Noodles & Company’s turnaround efforts under new chief executive officer Drew Madsen hit a bit of a rough patch in the third quarter as same-store sales fell by 3.3% and comp traffic declined by 5.8% (versus -1.1% in Q2).
Further, average unit volumes in Q3 were $1.27 million, compared to $1.32 million in the second quarter, and restaurant-level contribution margin was 12.8%, down from 16.4% during the same period in 2023.
“Our third quarter results reflect both industry-wide volatility caused by a difficult consumer environment that has led to significantly elevated levels of competitive discounting, as well as two other dynamics specifically related to Noodles – a high level of prior year discounting in the third quarter plus an unexpected sudden drop in third-party delivery sales. Collectively, these negatively impacted our short-term results in the third quarter,” Madsen said during the company’s earnings call after market Wednesday.
That said, he remains confident in the plan he put into place in the spring, which is focused on five priorities – operational improvements, menu transformation, leveraging the chain’s digital strength, increasing the catering business, and strengthening the company’s financial foundation. He noted the company is moving away from an aggressive discounting strategy put into place last year and is prioritizing guest experience improvements alongside a “normalized” discount level and targeted loyalty program outreach. This adjustment, he added, will drive longer-term sustainable improvements and has already helped improve sales and traffic sequentially throughout the year. Noodles has continued to focus on some promotional activity, however, to compete in the competitive environment, including with a kids-eat-free offer.
One unforeseen challenge has been a “significant” decline in third-party delivery sales beginning in July.
“Our third-party delivery channel was a strong traffic-driving channel for us through the first half of this year. Starting early in the third quarter, traffic from our largest partner suddenly began to decline despite continued investment in sponsored listings, exclusive dishes, and profitable promotions,” Madsen said, adding that the change was a “significant” contributor to negative comp results for the quarter.
“Discussions with this partner identified a potential opportunity to increase traffic profitably by addressing our menu markup on their platform. We are roughly one month into a test of different menu markups with encouraging results. We plan to finalize the test and introduce the optimal menu pricing strategy next month, which we believe will meaningfully improve traffic in our third-party channel,” he said. “The consumer didn't change. We believe … the algorithm changed.”
On the menu side, Noodles began rolling out new dishes nationally in October, which have improved traffic trends. The “comprehensive menu transformation” plan began last year and is now in phase three, which places the best new and improved dishes in test locations to assess response, operational feasibility, and financial implications. The goal, Madsen said, is to impact about two-thirds of the menu through new or improved dishes in the next year. New dishes so far introduced include Crispy Chicken Bacon Alfredo, Chipotle Chicken Cavatappi, and Lemon Garlic Shrimp Scampi. Metrics have shown that the dishes are positively impacting traffic trends, which went from -6% prior to introduction to -0.8% in the fourth quarter to date.
Noodles has also sharpened its focus on reducing turnover and has implemented biweekly training sessions to execute new food, service, and accuracy standards.
“Our primary training focus is to improve the dimensions of our guest experience that correlate most directly with traffic growth, overall satisfaction, taste of food and accuracy,” Madsen said. “The combination of team members who are better trained and managers who are in our restaurants more consistently during our busiest periods to provide immediate coaching has led to guest satisfaction scores accelerating each month of the quarter.”
Noodles’ focus on strengthening its financial foundation included an approximately $21 million to $23 million reduction in capital spending versus 2023 and the evaluation of approximately 20 underperforming restaurants for potential closure. Chief financial officer Mike Hynes said his portfolio review will include closures on or before lease expiration dates, adding that the company continues to negotiate with landlords to determine future potential closures “on a case-by-case basis.”
Noodles and Company third quarter by the numbers
- Total revenue decreased 4% to $122.8 million from $127.9 million in the third quarter of 2023
- Same-store sales decreased 3.3% systemwide, comprised of a 3.4% decrease at company-owned restaurants and a 2.9% decrease at franchise restaurants
- Company comp traffic during the third quarter declined 5.8%, pricing contributed 2.2% and mix contributed 0.2%
- Net loss was $6.8 million, or $0.15 loss per diluted share, compared to net income of $0.7 million, or $0.02 earnings per diluted share, in Q3 2023
- Restaurant contribution margin was 12.8% compared to 16.4% in Q3 2023
- Adjusted EBITDA was $4.9 million compared to $10.9 million in Q3 2023
- Three new company-owned restaurants and one new franchise restaurant opened in Q3
Contact Alicia Kelso at [email protected]
