Noodles & Company evaluated the performance of its 475 restaurants and found that about 20 restaurants had total coverage losses of about $2 million.
In a conference call to announce second-quarter results, Chief Financial Officer Mike Hynes said, “We will evaluate the closure (of these restaurants) on or before the expiration date of their leases. … The timing of any potential closures is uncertain and will be determined on a case-by-case basis.”
However, he said he expects 10 to 15 restaurants to close in the current fiscal year, including “some of the poorly performing restaurants.”
He did not say why the other restaurants were closed.
Noodles has opened a total of eight company-owned restaurants so far this year, including five in the second quarter ended July 2 and one later in July. One franchise restaurant closed and another opened. In addition, six restaurants were transferred to a new franchise group in Portland, Oregon, bringing the system’s total to 95 franchise restaurants.
These adjustments come as the company restructures and redesigns its operations and menu following a year of declining sales that temporarily reversed in the second quarter.
Store sales rose 2% in the quarter, with the company attributing the 1.2% increase primarily to the timing of the Easter holiday in the first fiscal quarter and the Fourth of July in the third quarter. Last year, both holidays fell in the second quarter.
Traffic at company-owned restaurants fell 1.1 percent, Hynes said.
Comparative figures for the first month of the third quarter fell by 3.2% – adjusted for the July 4 holiday shift, it was 0.7%, he added.
Hynes said he expects full-year store sales to decline between 0 and -2 percent compared to last year.
However, CEO Drew Madsen said progress was being made on his five priorities “for sustainable profitable growth,” which include operational improvements, revamping the menu, leveraging the chain’s digital strength, expanding the catering business and strengthening the company’s financial base.
“While the current operating environment may cause some volatility in our near-term results, we are focused on what we can most directly influence and continue to position Noodles to capitalize on the significant growth opportunities we believe it presents over the long term,” he said.
Improving operational processes
In terms of operations, Madsen is focused on three metrics that he says correlate most strongly with customer growth: overall satisfaction, food taste and order accuracy. He said the company is addressing these with, among other things, biweekly training to improve food preparation, service and order accuracy. Some of the topics covered in the second quarter included sautéing proteins, caramelizing udon noodles in sweet soy sauce, table checks and verifying delivery orders before packaging.
He said restaurants are also better complying with the requirement that managers and assistant managers be present in the restaurant during busy evening shifts.
“These efforts are definitely paying off, as our guest satisfaction improved in each month of the quarter across all three of our priority measures, and dinner improved the most,” Madsen said.
He added that while it is difficult to correlate these improved scores with revenue growth, “we are clearly establishing the culture and behaviors among our team members needed to deliver a more consistent and satisfying guest experience.”
Menu revision
Noodles & Company worked with restaurant consulting firm The Culinary Edge to revamp the menu. Phase one, concept testing, is complete, as is phase two, which involved developing new dishes and testing them in a central location to ensure they perform better than the current items on the menu.
Phase three is now underway, which involves an operational test at selected locations to determine “true guest satisfaction” and operational feasibility, and to determine how the new dishes impact the menu mix and, therefore, potentially profitability.
“Our goal is to add about two-thirds of our menu to new and improved offerings over the next year,” Madsen said.
He said the new menu would be introduced gradually over several months in 2025.
Three products have already been tested. The Crispy Chicken Bacon Alfredo, which Madsen says is a “more contemporary version” of the current Alfredo MontAmore that it will replace, saw a 50% increase in sales and higher customer satisfaction in the test locations.
The new Lemon Garlic Shrimp Scampi, added to meet a perceived need for more “light and fresh” menu options, is selling well and achieving guest satisfaction ratings that are “well above the average of our menus.”
Chipotle Chicken Cavatappi, designed to meet demand for a Latin-inspired flavor profile, has also been tested and is selling well “and enjoying solid guest satisfaction.”
Madsen said all three of those items would be introduced nationwide in October and three items would be eliminated: zucchini noodles with roasted garlic cream sauce, Leanguini Rosa (in spicy tomato cream sauce, mushrooms, Roma tomatoes, spinach and Parmesan cheese) and Leanguini Fresca (in balsamic vinaigrette with olive oil, roasted garlic, red onion, tomatoes, spinach and Parmesan cheese).
Leanguini is a low-carb, high-protein pasta which the chain will introduce in 2022.
Madsen said Noodles’ latest limited-time offering, Baked Alfredo with Grilled Chicken, hasn’t been as successful as its previous LTO, Steak Stroganoff, despite better test results and similar media support. The CEO said he believes that’s because it’s too similar to other current LTOs, including Chicken Parmesan and Chicken Prosciutto Tortelloni.
Therefore, starting in mid-August, the chain will launch marketing efforts for an existing dish: Spicy Korean Steak Noodles.
“This dish is little known but very popular with guests and popular with younger consumers,” said Madsen. “We are convinced that it will make more headlines and arouse more interest in pasta among visitors.”
Leveraging digital strengths
Fifty-five percent of sales come from digital orders, Madsen said, adding that Noodles is well positioned to leverage this strength. Twenty-six percent of sales come from loyalty program members, who spend twice as much at Noodles per year as other customers.
So they’ve been working to reactivate former members of their loyalty program, and those efforts have paid off: By the second quarter, customer traffic has increased by 5%. In addition, in 2023, the chain invested in a customer data platform that collects information about known customers, allowing Noodles to make personalized offers with fewer discounts. Those efforts have paid off, too, and spending on loyalty members’ discounts has dropped by 32%.
Efforts to selectively invest in sponsored listings in third-party delivery channels, as well as offering exclusive dishes and other promotions, drove double-digit traffic growth in those channels in the second quarter, and Madsen said efforts in that area will continue.
The chain is also testing ad buys in connected TV, streaming audio, podcasts and direct mail.
Increase in restaurant sales
Madsen said he sees the potential for catering to account for 4 to 5 percent of sales. They are not there yet, but it has increased from 1 percent of sales in 2022 to 1.2 percent in 2023 and 1.7 percent in 2024. In the second quarter, catering sales increased 42 percent year-on-year, he said.
“We believe that growth in the catering segment will be gradual and contribute to higher overall margins,” he said.
To that end, the chain will market new catering events, such as Teacher Appreciation Day (May 6) last quarter, he said.
He said new catering options would be added, including packed lunches and individual take-away meals.
In addition, the company will hire part-time catering managers in high-potential markets to build relationships with local sports teams, schools and health organizations, he said, and will run LinkedIn ads aimed at “decision makers in the catering space.”
He added that a technical solution will be rolled out by September that will transfer orders from a third-party catering platform, ezCater, to Noodles’ point-of-sale system, eliminating the current problem of having to manually re-enter those orders.
Strengthening the financial basis
Finally, the company improved its balance sheet by reducing capital expenditures, largely due to a reduction in new restaurant openings and the completion of the rollout of digital menu boards.
Madsen also said the company has made “adjustments to employee benefits that will save money while ensuring our competitiveness in the market.”
Noodles & Company Q2 in numbers
Sales in comparable stores increased by 2%
Sales increase by 1.8% to 127.4 million US dollars
Net loss of $13.8 million or 30 cents per share
Operating margin of 9%
Contact Bret Thorn at (email protected)
