Earnings Call
NOODLES & Co (NDLS)
Earnings Call Transcript - NDLS Q4 2021
Operator, Operator
Good afternoon and welcome to today’s Noodles & Company’s Fourth Quarter 2021 Earnings Conference Call. All participants are now in a listen-only mode. After the presentation – 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.
Carl Lukach, CFO
Thank you and good afternoon, everyone. Welcome to our fourth 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 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 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 fourth quarter 2021 earnings release and our supplemental information. Now, I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.
Dave Boennighausen, CEO
Thanks, Carl, and good afternoon, everyone. 2021 was an important year for Noodles & Company as we made significant progress against our growth objectives. Validating the resonance of the brand for today’s consumer, as well as setting the stage for accelerated unit growth, which is now underway. For the fiscal year, revenue increased 20.7% compared to 2020 to over $475 million. Comparable restaurant sales increased 22.1% system-wide and digital sales increased 20%, accounting for 57% of total sales. Restaurant margin for fiscal 2021 increased 400 basis points to 15.9%, culminating in a 233% increase in adjusted EBITDA to $38.1 million for the year. As we look back at 2021, one important aspect is the underlying AUV momentum that we’ve seen throughout the system. Evidenced by the record AUVs of $1.3 million that we achieved in Q3 prior to the staffing and Delta variant challenges of the fourth quarter. Even with the impact of Delta and staffing challenges, for the full year, average unit volumes reached an all-time high of $1.3 million, representing approximately 22% growth over 2020, an increase of over 11% versus pre-pandemic 2019. We saw strength throughout the country, with particular momentum in less penetrated markets where we were able to accelerate brand awareness through targeted digital efforts. As AUV grew in 2021, we were also proud of the efficiencies gained throughout our labor model, particularly with the implementation of steamers that will be completed nationally this quarter. The gains from these efficiency initiatives will manifest themselves throughout 2022, both to reduce labor hours and provide improvements and throughput in tough times, which are critical as we face increased demand, both in existing and new locations. Finally, during 2021, our newest vintage of restaurants performed at our highest level in company history, validating our strategy to accelerate growth with a proven model that yields over 30% cash on cash returns. Turning toward recent results. During the fourth quarter, while the underlying business remained strong, the company was significantly impacted by both staffing challenges, as well as the surge of the Delta COVID variant, which was concentrated in our most penetrated markets of the Rocky Mountain West and the upper Midwest. This resulted in a meaningful amount of temporary closures or reductions in operating hours, which we estimate impacted revenue by approximately $8 million for the fourth quarter. The Delta variant's impact on the full quarter’s financials was additionally compounded by one-time costs nationwide related to investments in staffing and continued volatility within our supply chain. It’s important to note that this impact was particularly profound during late October and through the month of November. Notably, as staffing improved and the Delta variant subsided, the business quickly regained momentum, as evidenced by our strengthening comparable restaurant sales throughout the quarter. From the fiscal period perspective, system-wide comparable sales grew 6.8% in October, increased to 11.9% in November, and then again to 14.7% during the month of December. As we transitioned to 2022, trailing the surge in Omicron cases has impacted the beginning of the year. But again, we’re pleased with how performance has improved as cases have subsided. During our January fiscal period, comparable sales increased 2.7% at company-owned locations and 4% system-wide. Results have accelerated in the recent weeks, with comparable sales in our February period increasing 7.5% at company-owned locations and 8.7% system-wide as of yesterday, February 22nd. These results give us confidence that the brand will again prove its resilience and accelerate both sales and margin expansion quickly as Omicron pressures subside. This belief is also bolstered by the brand’s strong value proposition, with the majority of our dishes having entry points of approximately $7. We feel this pricing power gives us the ability to enact additional pricing during the second quarter and potentially beyond to mitigate anticipated margin pressures. As we look to the year ahead, we continue to believe that our three primary strategies will have a profound impact on our ability to become a premier growth story in the restaurant space. These strategies remain first, the continued differentiation of our concepts to appeal to a broad range of lifestyles and dietary needs, which will be exemplified by an exciting new culinary launch in the second quarter. Second, further activating our brand through our digital assets and marketing strategy, which ultimately will result in the launch of a new brand or platform that we will roll out in the coming months. And third, accelerating our unit growth to take advantage of an operating model we feel is ideally suited for today’s environment, driven by our target of 8% unit growth in 2022 and accelerating to 10% next year. Let me provide a brief update on each of these. Starting with our culinary strategy and continued differentiation of the brand. Noodles & Company remains the only national fast-casual restaurant bringing fresh takes on world flavors with a noodles and pasta-based menu. Our fresh, flavorful and ready-to-order approach sets the brand apart. Additionally, our variety and the fact our food travels so well makes it perfectly suited for meeting consumer needs around convenience. Offering our guests real cooking, so they don’t have to, whenever and wherever they want. In 2021, we showcased the strength of our menus through continued innovation, particularly with the introduction of Tortelloni in June, which continues to be the best performing new menu item in our history. We still feel there’s a lot of runway that Tortelloni offering and are particularly pleased with the increase in frequency that we are seeing from those who have tried the dish. Our ability to optimize our menu innovation between healthy offerings and new spins on familiar favorites has been a hallmark of our brand, and that will continue in 2022. Just last week, we launched two new salads, refreshing the category in advance of upcoming warmer months, while simplifying our operational execution. And throughout the year, we will additionally be completely testing new menu items for 2023 and beyond. However, the culinary innovation we are currently most excited about is LEANguini, which we will launch in a few months. LEANguini has the taste and texture of a traditional linguini noodle and gets its name from having over 50% less net carbs and over 40% more protein than a traditional linguini noodle. The culinary formula for LEANguini is proprietary, a first-of-its-kind offering that is a result of nearly a year of innovation. We feel that LEANguini is going to have a similar impact to what zucchini noodles had on the brand a few years ago, expanding our market reach meaningfully by redefining the traditional expectations of pasta. As our culinary innovation accelerates in the upcoming months, so does our second strategy, which is further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. During 2021, our digital sales reached a 20% increase over the prior year, and both for the full year and Q4 accounted for over 57% of total sales. We continue to be impressed by the strength of this channel, which is bolstered by how well our food travels throughout premise occasions. The strength of our rewards program among our younger, more digital-savvy consumers adds to this. We continue to enhance the targeting of our marketing, as well as the capabilities of our digital assets. Introducing a higher level of personalization to our guest engagement has enhanced the overall guest experience. Of course, one of the biggest sources of driving digital growth is our rewards program, which has now crossed 4 million members. During 2021, we saw significant increases in our ability to attract new guests, as well as convert rewards members to more frequent guests. For example, 65% of the new members who sign up for our rewards program returned for a second visit within 60 days, which is faster than the revisit rates we’ve seen in prior years. We believe this points to not only the power of the program itself but also its ability to inform more effective targeted marketing communications. Given the disruptions the industry has faced in recent months, our marketing priorities in Q4 of ‘21 and Q1 of ‘22 have focused on accelerating a brand building platform that we’ll roll out in the coming months. This increase in marketing activity will capitalize on the strength of our initiatives and increase the insights we have gathered from our rewards program. This provides added confidence in our ability to accelerate momentum during 2022 with efficient targeted activation of the brand. While we look forward to culinary innovation and brand activation throughout 2022, perhaps the most impactful strategy is the acceleration of our unit growth profile, which is now underway. As we discussed before, the results from the restaurants opened in the last three years continue to perform better than any group of restaurants in our history. The average unit volumes and restaurant level margin for these locations exceed the company average. This momentum has continued thus far in 2022, which is particularly exciting given the openings thus far. We have put our first franchise location into the market of South Carolina, as well as tested a smaller square footage order-at-the-window location outside of Madison, Wisconsin, that is also an entirely off-premise location. We are anticipating approximately 35 openings system-wide for 2022, including 7 during this first quarter. While the balance of our 2022 openings will be somewhat backloaded given the current development environment, we remain very confident in the opportunity to accelerate unit growth to 10% beginning in 2023, with the proven 30% plus cash on cash return model that is ideally suited for today’s environment. This model, which incorporates our order-at-the-window concept and an operating model that reflects the progress made over the last few years in terms of labor efficiencies, continues to gain positive reception from the franchise community as well. As we mentioned earlier this quarter, we closed a transaction with an established multi-concept franchisee to be our exclusive partner for California. This transaction included the sale of 15 existing company-owned restaurants, as well as an early development agreement that provides for the opening of 40 new locations over the next several years. This agreement, along with the recent strong opening of our newest franchisee in South Carolina and the previously announced franchise deals expanded to West Texas and Southern New Mexico, validates the Noodles & Company opportunity, and we are pleased with the current quality and trajectory of our conversations with additional prospective franchisees. As we enter this phase of accelerated growth, the importance of our team cannot be overstated. While we’ve not been immune to the staffing challenges we see throughout the industry in recent months, we are highly encouraged with both the improvement in our overall staffing levels and our ability to retain the key talent critical to the execution of our new unit acceleration. Our management tenure remains extraordinarily strong, and we’re on track to open nearly 100% of new units with experienced, proven general managers prepared to introduce the brand to new markets throughout the country. As always, my thanks to our team for their incredible dedication toward delivering outstanding execution to our guests during this unprecedented time. I look forward to joining you on the journey as we accelerate all aspects of Noodles & Company’s growth story. I’ll now turn it over to Carl to discuss in more depth our financial results and expectations for 2022.
Carl Lukach, CFO
Thank you, Dave, and good afternoon, everyone. We are very proud of our full year financial results, which represent strong upward momentum toward our accelerated growth objectives even amidst a challenging market backdrop. For the full year, total revenue in 2021 was $475 million, which is nearly a 21% increase compared to last year. Underlying our revenue growth, our average unit volumes were $1.3 million for the year, a 22% increase from last year and an 11.3% increase versus 2019. More specifically, for the fourth quarter, total revenue was $114.8 million, an increase of 7.1% compared to the prior year. Comparable restaurant sales increased to 11.2% system-wide, comprised of a 9.5% increase at company-owned locations and a 20.8% increase at franchise restaurants. Average unit volumes for the fourth quarter were $1.31 million, representing a 14.9% growth compared to 2020 and a 10.8% growth rate compared to 2019. As Dave noted, while the business regained significant momentum during the latter stages of the fourth quarter, October and November were particularly challenged first by staffing issues and then by the prominence of the COVID-19 Delta variant in our most penetrated markets. This led to an increase in both temporary closures as well as reduced operating hours, which we estimate negatively impacted the fourth quarter by approximately $8 million in revenue. This increase in temporary closures combined with one-time staffing incentives also impacted our restaurant-level margins during the fourth quarter. Restaurant contribution margin for the fourth quarter was 12.4%, compared to a 13.6% margin during the fourth quarter of 2020. For the full year, contribution margin increased by 400 basis points versus the prior year to 15.9%. Cost of goods sold was 25.9% of sales in the fourth quarter, an increase of 70 basis points from last year. The increase during the fourth quarter was predominantly driven by ongoing market challenges in the supply chain and a volatile commodities environment. Our cost of goods sold inflation was approximately 8% during the quarter, largely driven by our protein basket, specifically, the price of chicken breast. Our full year cost of goods sold was 25.2%, roughly flat compared to 2020. Labor costs for the quarter were 33.2% of sales, which is 110 basis points above last year. Fourth quarter labor costs included approximately $1.1 million of one-time expenses related to retention, hiring, and COVID-related expenses, such as vaccination and sick pay. In total, our core wage inflation for the fourth quarter was approximately 9%. For the full year, labor costs declined by 130 basis points as a percentage of sales to 31.2%. Other operating costs for the quarter were 18.4% of sales, which was essentially flat compared to last year, given a similar mix in our delivery business, and was 17.9% of sales for the full year. Delivery fees were 5.9% of sales in the fourth quarter, compared to 5.7% in the fourth quarter of last year. G&A for the quarter was $11.4 million, which was essentially flat compared to last year. G&A includes non-cash, stock-based compensation of $700,000 during the fourth quarter, compared to $600,000 last year. GAAP net loss for the fourth quarter was $4.7 million, or $0.10 per diluted share, compared to a net loss of $3.8 million last year, or $0.09 per diluted share. We also reported net income on an adjusted basis, which adjusts for the impact of impairment, divestitures and closures. Excluding these adjustments, our fourth quarter net loss was $2.5 million, or $0.05 per diluted share, compared to a net loss of $2.3 million, or $0.05 per diluted share from last year. As a reminder, our methodology for calculating adjusted net income no longer includes a tax adjustment related to the valuation allowance and its impact on our effective tax rate. We expect our effective tax rate to remain low at least through 2022, and we do not expect to be a cash tax payer for the foreseeable future, given our sizable net operating loss and other tax credits totaling over $150 million. Now, I’d like to take a moment to talk about the first quarter of 2022 and bridge our expectations for the full year. As you have no doubt heard, external disruptions have impacted many of our peers in the first quarter to date, and we are no different. Additionally, it’s worth noting that our first quarter is seasonally our lowest, due to our geographic concentration in cold weather locations, even without the added impact of Omicron, staffing challenges and elevated levels of inflation. Despite the near-term challenges, we are extremely optimistic about our opportunities ahead of us this year. We are proud of our successes in 2021, particularly the strength we’ve demonstrated in our unit economic model, which sets the scene for our strategic focus areas in 2022, including our accelerated unit growth. Now, let’s start first with our expectations from a revenue perspective. For the first quarter, we anticipate total revenues to range between $110 million and $113 million, inclusive of mid-single-digit comparable restaurant sales growth. As Dave indicated, the onset of the Omicron variant during the beginning of 2022 had a material impact on our business in January and to a lesser extent in February. However, just as we saw in the fourth quarter with the Delta variant, comparable restaurant sales have rebounded as Omicron has subsided. Comparable restaurant sales increased 2.7% at company-owned locations in fiscal January and have increased 7.5% thus far in February. It’s also worth noting that with the successful close of our franchise transaction with Warner Foods, our prior California locations are no longer included in restaurant revenue as of mid-January, and instead, that revenue is now recorded in franchise royalties. We estimate that the net impact in the first quarter from a total revenue perspective is $4 million. The impact on EBITDA will be negligible in 2022 and accretive as the territory is built out thereafter. Now let’s look at our cost expectations. Today, we reiterated our target of 20% restaurant level margins by 2024, driven by acceleration of our average unit volume, continued labor efficiencies and a return to a more normalized level of food inflation. There is no question that the first quarter will be impacted by Omicron and inflationary pressures, compounded by our historic seasonality. We anticipate Q1 of 2022 restaurant level contribution margins of 7% to 9%. However, we expect meaningful acceleration of margins as the year goes on, culminating in restaurant level margins in the high teens during the back half of the year. For the components of restaurant-level expense, we’ll start with cost of goods sold. Our cost of goods sold margin is expected to be unusually high in the first quarter of 2022, given a reset in some of our annual food contracts and industry-wide record levels of inflation, particularly in protein. We expect COGS of 28% to 29% this quarter, with a linear progression back to our long-term goal of 25% by the second half of the year. Our COGS in the short-term is particularly impacted by inflation we’re seeing in protein, which accounts for approximately a quarter of our cost of goods sold. More specifically, we are seeing outside inflation in boneless chicken breasts, which makes up about half of our protein expense. Despite these challenges, we continue to be encouraged by our strong vendor partnerships and our ability to opportunistically secure shorter-term inventory at more favorable rates in the spot market. Like COGS, we expect labor to be unusually high during the first quarter, between 33% and 34% of sales, driven by sales deleverage during our seasonally low first quarter and staffing inefficiencies at COVID-related temporarily closed restaurants. We are forecasting low double-digit wage inflation for the first quarter and remaining at elevated levels throughout the year with modest sequential improvement. Even with the anticipated wage inflation, we are forecasting a return to our target labor cost of 30% of sales by the second quarter this year, driven by sales leverage as well as efficiencies gained from our steamer initiative, which will now be complete in its national rollout during Q1. Underlying our margin forecast is the anticipation of an additional price increase to our core menu during the second quarter. We firmly believe the company has meaningful pricing power, particularly as the majority of our pricing actions during the past few years have been defined by the premium paid by our third-party delivery guests. As you can imagine that gives and takes as pricing increases roll on and others roll off. But we expect effective pricing to be around 7.5% in the first quarter, increasing to about 9% to 10% during the second quarter, and leveling off between 6% to 8% throughout the balance of the year. We anticipate general and administrative expenses of approximately $12 million in the first quarter, inclusive of stock-based compensation. We expect stock-based compensation to be around $1.2 million. Switching to development, we continue to see excellent performance from our new restaurants, and anticipate 7 openings during the first quarter, primarily company-owned. For the full year, we expect approximately 35 system-wide openings, with roughly 70% of openings being company-operated. We do expect the pipeline to be somewhat backloaded, with roughly a third of our 2022 openings occurring in the fourth quarter. From a restaurant closure perspective, while we are confident that we are now at the end of the closures related to real estate that is not well suited for today’s current environment, in the first quarter we anticipate two closures, one, which coincides with the California transaction and one mall-based location in the DC Metro area. We continue to believe that our best use of capital is investing in new unit development, particularly given the strong performance of our recent practices, which are on track to support our target of a 30% cash on cash return at new restaurants. For 2022, we anticipate $30 million to $34 million in capital spend, of which, roughly two-thirds will support new unit development. Despite the inflation we are seeing in construction and raw materials for development, we expect average net investment for new locations to be at or just above $800,000 per location. We expect the remainder of our capital to be allocated to ongoing restaurant maintenance and continued investment in technology to enhance both our digital business and our guest engagement. Our accelerated unit growth is supported by a strong balance sheet. As of the end of fiscal 2021, we had cash and cash equivalents of $2.3 million and a total debt balance of approximately $22.3 million. We anticipate that our 2022 restaurant development needs will be funded through our operating cash flow. However, during our seasonally low Q1, we expect to utilize a portion of our revolver capacity to fund working capital and development needs. With that, I would like to turn the call back over to Dave for final remarks.
Dave Boennighausen, CEO
2021 was an extremely successful year for Noodles & Company, despite the well-documented industry challenges related to COVID, staffing challenges, and increases in inflation. While there are means and ways as we enter 2022, the fundamental business has never been stronger, with significant improvements in our culinary innovation, digital and marketing capabilities, operational efficiencies, all bolstered by our value proposition that allows us to mitigate the current inflationary environment. Most importantly, the brand is now embarking on accelerated unit growth with a model perfectly suited for today’s environment. Despite the strength of recent classes, the expected opening of 7 system-wide locations this first quarter, and increased momentum, Noodles & Company is well positioned to be one of the premier growth stories in the restaurant industry. I look forward to sharing our success with you in 2022 and beyond. With that, Alexander, please open the lines for the Q&A.
Operator, Operator
Thank you. We have your first question from Jack Corrigan with Truist Securities. Your line is open.
Jack Corrigan, Analyst
Hey, guys. Thanks for taking the question. My first one is just on what’s implied by your same-store sales guidance with mid-single digits in the first quarter? If I’m doing the math right with 2.7% in January and 7.5% in February, you’re sort of already at mid-single digits. So does that imply just mid-single digits in March? And I guess why wouldn’t we see an acceleration from here?
Dave Boennighausen, CEO
Yeah, Jack, we certainly think there’s opportunity for acceleration from here. The only aspect that we like to keep in mind is the weather. I mean, we saw that the Upper Midwest and restaurants in the Rocky Mountains have an impact on the business. And just knowing the volatility in weather, we want to respect that as it has the potential to impact March as well.
Jack Corrigan, Analyst
Great, thanks. That’s helpful. And then I guess, the second question is on your staffing levels. Is there any way you can quantify where your staffing levels are currently versus what you think full staffing would be at this point for these volumes? How much is that limiting your sales currently?
Dave Boennighausen, CEO
Yeah, we think that limiting on sales is very minimal. So it’s a very small percentage of our restaurants that are currently short-staffed, not out of the woods yet by any stretch, but at the same time, the momentum has been extraordinary, and the retention of the team has been great. One thing we point to that we’re particularly proud of is that our cook times thus far in 2022 are the best they’ve been in the history of the company. So we not only have staffing at a much higher level, but we’re executing at a very high level. Part of that has to do with the steamer initiative for sure, but a significant part of staffing is coming much closer to 100%.
Jack Corrigan, Analyst
Great, thanks. That’s really helpful. And then just lastly, on development. You had elevated store closures in '21. You said you expect two in the first quarter. Is that the only closures you expect for all of '22?
Dave Boennighausen, CEO
Yeah, we are finally at the malls. So there were some signs that from a finance perspective, it made sense for us to wait until the lease was over before we ultimately close it. We’re now at the end of that. So there’s the highest potential for one or two closures where either the developer has something happen or we see a different opportunity for relocation or something down the road like that. That’s always possible. We’re finally at the end of all those closures that were related to the review of the portfolio and how trade area dynamics and consumer needs have changed. One of those locations as an example was the mall location that we expect to close here in Q1.
Jack Corrigan, Analyst
Great, thanks for the questions.
Operator, Operator
We have your next question from Andrew Strelzik with BMO Capital Markets. Your line is open.
Andrew Strelzik, Analyst
Hey, good afternoon. My first question, you mentioned some of the inefficiencies as well as some one-time expenses in the quarter. Can you quantify how much the one-time stuff was in the quarter? And then is there any assumption for 1Q in the guidance you gave as well was kind of not from the costs?
Carl Lukach, CFO
Sure. For the quarter, the one-time impact that we had, which particularly showed up in our labor margins, was $1.1 million. That was related to one-time staffing expenses, such as retention bonuses, sign-on bonuses, and COVID-related sick pay or vaccine pay. From a forward-looking basis in our Q1 guidance, there is no expectation for any of those to continue, no more one-time charges. We don’t anticipate that to be present throughout the duration in this year.
Andrew Strelzik, Analyst
Yeah, got it. Okay, so that’s helpful. And then obviously understand the kind of regional pressures in some of your key areas in the Upper Midwest and the Rockies. I guess I’m just curious, you know what are the trends look like in maybe the rest of the country? I mean, did you see, just as we’re kind of thinking about understanding how to, you know, temporarily this isn’t those types of things, just kind of maybe more durability in some of the other regions? Could you speak to some of those trends, please?
Dave Boennighausen, CEO
Yeah, absolutely. As you look at the Mid Atlantic and Southwest, those markets that were not impacted by Delta, it was encouraging that they carried over the momentum we saw in Q3 pretty much throughout all of Q4. They didn’t actually start seeing the impact on their business until here, meaning that directly pushes to our 2022 with Omicron, which gives us that added confidence in terms of the overall trajectory of the business that draws momentum.
Andrew Strelzik, Analyst
Got it, okay. And then my last question is just on the menu. Recently here, just announced some of the new salads going on the menu. You talked about linguini. Recently, we’ve seen Truff Mac, and it just feels like the menu news pace is kind of accelerated here. Is that right? Is that intentional, you know maybe some holdover from the last 24 months or maybe that, you know, the environment wasn’t as conducive? I’m just kind of curious how you’re thinking about further opportunities across the menu as well rolling forward here. Thanks.
Dave Boennighausen, CEO
Yeah, I mean, let’s just start with the overall power of our menu innovation. We think that one has great potential similarly and for the brand in terms of expanding the overall reach into so many different types of occasions in guest profiles. That’s what has been in touch for a long time. Salad was something that we’ve been testing for a while as well. This is ultimately a pre-deliberate disciplined process where we have numerous items in tests. You can expect to see that type of innovation for the foreseeable future, every three to four months; plus having good menu news as we do that, ensuring that we don’t sacrifice operational complexity. I will say that the fresh category we’re excited about will be the great driver and another reason we’re confident we’ll gain momentum throughout this year.
Andrew Strelzik, Analyst
Got it, thank you very much. I’ll go ahead and pass it on.
Operator, Operator
We have your next question from Andy Barish with Jefferies. Your line is open.
Andy Barish, Analyst
Hey, guys. Wanted to just get a sense – excuse me, on the marketing side. To clarify, did you say with the COVID surge that you actually kind of pulled back on what you would have expected from a marketing side? And then, I think it’s – the messaging and the creative supposed to evolve a little bit in ‘22? Can you kind of let us know how that kicks off in Q2 beyond just product news?
Dave Boennighausen, CEO
Yeah, if you’ll see – you’ll see things shift from being more transactional, which is what we saw during the first part of COVID. And you’re correct, it wasn’t that we pulled back significantly from a marketing perspective. But there was a little bit of a muted nature to it, given all the staffing challenges that you saw throughout the industry, as well as the impact of Delta, a little bit of Omicron. What you will see as we look into 2022 is us harnessing the full power of all the data insights we’ve had and these improvements we’ve made to the digital assets, which you’ll see continuing to evolve and improve as well. In general, just making the brand more visible, pointing out all those great aspects from our cooking methodology to our service, the value proposition, and the variety of food. This brand has so many great attributes and elements to it that we feel we’re just scratching the surface in terms of consumers truly knowing what’s great about it. The data we’ve got and the improvements we’ve made throughout our guest engagement have given us confidence that the activation will be effective and efficient.
Andy Barish, Analyst
Got it, thanks. And then Carl, on the G&A side of things, I guess, is that $12 million you talked about in Q1 a pretty good run rate? And do you get any noticeable savings from California now being franchised, with that market probably needing some regional support out here, given it was not contiguous to some other areas?
Carl Lukach, CFO
Yeah, that’s right. So from a run rate perspective, I would assume that it’s a somewhat lower quarter than the full year if you think about analyzing the quarters, just given some of the cadence of our historical spend. So I would anticipate that Q1 and beyond we see a little bit elevated G&A expense. In terms of California, there is a definite benefit there certainly. I would expect that, that is baked into our number. It does help us streamline some of the operations.
Andy Barish, Analyst
Okay. Thanks, guys.
Operator, Operator
We have your next question from James Rutherford with Stephens Inc. Your line is open.
James Rutherford, Analyst
Thanks for taking the questions. Hey, Dave and Carl. I wanted to dig in a little bit on the margin guidance for Q1 and most importantly, the ramp through into the back half of the year. Starting on the COGS side of it, I think I heard you say that you’re expecting 28% to 29% COGS margin in the first quarter, then back to 25% in the back half of the year. We know your menu price assumptions for each quarter. What are you assuming on the commodity inflation front to get you back to that 25% COGS margin by the back half of the year?
Carl Lukach, CFO
Sure. James, let me walk you through a little bit. First of all, we are continuing to see this inflation pressure on our cost of food. It’s really driven by commodity price volatility, staffing pressures, and as I mentioned, particularly protein. In the first quarter, we do see elevated levels of inflation. What we’re estimating right now is around 18%. These challenges we’re experiencing ongoing, and we’re still seeing some elevated pricing even at where we are today, particularly in protein. Regarding the go-forward, there are two elements here. First, it’s the pricing action that we’re anticipating to take; we’re looking to take about 3% to 4% pricing action in the second quarter. That's going to be a key offset. But in terms of what getting back to normal looks like in the second half, you can imply mid-to-high single-digit levels of inflation just in the second half would get us back to normal levels.
James Rutherford, Analyst
Okay, thanks for that. Flipping over to the wage piece of it. If I have my notes correct, I think wage inflation was around mid-single digits last quarter. I think you said high-single digit, around 9% this quarter, and then guided low-double for the first quarter, correct me if I’m wrong on those numbers. But where do you think we find the top end of that? It sounds like most of your restaurants are fully staffed based on what Dave was saying earlier. What are you predicting for wage inflation? How does that progress through the year?
Carl Lukach, CFO
So, first of all, you’re correct on those assumptions. That’s what we’ve seen so far, and that’s what we’re anticipating in the first quarter. We are anticipating that wage inflation will continue; there will be some relief as you go throughout the year. But we’re anticipating that will remain at elevated levels. A lot of that is due to rehire rates, in addition to increasing our wage band as we remain competitive in each of these markets. And then thinking about what’s going to get us back to that 30% target by the second half of the year, it’s really three things. First, it’s ongoing efficiencies that we’re now anniversarying and having in full run rate, particularly from our steamer initiative, which is going to be completed in this quarter. The second is that there were some one-time associated costs with our labor force in 2021 that we are not going to anticipate this year. Finally, sales leverage is a factor as we look at the continuing growth in traffic and pricing. We’re anticipating driving that 30% target in labor cost.
James Rutherford, Analyst
Very helpful, thank you. If I could slip in one more. Dave, on the unit growth expectation for next year, which I think is still 10%. Conceptually, what kind of mix do you think – and you know, it’s probably like numbers, but between kind of company-owned and franchisee and what sort of visibility do you have into that growth acceleration?
Dave Boennighausen, CEO
Yeah, visibility continues to strengthen. We’re really encouraged by the sheer number of quality leads we’re seeing through the pipeline. While the development environment is a little bit volatile, we’re very pleased with what we’re seeing there. The overall mix will still depend on how we see the franchise community change their rate of growth as we’re seeing momentum there. We would expect the majority of openings in 2023 to be company-owned and then shifting in 2024 and beyond to be closer to a 50:50 mix in terms of company-owned and franchisee openings.
James Rutherford, Analyst
Excellent. Thank you guys, really appreciate the help.
Dave Boennighausen, CEO
Thank you.
Operator, Operator
We have your next question from Nicole Miller with Piper Sandler. Your line is open.
Nicole Miller, Analyst
Thank you, good afternoon. Just super quick on Q4. Was the $1.1 million labor investment you’re talking about all in Q4?
Dave Boennighausen, CEO
That’s correct.
Nicole Miller, Analyst
Okay. And so the question is then on the $8 million of sales impact from Omicron. Is the only store level margin impact at $1.1 million or did that hit other areas of the store level margin?
Carl Lukach, CFO
So first, the $8 million was actually related to Delta. So Omicron has more impact that we saw in the first quarter, particularly January into February, but Delta was the impact in the fourth quarter. To your question, it was both the $8 million and then the associated flow-through in addition to labor inefficiencies for restaurants that were operating at partial hours, plus the $1.1 million, so there was certainly a compounding margin impact.
Nicole Miller, Analyst
So the $1.1 million translates to a 100 basis points. If you didn’t have these COVID variants, would store level margin have been 13.4% instead of 12.4%? Just to put a finer point on it, you’re saying there are other things to take into consideration and would have been even better than 13.4%?
Carl Lukach, CFO
That’s right, Nicole. So for that $8 million of revenue impact related to partial closures, both full day closures and partial day closures, there were labor inefficiencies associated when you’re operating just a day part or having to close intermittently. I agree there were other factors impacting labor as a result of those temporary closures.
Nicole Miller, Analyst
Okay. I’m sure it’s difficult to tease out. But if there’s a number to throw out, let us know. And what was the percent marketing in Q4?
Dave Boennighausen, CEO
For our fourth quarter, marketing was just around 1%, which is consistent with what we saw in prior quarters, a little lower in terms of absolute dollar strength versus what we’ve seen, partially because of the impact on the revenue side of Delta.
Nicole Miller, Analyst
And I asked that then in the context of coming forward to Q1 with all the conversation and guidance you’ve already addressed at this point, and assuming the marketing isn’t changing too much in the operating line, the store level margin in total for Q1 is barely going to be double-digit. I just want to make sure we’re all on the same page before we end the call here. Is that the indication? Because you didn’t really address occupancy and other operating costs.
Carl Lukach, CFO
Yeah, Nicole, that’s about right.
Dave Boennighausen, CEO
Yeah, that’s correct. We actually guided 7% to 9% in terms of Q1 margin. Do you want us to give the historical seasonality we have in our brand?
Nicole Miller, Analyst
Okay.
Dave Boennighausen, CEO
In terms of this, 100 basis points lower for margin perspective than what you could see through the balance of the year. So, as we talked about on the call, that Q1 margin guidance incorporates a meaningful seasonal impact and the impact of Omicron, but we expect this to materially improve throughout the course of 2022. We expect to approach 20% restaurant level margins in the back half of the year.
Nicole Miller, Analyst
Just one more last question on the subject. And I realize it’s a very challenging question. But if we couldn’t absorb all the detail and just back up high level and say, gosh, you know, you’re making a little bit less here than in any other period, you know if you want to pick the same quarter or different quarters, for the same or different reasons, right? It’s a little bit of a question mark. Is the Delta between like Omicron market or let’s say COVID market conditions? I think the Delta then is just the commodity inflation. Can you slice and dice it that way and say, okay, that 7% to 9% store level margin should be this if demand had been normalized if like, you know, and it should be this, if commodities, if you could keep pace with price action?
Dave Boennighausen, CEO
Yeah. When I think of how we articulated that is that COGS we expected in the normal environment is around 25%, and due to inflation we expect that to be 28% to 29%. So it’s significant inflation during Q1. Now as we alleviate that, not just through the anticipation of improvements in inflation over the course of the year, but also through the price action that we’re taking from a labor perspective, our expectation is between 33% to 34%, always have been higher from the seasonal perspective. This one is more related to just some of the inefficiencies through Omicron. We would expect that labor line to have some meaningful opportunities to leverage throughout the balance of just ‘22.
Nicole Miller, Analyst
And just very last question. It could be a little challenging for franchisees with the sales being inconsistent and commodities being up like this. What kind of conversations are you having with the current potential franchisees and how are you lending support?
Dave Boennighausen, CEO
Yeah, very positive actually. They understand the impact that has also had on the business as well as our product inflation. These are multi-unit operators that are encountering all of this in their business. They’re attracted to us because they see the pricing power and our value proposition. Most importantly, they see the track record of 30% plus cash on cash returns from our most recent cohorts. That’s even before we are able to implement some potential cost savings. They’re encountering the same challenges in their markets as we’re seeing throughout the industry. When you look back at 2021 as a whole, it was an extremely strong year for us after a margin expansion perspective. We see the cadence bridging us towards ‘22 being remarkable and there remains tremendous confidence from that side.
Nicole Miller, Analyst
Thank you.
Operator, Operator
We have your next question from Todd Brooks with The Benchmark Company. Your line is open.
Todd Brooks, Analyst
Hey. Good afternoon, guys. Thanks for the questions.
Dave Boennighausen, CEO
Hey, Todd.
Todd Brooks, Analyst
A couple of questions here. One, you’ve bumped the AUV goal for fiscal ‘24 by another $50,000 here, so $1.4 million to $1.5 million. Can you talk about what percent of the current base is above that hurdle already? And what the restaurant level operating margin profile of those stores look like that are above $1.5 million?
Carl Lukach, CFO
So Todd, we have of our existing restaurant base, I would say anywhere from 30% to 35% already above that level, and they’re operating certainly above the 20% contribution margin. When we were looking at this at $1.4 million or $1.5 million on prior targets, over 40% of our current locations were at that level also and again, operating at 20% contribution margin or above.
Todd Brooks, Analyst
So with the increase in the AUV goal, does the 20% goal continuing for contribution margin just reflect inflationary realities? Because it sounds like the base that’s already north of the $1.5 million is above the 20% target.
Dave Boennighausen, CEO
I don’t know if we could say realities versus uncertainties in terms of we feel that this concept has the ability to expand margins meaningfully not just through this year, but beyond. But just want to reflect there is uncertainty in terms of what the overall inflation environment looks like in 2023 and beyond. So really reflects that in terms of the overall cost the brand can leverage beyond 20% its size ever.
Todd Brooks, Analyst
Okay, great. And then can you share with us the proceeds to the company from the sale of the 15 units to Warner Foods?
Dave Boennighausen, CEO
That’s something that we will be disclosing, but it is relatively not negligible for 2022. We’re excited about this transaction as it represents a great established partner, and as they build out that territory will be meaningfully accretive. However, the proceeds are not material enough to move the needle significantly in terms of the overall balance sheet.
Todd Brooks, Analyst
Okay, great. And then finally on the franchising pipeline. You talked about maybe a bit more of a corporate store next to the 23 openings before getting to 50:50 now in ’24. Is that just reflective of some lost momentum with discussions due to Omicron? Or how would you talk through that pipeline and the momentum that you would have around initial additional announcements here in the near-term?
Dave Boennighausen, CEO
Actually, that was always our expectation, just given the realities of as we sign on these new transactions. Each year we anticipate 1 in 2022, 2 or 3 in 2023 as we build more momentum; there’s a waterfall effect that will ultimately get us to roughly a 50:50 split. That was actually always the expectation that we were not going to be able to achieve that 50:50 split for the new growth perspective until 2024.
Todd Brooks, Analyst
Okay. And do you feel like Omicron slowed down the ability for us to see more announcements in the near-term? Or is it just pushing out closing deals for reality that everybody had to operate through?
Dave Boennighausen, CEO
We don’t think so. We certainly recognize that during the staffing crisis, our operating partners were talking with prospective franchisees who typically had their own concepts. During that staffing crisis they wanted to make sure that they had that under control. Omicron is a little bit different in that it’s been relatively short in terms of its impact; we saw a significant spike throughout the industry in January, and that subsided materially and almost completely in February. So that impact has been minimized. We feel momentum has actually been pretty strong.
Todd Brooks, Analyst
Okay, great. Thanks for the questions.
Operator, Operator
I am showing no further questions at this time. I would now like to turn the conference back to Dave for any closing remarks.
Dave Boennighausen, CEO
Thank you, Alexander, and appreciate everyone’s time today. Hope that you have a great evening. Thank you very much.
Operator, Operator
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.