NOODLES & Co Q3 FY2024 earnings call

• Five strategic priorities are being focused on: creating operations excellence, menu transformation, leveraging digital ecosystem, growing catering business, and strengthening financial foundation.
• Operations excellence: Staffing and management turnover improved, biweekly training sessions on food, service, and accuracy standards, and guest satisfaction scores are accelerating.
• Menu transformation: Phase 3 of menu testing began, with 3 new dishes launched in October showing positive sales trends; 3 new Mac & Cheese dishes to be tested soon with planned national rollout in Q1 2025.
• Digital ecosystem: 55% of sales from digital channels, loyalty members account for 26% of sales and spend more; new app update planned for Q4.
• Delivery channel: Addressed sudden drop in third-party delivery sales by testing menu markup changes.
• Catering business: Grown from 1% of sales in 2022 to 1.7% YTD 2024, system-wide sales up 27% in Q3.
• Financial foundation: Capital spending reduced from $52 million in 2023 to projected $29-31 million in 2024, with portfolio review evaluating closing underperforming restaurants.

In the third quarter, total revenue decreased 4.0% to $122.8 million. System-wide comp restaurant sales declined 3.3%, with company-owned restaurants down 3.4% and franchise restaurants down 2.9%. Company comp traffic dropped 5.8% in the third quarter. Restaurant level contribution margin was 12.8% in Q3, down from 16.4% in Q3 2023. COGS was 25.5% of sales, labor costs 32.0% of sales. G&A expenses were $12.9 million in Q3. Net loss was $6.8 million. Adjusted EBITDA was $4.9 million in Q3. In the third quarter, 3 company-owned restaurants were opened and 5 company-owned restaurants were closed; 1 franchise restaurant was opened and 1 was closed, with additional openings and closings in October.

• Full year 2024 revenue guidance: $487 million to $495 million, with comp restaurant sales negative 3% to negative 1.5%.
• Restaurant contribution margin: 12.7% to 13.3%.
• G&A expenses: $51 million to $53 million.
• 2025 capital expenditures expected to be less than $15 million, aiming for positive free cash flow in 2025.
• 2024 opened 10 company-owned and 3 franchise restaurants, expects to close 12-14 company-owned and 7 franchise restaurants.

• Challenging consumer environment leading to competitive discounting.
• Sudden drop in third-party delivery sales.
• Impact of prior year discounting.
• Menu transformation related obsolete inventory expenses.
• Uncertainty in consumer behavior and market conditions affecting financial results.

Q: About the trajectory of sales throughout the quarter, especially the drop-off in delivery sales and promotional activity.

A: Drew Madsen said a sudden drop in third-party delivery sales at the end of July was due to menu markup issues, and they pivoted to new promotional strategies with new dishes.

Q: Detail on delivery drop-off reason.

A: Drew Madsen stated it was due to algorithm changes rather than consumer behavior change.

Q: On guidance range and free cash flow.

A: Mike Hynes explained pricing in Q4 will be just over 1%, and Drew Madsen said 2025 expects to be free cash flow positive with lower CapEx