everything from pricing and menu strategies to in-store technology and digital ordering upgrades.
It is partnering with third-party research firms to better understand the elasticity of its pricing, both at a dish level and at a trade area level, with plans to introduce more surgical pricing tiers in 2024. One recent test focused on the interplay between entrée pricing and protein pricing, something Boennighausen said represents a “great optimization opportunity.”
“What if you had a net neutral price structure, such that the base price was modestly higher than what it was in the past, but the protein price was lower? We’re seeing some great learnings from that,” he said.
Pricing optimization will be enabled by the ongoing rollout of digital menu boards, which are expected to be installed at all company-owned restaurants by the end of the year. Noodles also is enhancing its ability to engage with digital guests through a better understanding of their behavior with its recently implemented customer data platform, as well as through its rewards program. It also introduced a product recommendation engine on its app and website. So far, the tool has boosted the likelihood of a guest adding a recommended item by 45 percent and lifted the average check on digital platforms by 1 percent.
The impact of those technology initiatives can be seen in the company’s third area of focus: leveraging the recent introduction of Chicken Parmesan. The primary messaging on digital menu boards has focused on the new dish lately, and Boennighausen said sales of the item are “meaningfully higher” in restaurants that are already equipped with the technology. Noodles also tailored messaging and imagery related to Chicken Parmesan to guests who previously added chicken to their orders. The more personalized approach resulted in higher message engagement and increased trial. Additionally, during the two-week rewards-exclusive period leading up to the full launch, the company saw a 33 percent increase in program sign-ups.
Noodles sees Chicken Parmesan as a growth driver that benefits from broad appeal and guest familiarity. The dish launched this fall and is consistently ranking among the top three best-selling menu items. It also is the top-performing item from a “taste of food” score perspective.
Importantly, Boennighausen said the new dish appeals primarily to younger and lower-income cohorts, which are the most price-sensitive in today’s environment.
“Given its broad appeal and attractive price point, we believe we continue to have significant runway for the product to drive traffic from loyal, lapsed, and new guests alike,” he said.
The introduction of Chicken Parmesan was the first step in a much broader effort to rethink the menu strategy. To that end, Noodles is working with The Culinary Edge on a comprehensive review to enhance and optimize its current offerings. It’s looking at several key areas with the consulting firm, including how the menu is structured, the offerings themselves, and kitchen operations.
“We believe that this is the time for us to look at overall transforming the menu,” Boennighausen said. “The first area that you are going to see us address is around the menu architecture. Collectively, we feel with The Culinary Edge that there are opportunities to make the menu less overwhelming and to optimize price … Following that up will be some of the new menu introductions, as well as ultimately looking at some of the culinary procedures.”
A fifth focus area for Noodles is its catering program, which grew 35 percent year-over-year in Q3. Boennighausen said the variety and portability inherent in the menu provide an opportunity to substantially grow that part of the business, and new catering offerings are being incorporated into the work the company is doing with its culinary consultant.
The company opened four new restaurants in Q3 and ended the quarter with a total of 468 units, including 377 company-owned locations and 91 franchised locations. It expects to add approximately 20 new stores for the full year, representing 5 percent unit growth, with a majority of openings being company-owned.