Noodles & Company, a fast-casual restaurant chain known for its globally inspired noodle and pasta dishes, has been navigating the evolving landscape of the modern fast food segment. With a focus on operational excellence, menu transformation, digital initiatives, catering growth, and financial discipline, the company is working to regain consistent, profitable growth.
Financials
In the fiscal year 2023, Noodles & Company reported annual revenue of $503.4 million and a net loss of $9.9 million. The company's annual operating cash flow was $27.5 million, while its annual free cash flow was -$24.5 million. These financial results reflect the challenges the company has faced in recent years, as it works to execute on its strategic priorities.
Strategic Priorities
One of Noodles & Company's key focus areas is operational excellence. The company has implemented biweekly training sessions across its system to improve guest satisfaction, particularly in the dinner daypart, where it has experienced greater traffic loss. These efforts have paid off, with overall guest satisfaction ratings at dinner improving significantly in the first quarter of 2024. The company has also seen improvements in food taste and accuracy guest ratings, which it believes have led to improved dinner traffic versus the prior year.
Supporting the progress in operations is improved staffing and retention, particularly at the General Manager level, where the company is seeing a 10-year high in retention rates.
Noodles & Company's second strategic priority is to stimulate more guest desire for its brand through a comprehensive menu transformation. The company has completed the first two phases of its menu transformation plan, which involved rigorous concept testing and central location testing of new and improved dishes. The results of this work are encouraging, with the company identifying multiple new dishes that address gaps in its current menu and improvements to existing dishes that meet its concept and central location excellence standards. These new and improved dishes will be tested in-market this summer, with the goal of introducing them nationally in the first quarter of 2025, followed by a second phase of new dishes and product improvements in the second quarter of 2025.
In the meantime, the company is using limited-time offerings (LTOs) to bridge the gap until its core menu transformation is complete. The Steak Stroganoff LTO has been particularly successful, with sales almost 50% higher than the company's forecast. Noodles & Company plans to bring Steak Stroganoff back in mid-May and will follow it with the launch of Baked Alfredo with Grilled Chicken in early June.
The third strategic priority for Noodles & Company is to broaden its guest base by further leveraging its strong digital ecosystem. The company has 53% of sales from digital channels and 26% of orders from loyalty members, who spend twice as much per year as non-loyalty members. In the first quarter of 2024, the company increased its active rewards audience and transactions while reducing its discount rate by using smart, segmented, and personalized offers. To further drive digital traffic, Noodles & Company is testing additional investment in digital media channels, such as connected TV, and increasing its focus on search engine optimization.
Noodles & Company's fourth strategic priority is to maintain double-digit quarterly growth in its catering business while fixing the fundamentals as a prerequisite before driving even more aggressive growth in the future. The company believes catering can be 5% of sales or more, but it needs to reduce the complexity in its operating model and enhance its menu offering before pursuing new growth opportunities.
The company's final strategic priority is to strengthen its financial foundation with proactive cash management and an increased emphasis on operational efficiency across the business. Noodles & Company has reduced its capital spending from $51 million in 2023 to a projection of $28 million to $32 million in 2024, largely driven by a reduction in new restaurant openings and the completion of its digital menu boards rollout. The company has also implemented a major cost reduction effort that is expected to save approximately $4 million in 2024.
Recent Performance
In the first quarter of 2024, Noodles & Company reported revenue of $121.4 million, down 3.7% year-over-year, and a net loss of $6.1 million, or $0.14 per diluted share. The company's restaurant-level contribution margin was 13.1%, down from 13.7% in the first quarter of 2023, primarily due to sales deleverage. However, the company is encouraged by the improving trends it saw in traffic and sales as it moved through the first quarter and into April, with April company-owned comparable restaurant sales increasing 2.7% and traffic increasing 0.3%.
Outlook
Looking ahead, Noodles & Company expects to open 10 to 12 new company-owned restaurants in 2024. The company also believes it can be free cash flow positive by the fourth quarter of 2024, driven by continued improvement in its sales trends, smart cost savings, and thoughtful investment.
Conclusion
Noodles & Company's journey to regain consistent, profitable growth is not without its challenges, but the company's focus on its strategic priorities and its commitment to operational excellence, menu transformation, digital initiatives, catering growth, and financial discipline suggest it is well-positioned to navigate the evolving modern fast-casual landscape.