NOODLES & Co Q1 FY2022 Earnings Call

Good afternoon and welcome to today’s Noodles & Company’s First Quarter 2022 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. You may begin.

Thank you and good afternoon, everyone. Welcome to our first quarter 2022 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 various 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 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 first quarter 2022 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 our results for Q1, which included a recapturing of the momentum that we had gained through the majority of 2021, as well as a positive inflection point in our unit growth trajectory. Noodles & Company has made significant strides over the past few years. And with a temporary disruption of COVID-related closures seemingly behind us, we feel the company is well-positioned to accelerate growth meaningfully for the balance of 2022 and beyond. While the first two months of Q1 were impacted by both our historical seasonality as well as temporary closures due to the Omicron COVID variant, the company quickly regained momentum as we entered March, culminating in average unit volumes for the March fiscal period of $1.35 million, $170,000 above pre-COVID 2019 levels. This momentum has continued thus far in Q2 with quarter-to-date average unit volumes cresting $1.4 million. As our restaurant base has regained momentum, we are also excited about the success of our new units and the unit growth opportunity ahead. We opened seven restaurants system-wide during the first quarter, the largest number of new openings in a quarter since 2016. More importantly, these restaurants, as a class, are already exceeding our internal projections and performing well above the company average. As a reminder, our target is to achieve a 30% plus cash-on-cash return on new company locations, supported by our smaller square footage, off-premise oriented prototype, the majority of which include our order ahead drive-thru pickup windows. Our classes of 2019 through 2021 continue to track toward these return objectives, and the class of 2022 thus far has been even stronger. Looking at their initial performance and accounting for typical honeymoon patterns of prior classes, we anticipate these restaurants will settle above $1.5 million in average unit volumes. Ultimately, we believe Noodles & Company has the potential for at least 1500 units nationwide. We continue to be a differentiated category leader with proven mass appeal in a wide variety of trade areas, both urban and suburban, as well as strong resonance in both college and small towns. We feel this growth opportunity is supported by our proven success in various geographies, with our top 30 restaurants spanning coast to coast amongst 20 different MSAs with representation from urban, suburban, collegiate and small-town locations. Additionally, as we exit the temporary disruption of COVID, we expect nearly 40% of our restaurants to meet our long-term target of $1.5 million of AUV during the second quarter. With significant opportunity in both infill and new markets, this mass appeal broadens our unit growth opportunity, increases attractiveness to franchisees and mitigates restaurant growth strategy. We continue to make progress towards increasing the franchise mix of our business, as evidenced by the recent re-franchising of California with the agreement calling for 40 new locations to be opened during the next several years. Finally, the variety inherent in our menu, our stronger off-premise capabilities, and our low entry-level price point gives us the ability to win in a wide variety of consumer occasions and environments. Well, we can't ignore the near-term impact of the inflationary environment, which Carl will discuss shortly, simply put, I've never been more confident in the growth opportunity ahead of us. This confidence is bolstered by the effectiveness of our strategies around menu innovation, guest engagement, and operations. From a culinary perspective, over the past few years, we have executed a robust pipeline of menu development, resulting in additions such as zucchini noodles and tortelloni that have increased both the reach and frequency of our brand. As an example of the effectiveness of these introductions, healthier items now represent 13% of mix, up from just above 10% a few years ago, while tortelloni continues to perform very strongly at 7% of the guest mix. Noodles & Company's ability to redefine traditional expectations of noodles and pasta has allowed the brand to resonate with a wide variety of audiences. And we feel our upcoming introduction, Leanguini, is a particularly powerful representation of how our menu can meet several dietary preferences without sacrificing taste or flavor. Leanguini has the taste and texture of traditional linguini noodle and gets its name from having 56% less net carbs and 44% more protein than a traditional wheat noodle. The culinary formulation for Leanguini is a proprietary, first-of-its-kind offering that is a result of over a year of innovation and is exclusive to Noodles & Company. Guests' responses have been fantastic, and we're excited to launch Leanguini nationwide next week. While Leanguini will be featured with our new light lemon parmesan dish, our made-to-order approach to culinary allows it to be substituted into any of our dishes, allowing guests to enjoy the same great flavors they have come to love from Noodles & Company with significantly fewer carbs and much higher protein. We believe Leanguini could be a transformational new menu introduction that could significantly expand our reach, encourage more repeat visits, and provide a great option for culinary launch occasions. As we did with tortelloni, we will leverage our guest engagement program to offer rewards members an exclusive opportunity to try Leanguini before it becomes available to all guests beginning on May 18. Our rewards program remains an important pillar in our overall guest engagement strategy. With over 4 million members, which compares favorably on a per-unit basis with competitors, we continue to garner greater insights to foster more personalized relationships with our guests. These rewards continue to be supported by a top-tier digital ecosystem, with digital sales accounting for 58% of sales during the first quarter. As our rewards program and digital assets strengthen, we will also soon be launching our new brand positioning, Uncommon Goodness. Through Uncommon Goodness, Noodles is bringing its purpose to life by elevating the Uncommon Goodness that has been core to the brand for more than 25 years. From how we treat our team members and create a unique guest experience to how we carefully select our ingredients and positively impact the communities we serve, Noodles infuses Uncommon Goodness into everything we do. At the core of this brand positioning are our operations and people. I'm incredibly proud of how our team has navigated the recent environment. Staffing has improved dramatically over the past few months, with nearly all of our restaurants now returning to full operating hours. Importantly, as we have navigated this environment, we've also gained efficiencies in our operating model through equipment and operational initiatives, resulting in significant improvements in throughput, as well as a reduction in the labor hours needed to provide a great guest experience. We've seen a 30-second reduction in cook times at our restaurants through these initiatives, as well as an over 50% increase in sales per labor hour since their implementation. These efficiencies will be particularly advantageous as we navigate the current inflationary environment. Again, Noodles & Company as a brand has never been better positioned to accelerate growth. Over the past few years, we've made tremendous strides in nearly every aspect of our business, from menu innovation and guest engagement to new unit economics and venturing. As I look at the balance of 2022, I feel we have an incredibly strong slate of initiatives, headlined by the launch of Leanguini and our new brand positioning. Combined with the strength of our team and new unit pipeline, I'm confident that we have not only regained the momentum that was interrupted by the Delta and Omicron variants, but we are also approaching an inflection point in realizing the company's immense potential. I'll now turn it over to Carl to discuss in more depth, our financial results and expectations for 2022.

Thank you, Dave, and good afternoon, everyone. I am pleased to share our first quarter results, which reflect accelerated momentum throughout the quarter as we move further away from COVID and staffing-related volatility. In terms of the financial highlights, total revenue for the first quarter increased 2.7% to $112.6 million compared to last year; comparable restaurant sales increased 6.4% system-wide, comprised of a 5.3% increase at company-owned restaurants and an 11.9% increase at franchise restaurants. The gap between franchise and company comparable restaurant sales is due to less impact from Omicron geographically, with franchise AUV now coming more in line with company averages. Our revenue for the quarter was adversely impacted by COVID-related temporary closures and reduced operating hours, predominantly during the earlier part of the quarter, which we estimate was approximately $4 million. Additionally, the year-over-year impact from the sale of our California locations was estimated at a $3 million impact on revenue, which includes lost revenue, net of royalty payments received. As mentioned before, the California transaction will have negligible impact on our full-year EBITDA. However, it is expected to be meaningfully accretive as the market grows and as a catalyst for future franchise growth. Underlying our revenue growth, our average unit volumes were $1.25 million for the quarter, a 6.8% increase from last year, and a 13.3% increase versus pre-COVID levels in 2019. Specifically, in March, we reported AUV of $1.35 million, driven by a significant decline in COVID-related temporarily reduced operating hours in addition to our typical seasonal sales lift. We are pleased to see that sales further accelerated into April, reaching $1.4 million, which represents about 18% over 2019. Overall, we still feel very positive about our economic model and our ability to leverage sales momentum throughout the P&L. For the first quarter, the restaurant contribution margin was 9.7% compared to 13.6% during the first quarter of 2021, representing a variance of 390 basis points. Within that variance, 150 basis points is a one-time revenue impact from temporary closures in addition to labor and COGS inefficiencies related to those closures. Our first quarter contribution margin was further impacted by 300 basis points in our cost of goods sold, which increased to 28% of sales from our historical average of 25% of sales. The inflationary environment has pressured many areas of our commodity basket. Though, as a reminder, the primary ingredient in our dry pasta is durum wheat, which represents 10% of our COGS and has not been impacted by the current disruption in Europe to the same extent as other wheat markets. The more material inflation in our food basket has been within protein, particularly chicken. Chicken is our number one spend item, and our high-quality, boneless, all-white chicken meat breast is an add-on chosen by over 50% of our guests for their dishes. This chicken market has been particularly challenging over the past few months, including the inability to contract prices further into the year as we normally would do. This has resulted in our Q1 chicken cost being approximately 70% higher than the prior year, with the expectation of nearly 80% cost increases during the second quarter. We anticipate that the back half of the year will include meaningful relief from these unprecedented cost levels, and we have already seen green shoots in the non-breast chicken meat market in addition to pricing benefits from normal seasonality during the summer. We are continuing to make strong progress in identifying and executing operational efficiencies with the support of our long-standing vendors to reduce food costs within our restaurant. As a further mitigation to elevated chicken prices, earlier this week, we implemented a temporary $1 surcharge on our chicken menu prices. We view this temporary surcharge as one-time and fairly short-lived, as the market is expected to normalize reasonably soon. We are fortunate that we maintain a strong value proposition and pricing power with an attractive entry-level price point of around $7. This has allowed us to take additional price without meaningful guest resistance, bolstered by the fact that our core price has been relatively stable during the last few years, as most of our pricing increases have been concentrated on third-party delivery. For the full second quarter, we anticipate our effective price to be just above 10%, inclusive of the chicken surcharge, compared with 7.5% during the first quarter. Still, with the unprecedented inflation in our commodity basket, we expect COGS to be approximately 28% of sales during the second quarter before easing during the balance of the year. Turning to our cost of labor. Labor costs for the quarter were 32.3% of sales, which is 50 basis points above last year. While the first quarter labor costs did not include any one-time expenses, our results were impacted by labor inefficiencies for COVID-related temporary closures. During March, which we expect will be more indicative of our second quarter performance given more normal seasonality as well as a significant reduction in temporary closures, our labor costs were closer to our typical labor expense of 30%. Our operating costs for the quarter were 19.9% of sales compared to 18.8% in prior years. This increase was driven primarily by delivery fees, which increased 50 basis points to 6.2% of sales. Additionally, we were impacted by deleverage from temporary closures during the first half of Q1, as well as increased utility costs. We expect other operating costs to be between 17.5% and 18% of sales in the second quarter, driven by sales leverage and a continued investment in our third-party delivery channel. With additional leverage anticipated in the occupancy expense line, we anticipate that second quarter restaurant-level margins will be approximately 16%. G&A for the first quarter was $11.8 million, compared to $10.9 million last year. The increase was driven by a return to travel and regular operating activities compared to last year. G&A included non-cash stock-based compensation of $1.2 million during the first quarter compared to $800,000 last year. For the second quarter, we anticipate G&A to be approximately in line with our spend last year, which was $13 million. Our G&A forecast for the second quarter is inclusive of the anticipated marketing support for our culinary launch of Leanguini and our new brand positioning beginning next week, in addition to $1.6 million of non-stock compensation expense. GAAP net loss for the first quarter was $6.4 million or $0.14 per diluted share, compared to a net loss of $2 million last year, or $0.04 per diluted share. We also report net income on an adjusted basis, which adjusts for the impact of impairment, divestitures and closures. Excluding these adjustments, our first quarter net loss was $5.8 million or $0.13 per diluted share, compared to a net loss of $1 million or $0.02 per diluted share last year. We expect our effective tax rate to remain relatively low at least through 2022, and we do not expect to be a cash taxpayer for the foreseeable future given our sizable net operating loss and other tax credits of over $150 million. Switching to our outlook for the rest of the year. Through April, we have seen continued strength in our average unit volume growth and expect volumes to remain strong throughout the second quarter. As a result, for the second quarter, we anticipate total revenue to range between $130 million and $133 million and comparable sales in the mid-single digits. As Dave noted during the quarter, we opened seven new locations system-wide, five of which were company-owned, the most openings we are seeing in a quarter since 2016. We continue to anticipate 35 new restaurants to open system-wide for the full year, representing 8% unit growth, with approximately 70% of openings to be company-owned and 30% as franchise locations. As we discussed last quarter, we do expect the balance of the year's unit growth to be somewhat back-loaded, with four to five openings in Q2. For the full year, we expect $30 million to $34 million of capital expense, supporting new unit growth and continued innovation on our website and mobile app. Turning to the balance sheet. At quarter-end, we had cash and cash equivalents of $1.6 million and a total debt balance of approximately $35.3 million. Our first quarter cash flow included expenses related to new unit openings during the first quarter, as well as typical timing and seasonality of payments. We expect to produce positive free cash flow throughout the remainder of 2022, and our strong liquidity position 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. One final note I'd like to make is that I recently had the opportunity to meet with nearly all of our general managers in the field. The team is energized by our overall strength and the passion and quality of our leaders. As we accelerate growth and leave the one-time business disruption behind us, I can confidently say Noodles & Company is better positioned than ever to become one of the premier growth stories in the restaurant industry. I look forward to the balance of 2022 and beyond. With that, please open the lines for Q&A.

And our first question comes from Jake Bartlett from Truist Securities. Your line is now open.

Great. Thanks for taking the question. I appreciate it. My first is on the cadence of same-store sales. And I think what I'm hearing is that the same-store sales maybe average weekly sales growth are diverging in some way. But I want to just focus on the same-store sales. You would provide what they were in January and kind of quarter to date or month to date in February last time you reported. It looks like there's a deceleration in March, yet the average weekly sales growth seems strong. And then what I'm hearing just the guidance for the second quarter looks like maybe it'd be a deceleration from there. And so, what I'm just wondering what the cadence on the improving, I would have thought that given the fewer closures that you would have seen in March and now in April, those two numbers would have gone up. But maybe it has to do with compare, just help us understand the trajectory of the business from the same-store sales side it's harder to see, and so to share, that would be helpful?

Yes. Jake, first and foremost, we unequivocally believe that we're actually seeing sequential and continued improvement and not deceleration of any shape, way or form. We find that the year-over-year, one-year comparison remains somewhat challenging and volatile based on the volatility that you saw throughout 2021. So how we look at it? First off, I was looking at a three-year growth, so looking versus pre-COVID numbers. What we've seen is just a continued acceleration throughout Q1 from roughly 11% and 12% or so during the first couple of months, up to 15% during March, and then that's accelerated, as Carl mentioned, to about 18% here in April. Even within April, we're seeing continued momentum and that is accelerating as well. From an average unit volume perspective to your point, part of that is seasonality, but we've seen those continue to improve and accelerate even throughout April as well. Specific to the year-over-year, you are correct, in terms of there was absolute one-year same-store sales were a little bit lower in March, and that's reflective of much more difficult comparisons. We see a similar thing in April, in terms of same-store sales thus far around 4%. We expect and are very confident that you're going to see that number continue to improve as we go through the balance of Q2, as you see a little bit more pricing action at play and then very excited about the impact that both Leanguini can have, as well as our Uncommon Goodness brand repositioning rollout. Ultimately, we look at that three-year growth, Jake, and we see that just continue to accelerate week-in and week-out. Overall fundamental underlying momentum in the business is actually we believe accelerating, certainly not decelerating.

Great. That's really helpful. Dave, you mentioned it, but Leanguini, I think you said it's been tested, and you've observed a strong response. It might even be stronger than the Zoodles, and we remember the launch impact back in the second quarter of 2018. Could you provide more details on how Leanguini has been tested? Also, what kind of impact do you think it could have?

Yes, certainly. It can have a very meaningful impact on this business, somewhat similar to what we saw with Zucchini, which, as a reminder, that brought a lot of people back into the brand and showcased our ability to meet different dietary preferences while maintaining the soul of the brand. What makes Leanguini so special is that it has much lower net carbohydrates, 56% less, and 44% more protein, but the taste and the texture unlike zucchini is that of a traditional wheat noodle. So what we are seeing and testing, we have not put a ton of marketing muscle behind this yet; it's much more for the national rollout. But we are seeing an increase in frequency as people try that particular dish, which is very meaningful. I think what's particularly important is all of our metrics that we look at from a very detailed real-time perspective, when you look at Net Promoter Score and overall satisfaction, the Leanguini lemon parmesan, and you can substitute anything, but the Leanguini lemon parmesan is number one in our entire menu across all of those metrics. So the guest response has been fantastic. We are very excited to roll that out first exclusively to rewards members next week, and then a couple of weeks later, go across the entire audience. We feel it can be a very transformative introduction. Very excited about what that can do.

Great. For the last question, Carl, regarding the cost of goods sold, you reached the low end of the guidance range of 28% to 29% this quarter. Could you explain what contributed to this progress? The overall news has been negative, particularly with the significant increase in chicken breast prices since you provided that guidance. What factors led you to the lower end of the guidance range? Additionally, what level of visibility do you currently have? I'm curious about your contracts with durum wheat and other proteins, as well as other commodity risks. How are your current contracts structured, and what should we be mindful of regarding margins moving forward?

Sure, happy to. So starting with the first quarter, we ended up with the low end of our guidance, because there has been some stabilization in our non-protein COGS basket. And we're looking at now, maybe the ability to contract that through the second quarter from both a supply security perspective, but also for pricing. So my confidence in the second quarter COGS forecast, which we got into at 28%, is higher now, because we are able to secure some of those shorter-term pricing contracts. On the flip side of that, there is still volatility in the chicken market. We are seeing that with outsized inflation, both in the first quarter and leading into the second quarter. So that's one area where we're remaining in pricing that's more variable in nature. What I would say is that we are beginning to see some green shoots in the chicken market, particularly in the non-breast market. So we are seeing some prices come down in wings, thighs, and other parts of the bird. And then secondly, just the chicken market overall, the fundamentals are strong. So, we should be anticipating some normalized levels of seasonality in that market coming into the summer and prices coming down.

Great. Thank you so much.

Thanks, Jake.

And thank you. And our next question comes from Andy Barish from Jefferies. Your line is now open.

Hey, guys, just a couple of quick follow-ups and then another one. I may have missed the total basket inflation in the 1Q, Carl, please?

Sure. So the total inflation in the first quarter was around 20% of total inflation. And as I mentioned, in the non-chicken ingredients of our COGS basket, we have begun to see some stabilization. And that was more in the low double digits. But just given the inflation we've seen, specifically in chicken, and as a reminder, chicken is about 13% of our food basket. And that was about 70%. That's going to be the outsized total inflation you see when you look at the total COGS.

Now, just add to that, Andy. Clearly, what we've seen in the last few months is that inflation as a whole is not necessarily going to be transitory. But we are seeing stabilization across nearly every aspect of the basket. And as Carl mentioned, kind of that low double digits perspective, boneless chicken breast and as a reminder that we have an all-white, highest quality aspect of the bird. That is the one area that we have seen just that volatility, and it's had an outsized impact on Q1 and we expect in Q2 as well. That is a market that we would expect normalization. As Carl said, you see it in thighs, you see it in other parts of the chicken. So that is one area we would expect to come down meaningfully over the balance of the year and return us closer to that lower double-digit inflation, which we're all seeing. It's stabilizing, but it's not necessarily going to be coming down.

Got you. And then on the pricing into Q2 with 10% or so. Does that include, I know that chicken temporary surcharge. But is Leanguini going to carry a premium if that's substituted for another pasta and in dishes?

Yes. It will carry a modest premium. We certainly believe this dish is so amazing that we want to make sure that price is no impediment for people trying it. Because when people try it, they're really going to be amazed. So there's some potential average check benefit that we would expect to see, probably pretty nominal, though, because Andy, we do want to introduce it at a pretty low price. Because we think it's something that wants people to try; it's really going to make them rethink how they view the carbohydrate and protein aspect of noodles and pasta.

Got you. And then just finally, as you continue to reiterate your 2024 targets, you mentioned that 40% of units are currently running at a million and a half or above. What is the margin profile on that group of stores, please?

Yes. The vast majority of those restaurants are north of the 20% target. It would be a little bit shorter than 40%, probably closer to 35%. Just based on some of this temporary chicken impact that they're not quite there, but close to 20%. As chicken normalizes, we would see that those percentages should be pretty equal across that 40%.

Okay. Sounds good. Thanks, guys.

And thank you. And our next question comes from Andrew Strelzik from BMO Capital Market. Your line is now open.

Great. Thank you. Thanks for taking the questions. The first one from me, I believe some of your key geographies, in particular, the Midwest, had been lagging from a recovery perspective in prior quarters. And so I guess I'm just curious if that's still the case? And if so, how much is that holding back the AUVs and the AUV recovery relative to maybe where it would be if it was holding in with the rest of the system?

Yes. That's a great question, Andrew. And I'm glad you asked that. There are markets that particularly got impacted by Delta. If we return back to Q4 and some of the temporary closures we had, now that we are seeing ourselves fully staffed. So our staffing levels are back to where they were pre-COVID, if not a little bit better. We are seeing that momentum come back quickly, as well as the regulatory environment becoming more favorable in those markets. So, the impact that they're having as we go from $1.35 million to $1.04 million and beyond, is continued upside as those continue to gain back some of what they lost. But they've already returned and are showing great momentum over the last couple of months. It's tough to quantify exactly because we're still only a couple of months into kind of being fully staffed. But we certainly like what we're seeing from a momentum perspective and feel it will further assist us as we go further into 2022.

Okay, great. That's helpful. And then, I think the labor side came in pretty meaningfully below, where you guys were expecting as a percent of sales perspective. I guess I'm just curious on the efficiency side, are you at this point of realizing the full extent of that? Or is that that build or is that what drove that favorability there or just something else to consider?

Yes. One aspect that drove the favorability, and we also ended up on the high end of our revenue range as well, wasn't it the staffing environment improved so dramatically. So as the staffing environment improved, we returned to full operating hours. We didn't have the inefficiencies that you saw throughout Q4 and part of Q1 as well. So that is the largest driver, returning to being nearly fully staffed. Additionally, we did finish the rollout of the steamers, and they continue to be a tremendous asset for us. As we said, 30-second improvement in throughput, as well as meaningful improvement in sales per labor hour, that will carry on into Q2 and beyond. Because now just really Q2 will be the first quarter where we have the full implementation of steamers across the entire country. So you're getting a combination of staffing getting much better, and now being fully rolled out in those steamer initiatives. One thing that's exciting is we're pretty early on, but Andrew, we see certainly a path for us to have this next generation of operational improvements, looking at everything from prep and processes within the restaurants, our current equipment, and how they could potentially be more efficient, and even looking longer-term at robotics. We feel that, while we're still in the early stages in some of these things, we've got continued momentum and opportunity to get more efficient on the labor side.

That's great to hear. And then my last one. I guess this is more philosophical, because you're seeing you're obviously very excited about the unit growth potential in the management of business. But if we were to go into an environment where the consumer were to soften up a bit, would it change the timing, I guess, or the trajectory of how you're thinking about the unit growth? Or would you just think, look, the business is what it is, let's think longer term and plow ahead? I guess I'm just philosophically how you're thinking about that would be helpful. Thanks.

Yes, I mean, absolutely, we see elevated construction costs, but from the consumer environment, we're so well positioned. And as a reminder, we were positive same-store sales throughout the 2008, 2009 recession. This brand, our guests tend to be a little bit more insulated. And with our entry-level price point remaining at around $7, we feel that we've just got great momentum and ability to meet all those different consumer situations. We are above 30% cash-on-cash return for these classes '19 through '21 as well as '22. We really like what we're seeing from the development pipeline perspective. The unit prototype being smaller square footage incorporating the drive-thru windows, we still feel that, regardless of the environment, we can continue to generate strong results from a cash-on-cash perspective. While others might be pulling back, that actually would give us even greater opportunity to have better results. Interestingly enough, if you go back in time, our best-performing class of new restaurants prior to the classes of '19 through '21, and now '22, was actually the class of 2009. So that can often give you opportunity to have even better results.

Okay, great. I'll pass it on. Thank you very much.

And thank you. Our next question comes from Todd Brooks from Benchmark.

Hey, good afternoon. A couple of quick questions. And then one bigger picture question, if I may. Carl, you talked about on the non-protein side of the basket, seeing the opportunity to maybe hedge some of that through Q2. But with Dave's comments about really cost stabilizing, but not really expecting them to come down. Thoughts about hedging out further to kind of lock in assurance to the cost base risk of maybe being wrong about seeing some easing in the second half? I know Chipotle highlighted last night that they expect stable kind of at these levels, commodity basket costs across the year. So I guess, thoughts on why we're not contracting further out on some of these categories that we can contract then?

Sure. What I would say is, as we're seeing prices stabilize, we're working with the vendors and they're getting more comfortable that we can contract not only the supply, but also the pricing. As we think about getting further into that stabilization, we're going to continue to have those ongoing conversations and think about a full pricing contract for the remainder of the year. We are starting to see some opportunities across certain areas of the basket where we can go longer duration, but right now securing second quarter really is optimal for us.

And I was just going to say, it sounds like it's more of a supplier willingness to contract versus your desire to get into a contract potentially?

Yes. Our desire and our traditional approach have been to be about 12 months ahead in terms of contract. We typically and historically have garnered more favorable pricing. We are doing that. There are certain aspects of the basket that we've been able to do that. We're being opportunistic, and as the opportunity arises, we are absolutely following that same strategy. But it does ultimately, Todd, kind of come down to a commodity-type approach, where there are certain ones like chicken that we couldn't contract for price even if we wanted to. But then there are others, the evolves, as an example, where we can add relatively favorable prices.

Okay, fair enough. And then based on that outlook, I know on the last call, you had talked about the restaurant-level margins improving over the course of the year, and hopefully exiting back towards that high teens or better range with the AUV recovery in the stores. The slope of the recovery curve. I mean, if we get back to 16% in Q2, how do you see that kind of exiting the year now, if you're looking forward with what you know on the cost side?

I mean, ultimately, it's probably a little bit premature in terms of we still see enough volatility in inflation that we don't know the duration of what that chicken surcharge will ultimately be, nor not necessarily what the chicken prices will be. We do feel significant confidence in the average unit volume growth and the fundamental demand of the brand, and the leverage that we're able to achieve throughout the balance of the P&L. When you look at that guidance for 16% restaurant level margin in Q2, the only reason that's even below the prior year is COGS. As that inflation environment becomes more clear, that will allow us to have a better answer. But in terms of the balance of the P&L, we feel extremely strong with where we're adding the ability to expand margins as COGS normalizes.

Okay, great. Thanks, Dave. And then a final and this is a bigger picture, one for you. Looking at the improvements in the operating model, which have been certainly material over the last couple of years in the AUV growth, and you see the stock trading at kind of sub four times or 40 with our estimate. I guess the markets obviously not believing something about the recovery potential and what you're driving here. You've got other properties being taken out at kind of eight to 10 times. I guess, what's your thought on the disconnect between the public market valuation of Noodles and the kind of acquisition values that you're seeing of properties being taken out at eight to 10 times? How do we unlock some of that value for the Noodles brand? Can we do it within the existing model? Is it a transaction? Is it capital allocation? Just how are you thinking about where we sit right now?

Well, certainly as a management team and as a board, we have regular dialogue around how we can best create shareholder value. I do feel that when you look at the disconnect between where our prices are today, we recognize that the near-term pressures we saw with the Delta variant as well as Omicron certainly caused an air pocket in the trajectory of this business. While we can absolutely look at what we can do to create shareholder value, we believe, first and foremost, continue to open very high profitable, high return on investment new units, launch Leanguini, and the new Uncommon Goodness brand platform, show that continued averaging and volume momentum and margin momentum. That is our first priority. But certainly it is something we look at in terms of the best ways to create shareholder value.

Okay, thanks for that. And then the final one for me. Kind of the real estate opening environment. I know you've been back half loaded by plans, and you got the seven opened in the first quarter. Can you just talk about the environment for equipment and materials? Are you seeing at least the supply chain side of construction loosened up to give you enhanced confidence in hitting the full 35 for the year?

Yes. We have strong confidence in the overall pipeline, Todd. We're not seeing the material availability issues that we had seen during 2021. You are still seeing some challenges in terms of the timing of landlord delivery, particularly of new builds. That's a reason why we still want to be cautious with the timing of the restaurants, not the number, but the timing of restaurants in 2022. Overall availability, however, is very strong. Our 2023 pipeline is well above where we were last year, in terms of several units that have already gone through lease, as well as the number of NOIs that are active, significantly higher than where we were last year at this time. We continue to have strong confidence; it's not the best environment, but as people are pulling back, we actually see it as an even greater opportunity.

Okay, great. Thanks, Dave. Appreciate it.

And thank you. And we have a follow-up question from Jake Bartlett for Truist Securities. Your line is now open.

Great. Thank you. And I just wanted to ask this question on a public forum. We don't miss it. But Carl, can you give us what the traffic in the mix was in the quarter?

Sure. So if you look at the total comp, I'm talking company for Q1, comp was 5.3%. Pricing for the quarter was about 7.5%. So there was a slight decline in traffic, year-over-year. If you think about the comparables particularly in March and with the Omicron impact that we had at the earlier part of the quarter.

Yes, it's relatively negligible. Just to clarify, the way we account for traffic is based on the number of entrees sold, not just transaction count. Our digital business remains incredibly strong. As we see customers returning to in-restaurant dining, we've already factored in the count of entrees in our tracking. Therefore, the overall shift in mix is quite negligible in Q1.

Thank you. I have a question regarding the pricing you anticipate for the menu in the second quarter. This includes the $1 surcharge, and since 50% of orders include chicken, it seems that half of the orders will incur a $1 surcharge. This appears to be a significant price increase. Can you break down that 10% for us? Specifically, what is the impact of the surcharge on that? Additionally, I understand you plan to implement menu pricing adjustments in the second quarter. What is the expected size of that increase? Also, what pricing do you anticipate for the third and fourth quarters, assuming no further pricing actions are taken? How will these adjustments affect pricing in those quarters?

Sure, happy to. So first there's two pricing actions we're taking in the second quarter. The first is the $1 surcharge. The second is an anticipated 3.5% increase, which we're taking next week on our core items. With that 3.5%, which we anticipated, and we spoke about last quarter, that was going to take us at pricing just below 10%. So our guidance to pricing being just above 10% now includes that $1 surcharge. On that surcharge, it's one-time in nature and the financial impact for pricing, but also the financial impact of the P&L is really going to be subject to the timing. From a financial impact perspective, it really is dependent on if there's any change in guest behavior or as a mix shift into any other protein. We've only been live with that for about a week, and encouragingly we have not seen any major shifts in any other proteins. Overall, we are encouraged by that so far. In terms of the back half of the year, anticipate no further pricing actions. Again, we are looking at this in relation to the inflationary pressure on the business in the first half. So without any further pricing increases, that should step down nicely probably around 7.5% for the full year.

Yes. And obviously, a very dynamic situation. Just to clarify as well, if you're trying to do a bridge between the 7.5% price in Q1 versus the expectations for Q2. Also keep in mind, we will roll off some nominal price from the prior year. Hence why, the non-surcharge price is a little bit below time.

Great. Thank you very much.

And thank you. And our next question comes from Nicole Miller from Piper Sandler. Your line is now open. And pardon me, and it looks like that line may have dropped. I would now like to go ahead and turn the call over to Dave Boennighausen for closing remarks.

Thank you, Justin, and nicely done with the pronunciation. In closing, we certainly can't ignore the current inflationary environment. But I'll tell you, I've never been more convinced in our opportunity for Noodles to be a premier growth story in the restaurant industry. Momentum has accelerated meaningfully. Staffing is back to pre-pandemic levels, and we've been continually strengthening our median and economic model. I'm really excited about the slate of initiatives we have for the balance of the year, headlined by Leanguini, as well as the launch of a new brand positioning. I look forward to sharing with you over upcoming earnings calls our progress towards achieving those accelerated growth objectives. So thank you for your time today, and stay safe.

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