Good afternoon, and welcome to today's Noodles & Company's Third Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce Noodles & Company's Chief Financial Officer, Mike Hynes. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to our third quarter 2024 earnings call. Here with me this afternoon is Drew Madsen, our Chief Executive Officer. I'd like to start by going over a few regulatory matters. During the call, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items 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 from those projections due to a number of risks and uncertainties, including those referred to in this afternoon's news release and the cautionary statement in the company's quarterly report on Form 10-Q and subsequent filings with the SEC. 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 measures is available in our third quarter 2024 earnings release. To the extent that the company provides guidance, it does so only on a non-GAAP basis and does not provide reconciliations of forward-looking non-GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable efforts. With that, I would like to turn the call over to Drew Madsen, our Chief Executive Officer.

Thanks, Mike, and good afternoon, everyone. Our third quarter results reflect both industry-wide volatility caused by a difficult consumer environment that has led to significantly elevated levels of competitive discounting as well as two other dynamics specifically related to Noodles: a high level of prior year discounting in the third quarter plus an unexpected sudden drop in third-party delivery sales. Collectively, these negatively impacted our short-term results in the third quarter. That said, we remain very encouraged by our positioning for long-term growth, aided by the positive early results from our menu innovation work, which I will touch on shortly. Let's start with the third quarter dynamics. Last year, Noodles pursued an aggressive discounting strategy to help offset the impact of the February price increase. This year, we've chosen to prioritize guest experience improvements driven by operations excellence, normalize our discount level, and invest the savings in targeted loyalty program outreach, broader digital media messaging, and increased third-party marketplace spending to drive longer-term sustainable improvements. This strategy was effective in helping us improve month by month from a significant gap in sales and traffic versus the fast casual industry benchmark in January to equaling the benchmark in July. However, a significant increase in competitive promotions and discounting this year, combined with our own elevated levels of discounting last year, proved challenging in August and September for our same-store sales. As a result, later in the third quarter, we moved to temporarily increase our level of promotional support to compete more effectively in the near term while our menu transformation progresses. This included the addition of a kids-eat-free offer in mid-September and a buy-one-get-one offer in connection with the rollout of three new menu items in October. We have seen a significant improvement in sales to date in the fourth quarter, even as the buy-one-get-one promotion has ended. As I noted earlier, we saw a sudden and significant decline in third-party delivery sales with our biggest partner starting late in July. We've also worked with this third-party delivery partner to identify and test a strategy to address the sales decline we have experienced in this channel and believe we've identified a solution that should help these sales recover. As I just noted, in early October, we were excited to roll out three of our new menu dishes nationally and are very encouraged by the noticeable improvement we saw in our traffic trends relative to the third quarter as a result. This has given us increased confidence in our strategic vision and the menu innovation improvements still to come. Although the current consumer environment has caused variability in our near-term results, we're focused on what we can most directly impact and continuing to position Noodles to capture the significant growth opportunity we believe it has long-term. Importantly, we continue to make meaningful progress on all five of our strategic priorities to achieve sustained profitable growth and drive long-term shareholder value. We also continue to strengthen our senior management team. Last week, we announced the appointment of Stephen Kennedy as our new Executive Vice President of Marketing. Stephen brings considerable expertise in digital innovation, paid digital media, loyalty, and brand building. He will be a very strong partner with Scott Davis, our new Chief Concept Officer. Now let's talk about our progress on each of our five strategic priorities. Creating a foundation of operations excellence remains our top priority...

Thank you, Drew. In the third quarter, our total revenue decreased 4.0% compared to last year to $122.8 million. System-wide comp restaurant sales during the third quarter decreased 3.3%, including a decrease of 3.4% at company-owned restaurants and a decrease of 2.9% at franchise restaurants. Company comp traffic during the third quarter declined 5.8%, pricing contributed 2.2%, and mix contributed 0.2%. The 4th of July shift from the second quarter in 2023 to the third quarter in 2024 negatively impacted our third quarter comp sales by approximately 80 basis points. Company average unit volumes in the third quarter were $1.27 million. Restaurant level contribution margin was 12.8%, down from 16.4% in the third quarter of 2023, primarily due to sales deleverage. COGS in the third quarter was 25.5% of sales, a 40 basis point increase from last year. Our third quarter pricing benefit was offset by inflation and mix shift. Labor costs for the third quarter were 32.0% of sales, which was up 70 basis points to prior year, primarily driven by sales deleverage. Hourly wage inflation was 2.4% versus prior year, which was largely offset by pricing. Occupancy costs were flat versus prior year at $11.5 million and other restaurant operating costs increased 210 basis points in the third quarter to 20.1%. The increase in other restaurant operating costs was primarily driven by a combination of sales deleverage, increases in marketing expenses, and third-party delivery fees. G&A for the third quarter was $12.9 million compared to $11.9 million in 2023, primarily due to expenses from the company's 2024 Summit, which is a biannual national conference with our managers, vendors, and franchise partners. We also had an increase in obsolete warehouse inventory expenses related to menu transformation. Net loss for the third quarter was $6.8 million or a loss of $0.15 per diluted share compared to net income of $700,000 or earnings of $0.02 per diluted share last year. Adjusted EBITDA for the third quarter was $4.9 million compared to $10.9 million in the third quarter of 2023. In the third quarter, we opened three new company-owned restaurants and closed five company-owned restaurants. One franchise restaurant was opened and one franchise restaurant was closed in the third quarter. One additional new franchise restaurant opened in October to bring the year-to-date franchise openings to three. Also in October, four company-owned and three franchise restaurants were closed. As we discussed last quarter, we're undertaking a comprehensive portfolio review where we're evaluating closing underperforming restaurants on or before their lease expiration dates. Our accelerated rate of closures in the back half of this year is a result of that process. We continue to negotiate with landlords, and we will determine future potential closures on a case-by-case basis. Turning to full year 2024 guidance. We have revised certain expectations for the full year to reflect our recent trends and the continued challenging consumer environment. For the full year 2024, we are providing guidance of $487 million to $495 million for revenue, inclusive of negative 3% to negative 1.5% comp restaurant sales. We anticipate full year restaurant contribution margin between 12.7% and 13.3%. General and administrative expenses of $51 million to $53 million, inclusive of stock-based compensation expense of approximately $4.5 million, depreciation and amortization expense of $28 million to $30 million and interest expense of $8 million to $9 million. In October, we completed our 2024 new restaurant development. For the full year, we opened a total of 10 new company-owned restaurants and three new franchise restaurants. We expect total 2024 capital expenditures between $29 million and $31 million. We currently expect to close a total of 12 to 14 company-owned restaurants and seven franchise restaurants in fiscal year 2024. In fiscal year 2025, we anticipate having substantially lower capital expenditures, primarily due to a reduction in company-owned new restaurant openings from 10 in 2024 to two planned openings in 2025. As a result, our expectation is that 2025 total capital expenditures will be less than $15 million. At quarter end, we had a total debt balance of $89.9 million and over $30 million of incremental liquidity available for future borrowings under our credit facility. As Drew mentioned, last week, we amended our credit agreement to provide for more flexible financial covenants, which together with our cash savings efforts and lower capital expenditure run rate will improve our overall financial flexibility.

Thanks, Mike. I am excited about our continued progress on our five key priorities. Our foundation of operations excellence is improving, and our menu transformation is on track with encouraging early test market results and an initial national rollout of three of our new dishes. I look forward to sharing more progress with you soon. Thank you for your time today. Operator, please open the lines for Q&A.

Our first question comes from Jake Bartlett from Truist Securities. Please go ahead.

Great. Thank you so much for taking the question. My first one was about the trajectory of sales throughout the quarter. It looks like roughly consistent in August and September versus where you started in July. And we've heard from others that there was an acceleration in trends that July was largely the bottom. A couple of moving pieces you mentioned. I just wanted to just make sure maybe try to disaggregate some of the impacts at the end of July, the drop-off in delivery sales. You also mentioned you increased promotional activity. Just trying to reconcile your trends, what drove it versus what looks to be like an accelerating trend throughout the industry?

Yes. Thank you, Jake. I'll start on that. You're right, at the end of July is when we saw a sudden drop in our third-party delivery channel sales, and that's a significant channel for us with a material drop. I think that's the biggest reason that we didn't mirror the rest of the industry in August. Additionally, we were wrapping up more aggressive promotional support of our own in the prior year that we had chosen not to pursue this year because up until August, our strategy to position Noodles for long-term sustainable growth was working. So that's exactly why we pivoted to a different promotional strategy when we introduced our new dishes. As we said, Q4 sales and traffic trends since then have improved materially with these new dishes, some increased advertising support, and those positive trends have continued more than two weeks after our promotion has expired. In addition, our test market results remain strong with more food news to come, starting with the three new Mac & Cheese dishes that I mentioned. Our foundation of operations excellence and guest satisfaction continues to improve. We believe we've identified a new strategy to regain profitable traffic growth in the third-party delivery channel. We'll be activating that shortly. While the challenging consumer environment impacted our Q3 results, we feel very good about capturing the opportunity ahead.

Great. To elaborate on what occurred in delivery and the sudden decline, you mentioned pinpointing the cause. It seems you wouldn't change anything, but I'm curious if the increased promotional focus on the platforms was a factor. I'm trying to grasp what led to the slowdown and the identification that suggests a need to adjust your prices in the delivery channel.

Yes. We didn't change our strategy or our investment or our approach to engaging on the third-party channel. We believe that our existing menu markup was what caused the problem, and we're evaluating alternative menu markups to make ourselves more compelling to the algorithm on that platform.

Okay. Was the change in consumer behavior driven by the algorithm suggesting a different direction based on your pricing? I'm trying to understand what led to the trajectory change and whether anything specific occurred or if it was indeed a shift in consumer behavior.

The consumer didn't change. We believe it was the latter. The algorithm changed.

Okay. Great. Regarding your guidance, I understand the wide range given the uncertain environment. It appears that at the high end, the implied comp guidance for the fourth quarter is approximately 1% to negative 5%, which is quite broad. It sounds like with pricing, you would be at around 1% already if traffic is negative 0.8%. Is that correct? I'm trying to grasp why there is such a wide range and whether you feel confident that the current trends can persist.

So first on the pricing, effective pricing in Q4 will be just over 1%, about 1.3%. Together with the traffic trend we talked about, it gives you a base of just under 1% today when you look at quarter-to-date results impacted by our kids-eat-free promotion, which drives our check a little lower. The guidance range, we wanted to leave room for variability, which we've seen all year. We wanted to ensure we captured some upside, which we believe in, and we believe we have room to the upside as third-party delivery continues to improve week-over-week in Q4 and as we build on the momentum with our three new dishes. However, we also wanted to recognize there has been variability and leave some room for that on the downside.

Great. I have one more, then I'll pass it on. And that is just around your free cash flow generation. You mentioned, Drew, that you thought you'd be positive in 2025. I'm wondering whether that's a commentary that you'd be positive for 2025 as a whole or at just some point during 2025 you would turn positive from a free cash flow perspective?

Yes. Our expectation is that with lower CapEx, much lower CapEx under $15 million expected for 2025, and it's a pretty broad guidance point there. We haven't totally fine-tuned 2025 CapEx, but we know with just two planned openings, it's going to be sub-$15 million that we're going to have an opportunity for the full year to be free cash flow positive and then be able to carry that forward.

Great. Thank you so much. I’ll pass it on.

Thank you, Jake.

Thank you. I'm showing no further questions. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.