Noodles & Company’s sales decline as customers push back against price hikes

The fast-casual chain based in Broomfield, Colo., reported a net loss of $1.3 million, or three cents per share, as the revenue decreased 4.5% to $125.2 million and same-store sales fell by 5.5%,

We believe our larger-than-historical price increases, which included an additional 5% increase in the first quarter and therefore peak at overall 13% year-over-year in late Q1, ultimately led to a degradation in our overall value proposition, which manifested itself in a sudden and significant double-digit decline in traffic during the first portion of Q2,” CEO Dave Boennighausen told investors in a conference call after the market closed on Wednesday.

The chain started promoting its value proposition early in the 2^nd quarter, including the return of its 7 for $7 menu, offering seven entrées at that price. It also introduced a $10 mac & cheese meal that included an entrée, a drink and house-made Rice Krispie.

Additionally, it enacted an effective 3% decrease in menu pricing at the beginning of May.

“With this pivot, our traffic declines steadily improved from a negative 14% in April to a decline of 5.8% during July, the first month of Q3,” Boennighausen said, adding that comp sales, which were down by 7.7% in May, improved to a 3.8% decline in July.

Average unit volumes also improved and hit $1.35 million in July, 14% higher than July of 2019, before the start of the pandemic.

Boennighausen laid out a five-point plan to improve its competitive positioning, “as we clearly do not believe the [quarterly] results represent the potential of the Noodles & Company brand.”

Those five steps are “price optimization with a balance of appropriate discounting and promotions,” further technological advancements to improve guest engagement and analytics, new easily recognizable menu items including a new Chicken Parmesan that’s targeted for launched in early fall, a broader assessment of its overall menu with the help of a consultant, and expansion of catering.

Key to those technology improvements is the digital menu boards that the chain is rolling out. Boennighausen said they were expected to be installed at 75% of the chain’s 373 company-owned restaurants by the end of the third quarter.

“With our continued rollout of digital menu boards, we will be able to quickly incorporate any findings from the current pricing and extensive menu research across the majority of our system for our in-restaurant guests,” he said. “We are already seeing the power of digital menu boards. As an example, when we introduced our mac & cheese meal deal in May, restaurants that had digital menu boards achieved sales of that deal 24% greater than those with physical menu boards.”

In another technological advance, the chain rolled out a new customer data platform in July, which Boennighausen said would give its marketing team a better understanding of its guests, which would in turn allow them to communicate with them more effectively.

Noodles & Company’s guests skew toward higher income, with around 45% of them having annual household incomes in excess of $100,000, the company had said in previous earnings calls. The remaining 55% are the ones who have reduced their spending, Boennighausen said on Wednesday.

The chain also added enhancements to its app and online ordering platform, including a new product-recommendation engine “driven by machine learning,” the CEO said.

“During the testing period, we saw a 50% increase in recommended items purchased from this engine,” he said.

The flow of the web checkout page also has been enhanced, which has resulted in a 2.2 percentage point improvement in its web order conversion.

Meanwhile its loyalty program membership increased by 14% compared to a year ago to 4.8 million members. Those members’ frequency increased by 2% during the quarter.

More than half of all of Noodles’ sales come through digital channels and 25% are from loyalty program members, the CEO said.

He added that Noodles’ next new menu item, Chicken Parmesan, has broad appeal and familiarity, and said he is excited “to provide a casual-dining favorite at a fast-casual price point and speed.”

In response to an analyst’s question, the CEO said they were targeting a price of around $10.95 for the new entrée.

Boennighausen said he was engaging a culinary consulting firm to assess and evaluate the menu. He said that would be completed by the end of the year.

In terms of catering, Boennighausen said Noodles has unique strengths in the form of its varied menu and the fact that the food travels well.

“Our catering program is easy for our restaurant teams to incorporate into their operations, and with staffing and turnover now at levels better than pre-COVID, we feel it’s the appropriate time for our teams to be more focused on building catering sales,” he said.

The chain has a long runway for improved catering business since it accounted for just 1.4% of sales in the 2^nd quarter, a 40% year-over-year increase.

“We believe the opportunity is meaningfully larger,” he said, with the potential to hit mid-single digits, adding that at the most successful units in terms of catering that revenue stream accounted for 4% of sales.

Boennighausen said the company had revised its targeted annual growth rate of restaurant openings down to 5%.

He said that rate would allow them to achieve long-term sustainable growth and have positive free cashflow by the end of the year.

The chain opened a net four units, all company owned, during the quarter, ending it with a total of 465 locations.

“While we are disappointed in the results of the 2^nd quarter, I want to reiterate my belief that the core of the Noodles brand is well positioned for success, and there’s significant upside potential of our current results,” Boennighausen said.