Good afternoon and welcome to today’s Noodles & Company Third Quarter 2021 Earnings Conference Call. All participants are now in a listen-only mode. After the presenters’ remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to introduce Noodles & Company’s Chief Financial Officer, Carl Lukach. Your line is now open. Please go ahead.

Thank you and good afternoon, everyone. Welcome to our third quarter 2021 earnings call. Here with me this afternoon is Dave Boennighausen, our Chief Executive Officer. I’d like to start by going over a few regulatory matters. During our opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items, including details relating to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The Safe Harbor statement in this afternoon's news release and the cautionary statement in the company’s Annual Report on Form 10-K for its 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company’s forward-looking statements. I refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s Annual Report on Form 10-K for its 2020 fiscal year and subsequent filings we have made. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company’s operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2021 earnings release and our supplemental information. Now, I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Carl, and good afternoon, everyone. I'm excited to share with you today our strong third quarter results and our progress toward achieving the accelerated growth objectives that we laid out earlier this year. Our third quarter results were highlighted by 16.3% comparable restaurant sales system-wide, allowing us to achieve another company record for average unit volumes at $1.3 million. In addition to strong sales performance, our restaurant level margin for the third quarter expanded 270 basis points versus the prior year to 18.1%, despite the impact of the current inflationary environment. Both our average unit volume growth and our margin expansion have been aided by the success of our new restaurants, with our restaurants open from 2019 to 2021, continuing to perform above company averages for both sales and restaurant level margin. Our success in the third quarter is a result of the three primary strategies that we've been asking to capitalize on the opportunity ahead of us. The first is the continued differentiation of our concept to appeal to a broad range of lifestyles, convenience, and dietary needs. Second, further activating our brand, particularly through our digital assets marketing strategy. And third, accelerating our unit growth to take advantage of an operating model that we feel is ideally suited for a post-COVID world. As we think about the differentiation of our brand, I'd like to start with a discussion of our ongoing success in executing a disciplined strategy of culinary innovation that is on-trend, resonates with cash, and builds brand loyalty. Last quarter, we highlighted the June launch of our Tortelloni offering. Noting that for years, stuffed pasta has been our guests' most requested dish. Now, almost past its launch, Tortelloni continues to exceed last year's expectations, and we're particularly pleased with the conversion that we are seeing from trials of loyalty and frequency for those who have tried it. While our focus for the balance of the year from a menu perspective will be fully capitalizing on the addition of Tortelloni, our teams have also maintained a robust pipeline of innovation for 2022 and beyond. Next year, we anticipate a combination of enhancements to our already strong lineup of healthy alternatives, as well as new twists on some familiar favorites. As we continue to differentiate the menu for today's environment, I’d now like to discuss our second strategy, focusing on further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. We have made significant progress with our digital capabilities and their impact on driving new guests, new usage occasions, and increased frequency amongst a broad group of consumers. Digital continues to account for 52% of our sales in the third quarter, even as in-restaurant ordering returned to 70% of pre-COVID levels. Of course, one of the biggest tools for driving digital growth is our rewards program, which is rapidly approaching 4 million members. The insights that we've garnered from our program, combined with increased capabilities to develop more personalized and relevant communication, has allowed us to attract new guests to Noodles & Company, as well as increase the frequency of our existing guests. As we said, we believe that we're still in the early innings of more effectively utilizing our digital assets and data to better engage with our guests, and we expect the strategy to be a meaningful driver of sales growth for years to come. Now, I'd like to talk about our third strategy surrounding unit growth. As I mentioned earlier, the restaurants open in the last three years continue to perform better than any group of new restaurants in our history with higher volumes and restaurant level margins above company averages. We are particularly seeing strength in our new restaurants that contain our order-ahead, drive-thru windows, which we estimate on average increase sales by approximately 10% to 20% relative to traditional restaurants. We continue to expect at least 70% of new restaurants to incorporate the order-ahead, drive-thru windows as they improve convenience for our guests and are easy to execute for our operations teams. While we are excited about our pipeline for new restaurants, from a development perspective, we have experienced the same short-term challenges that have been present throughout the industry. We and our franchisees have seen delays in construction, landlord building delivery, and equipment availability over the last several months. As a result, we have pushed three company openings and two franchise openings originally slated for 2021 into early 2022. These openings will be incremental to our prior outlook on unit growth for 2022, and we now anticipate at least 8% system-wide unit growth next year. At the present, we would expect our 2022 openings to be somewhat back-loaded given the delays that exist in today's environment. However, our overall pipeline remains robust as we execute our strategy to achieve at least 1,500 units nationwide. A significant contributor to our growth will be our franchise community, and we were excited to announce during the third quarter the signing of a new franchise deal to introduce the brand in the El Paso, Texas, and Las Cruces, New Mexico markets. We're also pleased with the quality and trajectory of our conversations with additional prospective franchisees for both new territories as well as potential refranchising of select company markets. While we do anticipate further franchising progress in the balance of this year, we also recognize that our prospective franchise partners, most of whom are established restaurant operators currently running additional brands, are also laser-focused on navigating the current labor environment. As we said before, for each of our three strategies—continued differentiation of our unique brand strengths, activating the brand through our digital marketing channels, and accelerating unit growth—the importance of our team cannot be overstated. Our team has done an amazing job rising to the challenges of the last 18 months. Even with the strength of our team and better-than-industry turnover metrics, we have not been immune to the well-documented staffing difficulties seen throughout the country. During the last half of Q3, these challenges combined with the impact of the Delta COVID variant became more pronounced, resulting in reduced store hours across a number of restaurants in our system. Normalizing for staffing challenges, our sales growth thus far in the fourth quarter remains on par with our record-setting Q3, and we're taking a number of actions to address the current labor environment. We've implemented meaningful increases to our restaurant management compensation, as well as instituted thank-you and retention bonuses throughout our restaurant organization. Additionally, we've eliminated many time-consuming tasks executed in our restaurants, some on a temporary basis and others that we believe will make our restaurants more efficient in both the short and long term. From recruiting to retention to development, we have piloted or implemented a wide variety of new approaches to combat the current staffing environment. From sharing best practices amongst our operators to offering sign-on and retention bonuses for areas where labor markets are particularly tough. While we believe staffing will remain a significant challenge in the near term, including in the fourth quarter based on trends from the last few weeks, we feel that the worst is behind us and I'm optimistic that our efforts will allow us to mitigate the impact as well as make us even stronger in the long term. My optimism is based on the overall strength and commitment of our teams throughout the country. This commitment, evidenced by the tangible progress we've made across all aspects of the business, has allowed the company to successfully navigate an unprecedented environment during the past 18 months, and it gives me great confidence that we will navigate the current environment successfully and build off of the record-setting sales results that we saw during the third quarter. I'll turn it over to Carl to discuss in more depth our financial results.

Thank you, Dave, and good afternoon, everyone. In terms of the financial highlights. Total revenue for the third quarter increased 18.1% to $125.1 million compared to last year. Comparable restaurant sales increased 16.3% system-wide, comprised of a 15.3% increase at company-owned locations and a 21% increase at franchised restaurants. Average unit volumes for the third quarter were $1.38 million, representing a 16% growth rate compared to 2020 and a 15.9% growth rate compared to 2019. As a reminder, average unit volume is adjusted for restaurants that have been temporarily closed but is not adjusted for temporarily reduced hours within the restaurant. As Dave mentioned, total revenue during the third quarter was partially offset by both temporarily closed restaurants and reduced restaurant hours, driven predominantly by industry-wide labor shortages. These temporary closed days and reduced hours were more pronounced in the back half of the third quarter. It is difficult to measure the exact impact, but based on trends from the past two weeks, we estimate this impact has peaked, and we are encouraged by the opportunities we've outlined from a talent acquisition and retention perspective. On a restaurant contribution basis, restaurant level margins were 18.1% in the third quarter, compared to 15.4% last year. Relative to the third quarter of 2019, which we believe to be a more relevant comparison, contribution margin increased 100 basis points from 17.1%, driven by sales leverage on higher average unit volumes and labor efficiencies. These benefits also fully outweighed the incremental cost associated with third-party delivery, which remains a key driver of investment for our business and held steady at 25% of total sales during the third quarter. Now, let's dive into margin drivers in a bit more detail. For the third quarter, the cost of goods sold was 25.1% of sales, an increase of 30 basis points from last year and 20 basis points better than the third quarter of 2019. On our last call, we indicated that cost of goods sold for the third quarter would be unfavorably impacted by commodity inflation, and we are pleased to report that our results were better than anticipated. Our ability to offset the current inflationary environment was driven by temporarily securing shorter-term inventory at more favorable rates than the spot market, driving efficiencies in our discounts, and the 3% pricing we took on our core menu during the third quarter. Speaking of pricing, our third quarter pricing was approximately 5.5%. As we look forward into the fourth quarter, we are still operating with industry-wide inflationary challenges and anticipate continued incremental costs associated with securing supplies for our restaurants, particularly within our protein mix. In light of these headwinds, we are taking an additional 2% price increase on our core menu, which will go into effect in the tail end of the fourth quarter. This increase will coincide with the lapping of price actions taken last year in the fourth quarter, and we expect full fourth quarter pricing to be approximately 7.5%. Given the expected timing of our price actions, we anticipate that commodity inflation will still have an unfavorable impact on our cost of goods sold by approximately 50 to 60 basis points in the fourth quarter relative to the third quarter. A majority of this increase will be based on the need to temporarily purchase chicken at rates higher than historical levels. Labor costs for the third quarter were 30.0% of sales, which is essentially flat to last year and a 250 basis point improvement from 2019. From a margin perspective, we saw a benefit in the quarter as a result of the temporary decreases in labor hours due to staffing challenges and reduced hours. As Dave mentioned, this margin benefit was offset by strategic investments in the third quarter and the retention of our team members primarily through a one-time appreciation bonus. We have also seen an increase in our average hourly rate driven predominantly by new hires onboarding at a higher rate in addition to overtime payouts. We continue to track the benefits of our Kitchen of the Future initiatives, in particular the rollout of our steamer equipment, which is meeting our expectations and is projected to reduce approximately two additional labor hours per restaurant per day. We have completed over 75% of our steamer rollout thus far in 2021, and we expect up to 90% of steamers to be rolled out by the end of this year. We remain encouraged by the positive results demonstrated by the improved cook times, reduced labor hours, and better taste to food scores. As we look ahead to the fourth quarter, we anticipate a similar labor cost percentage relative to the third quarter. Other operating costs for the quarter were 17.5% of sales compared to 18.6% last year, due primarily to sales levers. Operating costs were 280 basis points higher than 2019 due to an increase in third-party delivery fees, as this channel remains a critical avenue to drive brand awareness and new guests. Delivery fees were 5.3% of sales in the third quarter compared to 5.5% in the third quarter last year. We expect third-party delivery to remain an important driver of the business going forward, and as such, we expect our operating cost percentage in the fourth quarter to be at similar levels to the third quarter. General and administrative expenses for the quarter were $12.2 million compared to $10.8 million last year, due to increases in both stock-based compensation and temporary pay reductions implemented during 2020. As a percentage of total revenue, G&A decreased 50 basis points compared to last year. G&A included non-cash stock-based compensation of $1.2 million during the third quarter, compared to $700,000 last year. We anticipate that stock-based compensation will be approximately $1 million next quarter, and we anticipate that G&A dollars in the fourth quarter will be similar to our spend in the third quarter. GAAP net income for the third quarter was $4.7 million or $0.10 per diluted share, compared to a net loss of $0.1 million last year or $0.00 per diluted share. We also reported net income on an adjusted basis, which adjusts for the impact of impairments, divestitures, and closures. On an adjusted basis, net income was $5.3 million or $0.12 per diluted share, compared to net income of $0.7 million or $0.01 per diluted share last year. It is important to note that our methodology for calculating adjusted net income no longer includes a tax adjustment related to the valuation allowance impact on our effective tax rate. Accordingly, the adjusted net income reconciliation table in our third quarter earnings press release uses the same methodology for prior periods. We expect our effective tax rate to remain low for at least the remainder of the year. We do not expect to be a cash taxpayer for the foreseeable future, given our sizeable net operating losses. Switching to our outlook for the rest of the year—ahead through October, we have seen continued strength in our average unit volume growth compared to 2019 and expect volumes to remain strong throughout the fourth quarter. That said, we also anticipate continued uncertainty related to the extent and duration of the current staffing disruption and the potential impact on our operating hours. As a result, for the fourth quarter, we anticipate total revenues to range between $119 million and $124 million. From a unit development perspective, we remain encouraged by our robust real estate pipeline as we head into next year. For 2021, we now anticipate seven to nine new restaurants system-wide compared to our previous guidance of 10 to 15. As Dave noted, the change in guidance is due to equipment availability and landlord delivery timing, which has pushed a handful of company and franchise locations into the early part of 2022. These locations are simply a shift in timing and are considered incremental to our prior guidance of at least 7% unit growth on a system-wide basis in 2022. As such, we now anticipate at least 8% system-wide unit growth next year. From a capital perspective, in anticipation of several locations shifting into 2022, we expect full year capital expenditure of approximately $20 million to $22 million compared to our original guidance of $20 million to $24 million. Turning to the balance sheet at quarter-end, we had cash and cash equivalents of $3.1 million and a total debt balance of approximately $23.7 million. During the quarter, we made a full repayment on our revolving credit facility and anticipate maintaining a low cash balance going forward to optimize our cost of borrowings. We anticipate that we will produce positive free cash flow through the remainder of 2021. Our ability to maintain strong liquidity will provide ample room to meet our growth objectives. With that, I would like to turn the call back over to Dave for final remarks.

Thanks, Carl. Tomorrow, Noodles & Company will release our first Social Impact Report, highlighting our progress and benchmarks across food, people, planet, and community. Our team has much to be proud of in creating a culture of servant leaders committed to fostering a better world. This commitment has allowed our team to navigate uncertainty from COVID to the economy to staffing challenges. While we can't ignore the impacts of the current staffing environment on our short-term operations, I'm confident that our team will rise to the challenge and come out even stronger than before. Noodles & Company’s off-premise digital and people strengths, executed with a differentiated on-trend menu perfectly suited for today's environment, position the company for significant growth over the years to come. Our performance thus far in 2021, including record-setting AUVs from the second quarter and then again in the third quarter, coupled with the strengthening operating and economic model, also bolsters my confidence in the significant expansion opportunity ahead of us for both growth company and franchise development. I'm proud of what our team has accomplished and look forward to taking the next steps with Noodles' journey together. With that, please open the lines for Q&A.

Thank you. Our first question comes from James Rutherford with Stephens Inc. Your line is open.

Hey, Dave. Hey, Carl. Hope you're both doing well. Want to start on the unit growth side. I appreciate the color on the near-term growth challenges—I mean clearly, you are not the only ones experiencing the delays there—but just as we think about 2022, you mentioned that growth would be a little bit more back-half loaded. Just wanted to hear your thoughts on what visibility you have into that growth. Are you in a place where leases are pretty much signed and it's simply a matter of getting the construction done, the equipment installed? Help us think about what level of visibility you have into that 8% growth for 2022.

Yes. So, again, we feel very comfortable with what we're seeing from a visibility perspective. First off, those restaurants that did get pushed from 2021 to 2022, those are all ready to go. And there's the critical piece of equipment that wasn't going to be able to make it in time for us to get the construction timeline done for 2021. Now you're just looking at the balance of the pipeline of what we had already said is kind of our target rate, and we're actually ahead of where we expected to be from an overall LOI perspective. They’re in different processes in terms of construction, recently lease signing, and LOIs. But we're actually above where we had expected to be. So while we still do expect that there could be some delays in terms of when the buildings are actually delivered to us and we have all the equipment available, we feel pretty strong with the quality and quantity of the pipeline and the work we see for 2022. And that includes from a franchise perspective.

Okay. Perfect. And then on the staffing dynamic, I appreciate the comment that it was about a 1.5% AUV impact in the third quarter. If I heard it correctly—it sounds like that the suggestion is those challenges maybe peaked and it's still uncertain, but maybe we're on the downward side of that. And just thinking about the outlook that you provided, Carl, in terms of 119 to 124 million of sales. Can you just kind of level set us on what that sort of assumes for an AUV growth perspective? Are you assuming a pretty significant step down in your growth, because I'm just trying to figure out what the implied impact there with staffing if you could help there. Thank you.

Sure, happy to. So our sales guidance reflects a similar trend in AUV growth relative to 2019 that we reported in the third quarter. So continued strength there—really, when you look at the range on the high end of the range we reflect an improvement in staffing and the resulting temporary closure days and the low end of the range we reflect a continuation of current levels through a good portion of the fourth quarter. So really, that's the volatile piece that defined the range.

That's super helpful. Perfect. Thank you. If I could put this one more in, and then I'll turn it over. From the menu price dynamic, we've heard consistently from all the restaurants that we cover when you push on price, you're not seeing much resistance from the consumer. I'm just curious what you see on any traffic impacts from the price you've taken so far and kind of what gives you comfort on the next action, the 2% price you're taking in the fourth quarter?

Yeah. This is Dave speaking. I think we feel very strong, James, with the overall value proposition of Noodles & Company. Over the years, we've been pretty resistant and pretty soft in terms of the amount of pricing we've taken. As we continue to evolve and improve the concept from a quality of food perspective, convenience, speed, etc., we feel our value proposition remains very strong. As a reminder, most of the pricing does tend to fall on third-party delivery, which we have seen continues to be an occasion that's not as price sensitive. That's where we've been most heavily into from a pricing perspective. So the result—both historically not being very aggressive on pricing as well as not being able to not being really touching the core menu very much—we still feel like we're in a very good place and we've not seen resistance to your point over the last several months on a pricing action we’ve taken.

Jim, the only thing I'll add to that is the 3% pricing increase took effect in August. We took those three strategically inelastic areas of the core menu. So, we were able to measure that specifically when we look at that from a food cost basis and from a unit and dish velocity basis. And so we were able to measure that, which gives our confidence that there hasn't been any impact of the price increase.

Perfect. Thanks very much.

Thank you, our next question comes from Jack Corrigan with Truist Securities. Your line is open.

Hey, guys, thanks for taking the question and congrats on your continued momentum in your business here. It's impressive to see, now year-to-year, same store sales trends accelerating despite all the staffing issues. But I want to ask more specifically about the trends you're seeing in same store sales throughout the quarter. And if you guys could give October specifically or quarter-to-date specifically, I think that'll be really helpful.

Yeah, I think from overall cases, I'll actually start with Q3. So what we had seen, Jack, was momentum in the growth across the system really through July and that first part of August.

As you bifurcate restaurants and markets that have not had as much staffing challenges, we've been able to maintain that same level of trajectory, that same growth momentum as we've gone into October. The only difference you're seeing really is applying the restaurants that have had some staffing challenges. So the fundamental strength in the business remains extremely strong. We don’t want to necessarily suppose pure October numbers because there were some volatilities, we think, of how COVID impacted us across the quarter, but the fundamental two-year growth that still remains very consistent with what we had seen during the third quarter.

Okay, great. That’s really helpful. And then, I mean, if you think about the drivers in the quarter—looking at digital marketing or your food news with the tortellini and then the reopening of the dining rooms, I guess how would you rank order those or any others you can think of?

Certainly, tortellini has been a great hit, and we still feel there's a long runway ahead of us from tortellini. And I think what's exciting is not just has it hit core guests, but one metric we're seeing just across tortellini, but even across the entire system is, as people get introduced to the brand, they enter that rewards program. We’re seeing that the duration of time before their next visit continues to shrink. So we're continuing to convert people who are trying the brand into more frequent and loyal consumers. At the same time, our core group continues to strengthen as they have more reasons to come to Noodles & Company. So the combination of tortellini and how we're able to leverage that from a data and digital perspective is extremely encouraging. As you go to a little bit more, a couple of things that I would point out that gives us continued confidence is that digital retention is still over 50%, even as we're getting in-restaurant sales come back. That continues to be a very sticky retention, and I feel very strong about that. We're also seeing positive same-store sales perspective, which had positive same-store sales during the third quarter for the first time in quite a while. So the fundamental aspects of the business, because everything seems to be moving in the right direction, we certainly got some noise here from a staffing perspective, but the fundamentals are very strong and strengthened during Q3, and we've been able to maintain that through Q4.

Great. That’s great. That’s very helpful. And then just one quick one on development. Can you break out what you expect for company versus franchise openings in 2022 as some have shifted and it's a little different outlook?

We haven't disclosed the exact number, and there are some franchise potential candidates we're looking at that might potentially be involved in refranchising as well. So until we get a little closer in that comes to pass, we have said historically that we expect that the growth is going to be predominantly company-based during 2022. We would expect that still to hold. As we go through 2023 and 2024, especially, that's when we'll be looking for about half of the growth to come from franchises and half from the company.

All right. Great. I'll pass it along.

Thank you. Our next question comes from Nicole Miller with Piper Sandler. Your line is open.

Thank you. Good afternoon. I want to ask first on the top line in the AUVs. If we could look past the noise here at the 1.38 million AUV, if you could look past seasonality, some one-time items, and fully get the price that you're looking for to absorb inflation, what would be the start of a margin? I'm thinking if the long-term is 1.35 million AUV in a 20% store level margin, this 1.38 million has to get you quite close to that.

Yeah. We think that is pretty accurate, Nicole. As a reminder for folks, we now accelerate growth objectives to get to a 1.450 in AUV and 20% restaurant level margin by 2024. Clearly, the momentum in the business since we initially disclosed these numbers gives us pretty strong confidence that we'll be able to meet that objective and potentially surpass it. The 1.38 million does have some one-time noise from an inflationary perspective, as well as some of the compensation actions we took. With that 18.1% or 18.5% or 19%, potentially in a more normalized environment, but I can't say clearly as we look at the overall long-term path of a 1.450 million and 20% margin, we feel that the results are in line with what we'd expect.

Okay. Great. And then the second and last question, also trying to look through the noise related to the pipeline in these shifts are clearly very unforeseen issues. Typically in any pipeline, you would have some cushion, and I'm just thinking it's not an LOI or signed lease issue at all, right? I mean, you had all your ducks in a row, and then here's the new glitch. So if you think of the next year and the 8% development, is the pipeline like 9 to 10% deep? So we could have another unforeseen glitch because they seem to be appearing now more than we like or you're kind of right at 8% on the nose in terms of the pipeline?

No, we're building a pipeline to call assuming that there are still volatility. Whenever you build the pipeline, you assume some level of fallout for whatever particular reason. So we built that type of cushion into our overall projections. It does—to your point, the LOIs are still very good in terms of the lease negotiations and so forth. We have seen some delays just over the last year, as you've seen landlords going through their base building delivery dates and what they expect. How we've approached it is that as we target 8%, we certainly build a pipeline that’s beyond that, recognizing that there could be continued challenges out of our control.

All right. Thanks for the update. Have a great night, thank you.

Thank you.

Thank you. Our next question comes from Andrew Strelzik with BMO. Your line is open.

Hey, good afternoon, thanks for taking the questions. I guess first, I just wanted to clarify the gap between the company comps and the franchise comps. Are we supposed to understand that that's basically a function of the staffing challenges? I know the laps and things like that, the numbers can be wonky. Is there more in there that's driving the divergence, or is that really the biggest piece of that?

Yeah, I just struck it as a reminder, everybody, we have about 15% of our restaurants, about 77 units that are franchised. They tend to be a bit more in college locations, Andrew. And one thing we've seen, both from the company as well as franchise, is really strong same-store sales growth as college campuses now versus what they were a year ago. You see some outsized growth. Additionally, from a franchise perspective, they had some of the staffing challenges in their particular markets a bit earlier than we did on the company side. So they tend to be in markets that aren't having as much disruption from a staffing side. So as we look at the fundamental strength of the business, one thing that gives us great confidence is how well our franchise partners have gone past some of these temporary disruptions and maintained momentum over that timeframe.

Got it. Okay, so that makes sense, and that's helpful. Secondarily, I wanted to dig in a little bit more on the turnover commentary. I know the brand has had periods where turnover has been a challenge, and more recently it's been running in a much better place. But in an environment now where every brand in the restaurant space and even outside is kind of fighting for talent and taking actions to try to get as much time as they can. What do you attribute continuing to drive lower turnover? It's really impressive for the brand, and I'm just curious for your insights about what you think are the biggest drivers contributing to that?

I would say that in this sense, you have two years, you have been with Noodles and Company in the 20 years in the industry. The most common thread I've seen in any business is that the success of a restaurant is driven more than anything by the tenure of the general manager. We have done a very laser-focused approach from a culture, compensation, incentive rewards, just how we've approached that particular group. So the one thing that gives me so much confidence as we look forward is our tenure of managers is actually higher, even as we've gone through this process. So we've been able to maintain that core culture of strong future leaders. And as you maintain that core leadership group, it just permeates through the whole organization. I would attribute more than anything. I think our teams have great leadership across the board from our operations side, but how we've built that and strength and just the overall consistency from store level manager perspective has been the most important part. As we said, we're not immune, but I think we feel very good, not just with how we're weathering this compared to others, but also how it looks from a foundation perspective as we start building out significantly more restaurants.

And then the last piece here, I just wanted to—and I apologize if I missed this or didn't understand fully—but the comment that the worst is behind the company in terms of the staffing challenges or the margin pressures. What is it exactly that you mean by that? Are you actually seeing the percentages get better exactly that you mean by that or are you seeing the hours improve a little bit? I know there's uncertainty, but I just want to understand exactly what you mean by the worst is behind the company? Yeah. Thank you.

Yeah. I approach it two different ways. So the first part is every single day our restaurant teams and our team throughout the organization is looking at the number of restaurants that have been impacted with how to reduce hours, and we're seeing that number just continue to go down over the last couple of weeks. So it really started to get higher at the tail end of Q3 and then into the first part of Q4. And then the last couple of weeks, you're starting to see some really significant progress. The underlying cause in terms of just the pure number of employees you have and how staffed you are at the restaurant level—we are seeing significant progress in terms of the number of applications that are now turning into hires and employees within the organization that has meaningfully improved really over the last three to four weeks. So that's kind of the leading indicator that we started seeing a few weeks ago, three or four weeks ago that are now manifesting itself in fewer restaurants that are getting impacted by the disruption.

Got it. Okay, thank you very much. I’ll pass it on.

Thank you. Our next question comes from Todd Brooks with C.L. King and Associates. Your line is open.

Hey, thanks. Good afternoon, guys. A couple of questions for you. One, Carl, can we talk about the one-time bonuses paid in the third quarter? Maybe what kind of basis point impact that had and I guess how effective they were? Do you think it's something that needs to be repeated in future quarters or truly one time?

Sure. So you're right. During the third quarter, we implemented a thank-you bonus. Really, this was largely offset by some of the staffing levels that we saw in the restaurant due to the reduction in hours. So we would characterize this as one-time in nature and something that we would not anticipate repeating. Having said that in the fourth quarter, Dave did also mention that we are planning some retention bonuses and signing bonuses, which are also anticipated to be offset by the lower staffing levels.

Okay, so is there a way we can characterize it from a—without the bonus activity that gets us towards that 18.5%, 19% restaurant-level operating margin that Dave was talking about in response to Nicole's question at these unit volumes?

Yeah. I would say that when we talk about in the past, Todd, is that we like our prime costs to be at 55% at this level. So roughly 25% of our COGS, 30% on labor. There's a lot of noise in Q3 itself. So as we look fundamentally at the business and how we then lever from those starting points, I feel very good that we're continuing on that path. As you look at the labor environment from a long-term perspective, obviously retention and being an employer of choice will remain extraordinarily critical. So retaining the right folks, keeping them, and then developing future leaders will be a critical component as we look at wage inflation and maintaining that kind of 30% level and then incrementally getting better. At the same time, we also recognize that with wage inflation we do continue to look for what's the next kitchen of the future? What are the operational changes we can make, equipment changes we can make that will allow us to be more efficient and effective at the restaurant level. So while we're not able to necessarily say hey, 18.1 would have been 18.5 or 19 in Q3, excluding some of those one-time events, that's just because there were so many gives and takes throughout the given quarter. You think of COVID incentives, you name it. Probably vaccine incentives. We think that as we get to that increase in volume and we're able to maintain that over a sustained time and then continue to build off of that, that we're well on our way to that 20% target.

And Todd, just to add some context...

Yeah. Go ahead.

Todd, just to add some context to what Dave mentioned about pulling forward some of the compensation increases or the wage inflation. In the third quarter, we saw wage inflation just under 6%. As we look forward to the fourth quarter, we're anticipating mid to high single digits.

Okay, great. Thanks, Carl, and then my final question, I'll pass it along. Two parts, one just on the franchising side. Dave, you pointed to the fact that, listen, a lot of these guys are not multi-unit multi-brand and they're working on operating through the same challenges that the rest of the spaces. But can you talk qualitatively about how the pipeline is building given how much the results are improving over the course of the year? And then you've kind of touched on not wanting to talk about the unit breakdown for growth for fiscal 2022 because there could be some refranchising opportunities with potential new partners. Can you talk about those efforts, what it takes to decide to refranchise corporate stores that have inflected in the return profile and continue to improve, and what you would look for in return for making that decision? Thanks.

Yeah. Let's start on the second one in terms of refranchising. What we typically look at is a market where if you can find a strong operator confined a strong operator that has infrastructure and a pipeline of talent from the concepts that they operate. If they can likely grow that market faster than we could, and they were able to capitalize on that experience, clearly there's an asset-light aspect to just bouncing off the portfolio. But from an overall perspective, we look at that growth opportunity and who can we think is best situated to grow that concept—or to grow our concept—as quickly as we think is appropriate. Quantitatively, just how we're looking at the pipeline itself, I'm very pleased with what we're seeing, in particular to as you referred to, Todd, the Q2 results. Now as you look at Q3 results, I think everything we’re seeing with a franchisee is very attractive to the cash and cash return, the momentum in the business, how we're positioned, and the effectiveness of our new unit prototype. So as we continue to get more and more strength beneath us, a fundamental business success in the operating model, we just continue to build more from a flywheel perspective, if you will. So yes, as we said, folks, we're talking to, they're working through some of the same supply chain disruptions, staffing disruption issues that we’re dealing with from the company side and that the whole industry is dealing with. I feel like as you can expect some good things in the next three to six months in terms of momentum on the franchise side.

Okay, great. Thanks, Dave.

Thank you. And I’m currently showing no further questions at this time. Now I turn the call back over to Dave for any closing remarks.

Now, just want to say I appreciate everybody's time this afternoon. Again, thank you to our team. Time and time again, over the past 18 months, they've risen to unprecedented challenges and we're already seeing ourselves starting to get to the right side of this current challenge. As we look into the remainder of 2021 and beyond, it couldn't be more excited and proud of where the team is and where we're going from this point forward. So thank you again for your time. Have a wonderful evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.