Noodles & Company (NDLS) Earnings Call Transcript

Thanks, and good afternoon to everybody. I appreciate you joining us for the earnings call covering our third quarter of 2025. Sitting with me this afternoon is Joe Christina, who serves as our Chief Executive Officer. I want to begin by covering a handful of regulatory items. Throughout this call, we might deliver forward-looking statements about upcoming events or how the company will perform financially in the future. All items of that kind ought to be treated as forward-looking statements under the meaning of the Private Securities Litigation Reform Act. Those statements amount to nothing more than projections, and what actually happens or what results we actually achieve may end up differing from what was projected, because of various risks and uncertainties, among them the ones mentioned in this afternoon's news release along with the cautionary statement contained in the company's annual report, on Form 10-K, and in later filings made with the SEC. While on this call, we'll be talking about non-GAAP measures, which in our view can be helpful when assessing how the company is operating. You shouldn't look at these measures by themselves, nor treat them as a replacement for our financial results that are put together in line with GAAP. You can find a reconciliation of these measures against the GAAP measures that are most directly comparable in our earnings release for the third quarter of 2025. Whenever the company offers guidance, it does so solely on a non-GAAP basis and won't supply reconciliations for forward-looking non-GAAP measures. Getting quantitative reconciling information for these measures isn't possible without unreasonable efforts. Having said that, I'd like to hand the call over to Joe Christina, our Chief Executive Officer.

Thanks, Mike, and good afternoon. I'm grateful for the chance to walk you through what we delivered this quarter and to talk about the great strides we're making throughout Noodles & Company, among them the sales acceleration we recorded during Q3 and then again in October. My time as CEO is only around two months long, having come aboard earlier in the year as President and COO, and my pride in what this organization is accomplishing could not be greater. Whether it's our restaurant crews or our support center, everybody has gotten behind our purpose and our dedication to serving excellent food alongside a standout guest experience. Our latest sales pattern has me extremely encouraged — it beat the fast casual benchmark by a wide margin in Q3 and kept going in October. Same-store sales rose 4% during Q3, gaining sequentially month by month inside that period, and that momentum sped up even more in October, reaching a strong 8% lift in comparable sales, far ahead of the industry average, with traffic climbing more than 1.5%. Every bit of this happened even with consumers facing a tough backdrop. Such outcomes aren't luck — they stem from intentional, sharpened work throughout our business. Our new menu launch from earlier in the year, which has brought clearly better food to our guests, the compelling value of the Delicious Duos platform that arrived in late July, the buzz surrounding our Chili Garlic Ramen limited time offer, plus the effect of stronger marketing and better operational execution — all of these are combining to boost how relevant the Noodles brand feels. That momentum has generated excitement among our guests and put new energy into our team members. We're laying groundwork for growth that lasts, and I have strong confidence in what lies ahead. We're posting substantial year-over-year gains in our digital sales channel, mostly thanks to third-party delivery, which was up 12%. Digital continues to be a vital growth engine for noodles, boosting both awareness and accessibility while matching the broader trends in our sales performance. We've likewise recorded higher enrollment and deeper engagement in our NoodlesREWARDS program, helped along by targeted promotions like our 30th anniversary offer and our early access ramen launch for reward members; such initiatives keep building loyalty and strengthen our bond with guests, underscoring how digital fuels frequency and relevance for the brand. One more key driver is the rollout of our Delicious Duos platform in late July. This value offering delivers the new menu flavor and quality we take such pride in to our guests at a price point they can access. Early results reveal that guests treat Duos as an everyday choice instead of a limited time promotion, letting them make noodles a routine part of how they dine. The platform is widening our reach and bolstering our value credibility while preserving brand equity and profitability. Putting guests first, serving them wherever they happen to be, offering genuine value, and delivering a standout experience — that combination is what's fueling steady gains in same-store sales, and we're confident this momentum carries forward through the quarters ahead. What's happening in our sales trends has me particularly upbeat. As I mentioned before, October came in very strong, with comp sales climbing to positive 8%, which speaks to the ongoing strength of our brand and how well our recent initiatives are landing. October stood out in particular, driven by the sustained momentum behind Delicious Duos and the win we scored with our new Chili Garlic Ramen dish. That item struck a chord with guests hungry for something daring and different, among them younger diners walking into Noodles for the very first time. What our ramen LTO accomplished shows what happens when smart menu development and flavor creativity join forces. Several important drivers were hit with this launch: a high-quality product people crave, a new take on worldwide flavor movements, and a surprising but easy-to-love spin on a comfort food everyone knows. All of that together sparks curiosity and excitement among guests, which the strong trial and early repeat numbers make clear. From a strategic standpoint, ramen shows how we keep moving our menu ahead, bringing in daring, distinctive flavors that come across as both fresh and authentic to who we are. Backed by a unique creative platform and a tightly integrated media plan, this limited time offer turned culinary creativity into cultural relevance, generating excitement, traffic and brand buzz that carried far past the original launch window. During the fourth quarter, we're up against a stretch of aggressive promotions and discounts that we've decided not to bring back this year. Because of that, average check is up over 6% quarter-to-date, and we look for that to hold through Thanksgiving. Even with that discount-heavy comparison, our year-over-year traffic is running positive over 1.5% quarter-to-date, continuing a positive traffic trend that started midway through the third quarter. This result reflects the quality of what we serve, how strong our value platform is and the Noodles brand's rising relevance. Now on to earnings and margin growth. We keep making disciplined choices that make our business stronger and set us up for lasting profitability. Strategically shutting underperforming restaurants is among the most powerful levers available to us. We're handling these closures with care, targeting locations where sales can be moved effectively to nearby restaurants, given a high mix of off-premise revenue. For the restaurants slated to close, we anticipate keeping roughly 30% of sales by transferring them to neighboring units, in line with how recently closed locations have performed; these moves boost overall sales leverage and lift restaurant level profitability and efficiency. Shutting locations is never simple, but for the long-term health of the brand, these are the right calls. By tightening our portfolio and concentrating on high-performing restaurants and markets, we can strengthen operations, elevate the guest experience and focus on innovation that drives continued growth in sales and margins. We anticipate that adjusted EBITDA will increase significantly because of these actions, which come from shutting locations that lose money, moving about one-third of those sales into restaurants close by, and cutting some overhead costs tied to having fewer stores. During Q3, margins on restaurant contribution rose 40 basis points, which shows the benefit of both greater comparable sales and the closing of weaker locations, along with our ongoing discipline around cost management while sales are growing. A stronger margin is still essential for our operating model to succeed, and we will keep working to deliver further gains in upcoming quarters. It is also worth noting that in Q3 our adjusted EBITDA rose $1.6 million, roughly 33%, thanks to the sales gains I mentioned plus our expense discipline. Going forward, we continue to concentrate on carrying out our main priorities: making operations stronger, encouraging innovation and lifting profitability overall. Ever since we started the operations excellence coaching program earlier this year, we have achieved substantial progress; that effort centers on the things guests care about most, including order accuracy, speed of service, taste of food and hospitality; we tackle every one of those areas with focused training and accountability. So far, our committed coaching group has been to close to 200 restaurants, collaborating directly with operators to spot opportunities, leverage each location’s strengths and raise performance throughout the system.

We're already seeing the payoff from this investment through higher guest satisfaction, and it's helping us provide an experience that's more consistent and elevated across all our brands. When it comes to culinary, we're maintaining our momentum with new menu items and marketing programs that are generating excitement. Come December, we'll roll out our latest holiday crispy, which we developed alongside a candy bar that ranks among America's favorites. On top of that, at the start of next year, a fan favorite that's been requested more than almost any other will make its return, responding to guests who are eager for it to come back. Meanwhile, our digital and third-party channels keep growing, and they remain strong drivers of awareness, convenience and incremental sales. All of this reinforces where we stand as a brand delivering both variety and innovation, serving the changing tastes of today's guests while remaining true to our identity. Financially, we keep making disciplined choices that set Noodles up for long-term success. Alongside the restaurant closures, we're carrying out a comprehensive plan for cost savings that's on track to deliver over $5 million in savings across our P&L in 2025. We'll build on that progress in 2026, concentrating on optimizing our labor model, cutting food waste and improving efficiencies throughout every part of our P&L. Simultaneously, we're getting more efficient and effective with what we spend on marketing, making sure each dollar works harder to drive business impact. Using insights from our media mix model, we've optimized our media strategy to better balance reach and return, moving spend toward the channels and tactics that generate the strongest ROI. Our refined audience targeting also aims to ensure we reach the right guests with the right message, maximizing both relevance and conversion. Taken together, these efforts are boosting profitability for the company and our franchise partners while building a smarter, more agile business ready to capture future growth. Before handing things to Mike, I want to give an update on something we announced in September. As we shared previously, our Board of Directors has begun a review of strategic alternatives to explore ways of maximizing shareholder value. The process could involve a range of potential options, including refinancing existing debt or other strategic or financial transactions. No decisions have been made yet, and there are no set timetables for completion. Until the review wraps up, we won't provide additional commentary; with that, I'll pass it to Mike to review our third quarter financial highlights and full year guidance.

Thanks, Joe. Looking at the third quarter, total revenue came in at $122.1 million, which was down 0.5% versus the prior year. System-wide comp restaurant sales rose 4.0% in Q3, with company-owned restaurants up 4.0% and franchise restaurants up 4.3%. Company comp traffic dipped slightly, by 0.6%, in the third quarter, but it was positive over the back half of Q3, and average check grew 4.6%, which includes 2% effective pricing for the quarter. Company average unit volumes rose 5.4% in Q3, reaching $1.34 million. As Joe noted, comp sales showed sequential improvement in the third quarter. July came in at positive 1.6%, August at positive 4.5%, and September at positive 5.5%. As we head into Q4, it's great to watch that momentum grow — October comparable sales came in at plus 8%. Turning to profitability, we're especially happy that the strength at the top line translated into restaurant-level margin improving year over year, climbing to 13.2% versus 12.8% during Q3 of 2024. For the third quarter, cost of sales represented 25.7% of sales, a 20-basis-point increase over last year, driven primarily by pricier food associated with the new items we've added to the menu, plus inflation, which was partially offset by menu pricing and vendor rebates working together. Food inflation during Q3 ran at about 2%. For the third quarter, labor expense equaled 31.4% of sales, a 60-basis-point improvement year over year. That largely reflects the benefit of sales leverage, though wage inflation partially counteracted it. Hourly wage inflation for Q3 stood at 2.5%. Occupancy costs in the third quarter were $11.1 million, compared with $11.5 million in 2024, a decline attributable to having fewer company-owned restaurants over the last 12 months. Other restaurant operating costs increased 40 basis points in Q3, reaching 20.5%. The main drivers of that rise were a combination of higher fees paid to third-party delivery providers, resulting from greater sales through the third-party delivery channel, along with higher marketing expenses; sales leverage mostly offset these pressures. General and administrative costs came to $12.3 million during the third quarter, down from $12.9 million in 2024. The main drivers were lower spending tied to our yearly summit along with reduced costs from obsolete inventory. For the third quarter, our net loss reached $9.2 million, which works out to a loss of $0.20 per diluted share. A year earlier, the net loss stood at $6.8 million, or a loss of $0.15 per diluted share. Included in the 2025 third-quarter loss was a $5.3 million noncash impairment charge stemming from our choice to shut down restaurants that were underperforming. Adjusted EBITDA for Q3 came in at $6.5 million, compared with $4.9 million during the third quarter of 2024 — a rise of almost 33%. We shut down 15 company-owned restaurants and 3 franchise restaurants over the course of the third quarter. For the third quarter, capital expenditures came in at $3.7 million, versus $7.1 million during 2024. When Q3 came to a close, we held $4.7 million in cash, our debt stood at $109.8 million, and roughly $12 million-plus of capacity remained available for us to draw on our revolver going forward. In August, we introduced a wider effort focused on closing weaker-performing restaurants once their leases end or sooner. By the close of October, 29 company-owned locations had been shut down, and we're still on schedule to close somewhere between 31 and 34 company-owned restaurants prior to the end of 2025. What we're seeing from these closures continues to encourage us. Shutting these locations eliminated negative cash flow restaurants from our system, and afterward, nearby Noodles restaurants are posting higher sales and profits. We anticipate that closing underperforming restaurants during 2025 will boost 2026 restaurant level contribution by more than $2 million. Given the favorable outcomes observed over the past year from these closures, we'll keep a close watch on our restaurant portfolio in order to optimize our overall financial performance. Now shifting to our full year guidance for 2025. Given the encouraging trends we've been seeing lately, we're revising our outlook. So for the entire 2025 fiscal year, the guidance we're offering is as follows: consolidated revenue in the range of $492 million to $495 million. That figure assumes same-restaurant sales growth between 3.6% and 4.2%, along with a restaurant contribution margin spanning 12.3% to 12.7%. G&A costs should land somewhere between $48 million and $49 million, and that includes roughly $3.3 million in stock-based compensation. Depreciation and amortization will come in at $28 million to $29 million, interest expense will be around $11 million, and for all of 2025 we're anticipating capital expenditures of $12 million to $13 million. If you'd like more information on what we're expecting for 2025, take a look at the Business Outlook portion of the press release we issued. With that, I'll hand the call back to Joe for closing remarks.

Appreciate that, Mike. Looking at things across our operations, I have strong confidence that the efforts put in throughout this year are producing results. A brand that matters more is what we're creating, while delivering more worth and selection to the people we serve, and getting everything ready for steady expansion over the coming quarters. I'm grateful for the time you've given me today. At this point, I'll hand the call back to the operator.

Congrats on the business's momentum. That's really good to witness. I'm aware that a great deal of effort went into achieving this across the past 2 years. So it's wonderful to watch it bear fruit. If I could probe a bit, to start with, regarding the Duos, the achievement there. Could we sort of walk through the way Duos are combining or the way you view worth on the menu? Simply attempting to determine how customers are getting in through the value offering and then their behavior when they come back.

Todd, this is Joe Christina. I appreciate the inquiry. Indeed, Delicious Duos ever since we introduced it at July's conclusion, definitely addressed the value gap we had with our patrons. And we're combining roughly 4% to 5% based on the locations. What gives us optimism is that we observe this across the entire operation, not merely at lunch or dinner or through our third-party channels. So it's a robust mix, and we notice that sort of spillover benefit of the Delicious Duos among our customers, and we keep receiving favorable value ratings from our patrons that demonstrate to us that it's succeeding within the value offering versus our rivals.

Yeah, that's excellent. So I realize it's still early since the launch happened at the end of July, but what kind of repeat frequency are you observing among customers who first came to the brand through Duos? Also, do those people move around the menu, or does someone who orders a Duo on their first visit usually stay a Duo customer?

Given that our mix has held steady at 4% to 5%, we think we're attracting incremental and existing guests — I mean, both new and incremental. And once we get them inside the restaurant, our teams have really been upselling them into other sections of our menu, including the new items we've added, and those guests are giving them a try as well. So from our perspective, it's paying off on two fronts: it brings customers into our brand, and it also lets us move them up into other menu items that came out earlier this year.

All right. Then, Mike, when we examine — and clearly, that 8% figure for October is fantastic. It's wonderful to witness. I believe you mentioned traffic came in at 1.5%. How should we think about organic traffic as opposed to what sales transfer contributes to the same-store sales traffic figure, coming from the locations you've shut and where you've observed that sales transfer going to stores still operating?

Certainly. We are seeing a lift — a sales lift stemming from our closures. And those closures have largely been concentrated in the back half. So we're genuinely noticing that pick up speed lately; during October, it gave us roughly a 1%, 100 basis point lift. And ideally, that will keep going as we broaden the initiative.

That's wonderful. Beyond the transfer from sales, your traffic remains in positive territory, and that's truly good to witness too.

Right. As a quick note, during October of the prior year, we were doing a lot of discounting. So seeing positive traffic for October against that comparison is genuinely heartening.