Noodles & Company has evaluated the performance of its 475 restaurants and found around 20 that, combined, accounted for contribution losses of approximately $2 million.
In a conference call announcing second-quarter earnings, chief financial officer Mike Hynes said, “We will explore closing [those restaurants] on or before their lease expiration dates. … The timing of potential closures is uncertain and will be determined on a case-by-case basis.”
However, he said that during the current fiscal year he anticipated closing 10-15 restaurants, including “a few of the underperforming restaurants.”
He didn’t say why the other restaurants were closing.
Noodles has opened a total of eight company-owned restaurants so far this year, including five during the second quarter, which ended July 2, and one later in July. One franchised restaurant closed, and another one opened. Additionally, six restaurants were refranchised to a new franchise group in Portland, Ore., making for a total of 95 franchised restaurants in the system.
Those adjustments come as the company works to revamp operations and the menu following a year of declining sales that were temporarily reversed in the second quarter.
Same-store sales were up by 2% for the quarter, although the company attributed most of that,1.2%, to the timing of the Easter holiday in the first fiscal quarter and July 4 in the third quarter, unlike last year when both holidays fell in Q2.
Traffic at company-owned restaurants was down by 1.1%, Hynes said.
Comps for the first month of Q3 were down by 3.2% — 0.7% when adjusting for the July 4 holiday shift, he added.
For the year, Hynes said he expected same-store sales to be between 0% and -2% compared to last year.
But CEO Drew Madsen said progress is being made in his five priorities “for sustained profitable growth.” Those are operational improvements, menu transformation, leveraging the chain’s digital strength, increasing the catering business, and strengthening the company’s financial foundation.
“Although the current operating environment may cause some variability in our near-term results, we are focused on what we can most directly impact, and continuing to position Noodles to capture the significant growth opportunity we believe it has long-term,” he said.
Improving operations
In terms of operations, Madsen is focused on three metrics that he said correlate most with traffic growth: overall satisfaction, taste of food, and order accuracy. He said the company is tackling those with, among other things, bi-weekly training sessions to improve food preparation, service, and order accuracy. Some topics covered in the second quarter were sautéing proteins, caramelizing udon noodles in sweet soy sauce, table checkbacks, and checking delivery orders before packaging them.
He said restaurants also are adhering better to mandates for managers and assistant managers to be in restaurants during busy dinner shifts.
“These efforts are definitely paying off, with guest satisfaction improvement accelerating each month of the quarter on all three of our priority measures, and they improved the most at dinner,” Madsen said.
He added that, although it’s difficult to correlate those improved scores with sales growth, “we are clearly establishing the culture and team member behaviors required for a more consistent and a more satisfying guest experience.”
Menu overhaul
Noodles & Company has been working with restaurant consulting firm The Culinary Edge to transform the menu. Phase one, concept testing, is complete, as is phase two, which was the development of new items and testing them in a central location to make sure they scored higher than current menu items.
Now phase three is underway. That’s an operational test in select locations to determine “real-world guest satisfaction,” as well as operational feasibility and how the new items affect menu-mix, and thus, potentially, profitability.
“Our goal is to impact roughly two-thirds of our menu through new and improved offerings over the next year,” Madsen said.
He said the new menu would be rolled out gradually over several months in 2025.
Three items have already been tested. The Crispy Chicken Bacon Alfredo, which Madsen said is a “more contemporary version” of the current Alfredo MontAmore, which it will replace, saw a 50% increase in sales in test locations and higher guest satisfaction.
The new Lemon Garlic Shrimp Scampi, which is being added to fill a need they identified for more “light and fresh” menu options, is selling well and has guests satisfaction scores “well above our menu average.”
Chipotle Chicken Cavatappi, which is intended to address the need for a Latin-inspired flavor profile, has also been tested, is selling well, “and has solid guest satisfaction.”
Madsen said all three of those items would be rolled out nationally in October, and three items would be removed: Zucchini noodles with roasted garlic cream sauce, Leanguini Rosa (in spicy tomato cream sauce, mushrooms, Roma tomato, spinach, and Parmesan cheese), and Leanguini Fresca (in balsamic vinaigrette with olive oil, roasted garlic, red onion, tomato, spinach, and Parmesan).
Leanguini is a low-carbohydrate, high-protein noodle that the chain rolled out in 2022.
Madsen said Noodles’ most recent limited-time offer, baked Alfredo with Grilled Chicken, did not perform as well as the LTO before that, Steak Stroganoff, despite having stronger concept test scores and similar media support. The CEO said he thought that was because it was too similar to other recent LTOs, including Chicken Parmesan and Chicken Prosciutto Tortelloni.
So, starting in mid-August the chain will put marketing efforts behind an existing dish, Spicy Korean Steak Noodles.
“This dish has low awareness, but high guest satisfaction and strong appeal among younger consumers,: Madsen said. “Our belief is that it will be more newsworthy and do a better job of driving special visit interest for Noodles.”
Leveraging digital strength
With 55% of sales being made through digital orders, Noodles is well positioned to lean in to that strength, Madsen said, adding that 26% of sales are from loyalty program members, who spend twice as much per year at Noodles as other customers.
So they have been working on reactivating lapsed loyalty members, and those efforts have worked: Through Q2 loyalty member traffic is up by 5%. Further, the chain invested in a customer data platform in 2023 that aggregates information about known customers, which allows Noodles to make personalized offers with fewer discounts. Efforts on that end have worked, too, and loyalty-member discount spending is down by 32%.
Efforts at selective investment in sponsored listings in third-party delivery channels, as well as offering exclusive dishes and other promotions generated double-digit traffic growth in those channels in Q2, and so Madsen said efforts in that area would continue.
The chain is also testing ad buys in connected TV, streaming audio, podcasts, and direct mail.
Increasing catering sales
Madsen said he saw the potential for catering to account for 4% to 5% of sales. It’s not close to that yet, but it has grown from 1% of sales in 2022 to 1.2% in 2023 and 1.7% year-to-date in 2024. For the second quarter, catering sales were up by 42% compared to a year ago, he said.
“We believe that catering growth would be incremental and contribute to higher overall margins, he said.
To that end, he said the chain would market new catering occasions, like last quarter’s Teacher Appreciation Day (May 6).
He said new catering options would be added, included boxed lunches and individual grab-and-go items.
Additionally, he said the company would add fractional catering managers in high-potential markets to develop relationships with local sports teams, schools, and healthcare organizations, and would buy LinkedIn advertising targeting “catering occasion decision makers.”
He added that a tech fix would be introduced by September that would transfer orders from third-party catering platform ezCater to Noodles’ point-of-sale system, removing the pain point currently in place that requires those orders to be re-keyed manually.
Strengthening the financial foundation
Finally, the company was improving its balance sheet by reducing capital expenditures, largely due to a reduction in new restaurant openings and the completion of its rollout of digital menu boards.
Also, Madsen said the company has made “employee benefit adjustments that save money while still keeping us competitive in the marketplace.”
Noodles & Company Q2 by the numbers
Same store sales up 2%
Revenue up 1.8% to $127.4 million
Net loss of $13.8 million or 30 cents per share
Operating margin of 9%
Contact Bret Thorn at [email protected]
