Noodles & Company’s third quarter earnings showed progress from a challenged second quarter in which customers pushed back against aggressive price hikes. During the previous quarter, for instance, revenue decreased by 4.5% to $125.2 million, while same-store sales declined by 5.5%. In Q3, reported Tuesday after market, revenues declined by 1.2% year-over-year, to $127.9 million, while same-store sales were down 3.7%. Importantly, restaurant-level margins improved by 200 basis points year-over-year, to 16.4%. And, while Noodles experienced double-digit traffic decline during much of Q2, traffic was down mid-single digits (6.7%) in Q3.
“During the third quarter, Noodles & Company gained meaningful traction improving our financial performance,” CEO Dave Boennighausen said during the earnings call. “Thus far in Q4, sales are trending similarly to Q3 with a modest deceleration in comparable restaurant sales, but an acceleration in two-year growth.”
The company is prioritizing five initiatives to improve its sales performance, including price optimization; advancement of technology platforms with a focus on guest engagement/analytics; leveraging the new chicken parmesan offering first introduced in September; evaluating culinary offerings; and “significantly: expanding its catering program.
The price optimization effort included Q3 tests, in partnership with third-party research firms, to address value and protein opportunities, as well as pricing elasticity for both dishes and trade areas.
“Clearly, value is increasingly important and we believe we have an opportunity to address the price of our proteins, which are added to their dish by 80% of our guests,” Boennighausen said. “We are encouraged by the initial results of this work and anticipate both broadening our test, as well as introducing more surgical pricing tiers within our menu and across trade areas.”
The continued rollout of digital menu boards will enable much of Noodles’ price optimization strategy. The company anticipates the boards will be rolled out by the end of the year. Boennighausen said in restaurants with digital menu boards already installed, the primary messaging has been around chicken parmesan and a rice crispy add-on, and those units have experienced “meaningfully higher” in-restaurant sales than those without digital boards.
Chicken parmesan overall has provided momentum for the company, which is why it is also a focus area. Boennighausen said the item has consistently been one of Noodles’ top three selling dishes and ranks highest for food scores. Additionally, during the two-week rewards exclusive period prior to the chicken parmesan launch, Noodles experienced a 33% increase in program sign ups.
“We have seen the dish appeal primarily to young and lower income cohorts, which are the most price-sensitive in today’s environment. We are only months into the launch of Chicken Parmesan. And given its broad appeal and attractive price point, we believe we continue to have significant runway for the product to drive traffic from loyal, lapsed and new guests alike,” Boennighausen said.
The introduction of chicken parmesan is an initial step in Noodles’ work to enhance its current menu. This work is broken down into three parts – menu architecture, the offerings themselves and operational enhancements. The company has engaged The Culinary Edge to help with this process, which is expected to start rolling out over the course of 2024. It’s early days, but Boennighausen said this effort has the potential to provide “more compelling” offerings that could bring back lapsed guests.
“You will really see us look at the operating model and say, how can we actually find some efficiencies, while at the same time, investing in some areas to make our menu even more compelling and resonate better and be more contemporary,” Boennighausen said, adding that there are opportunities to make the menu less overwhelming, emphasize the company’s position as the noodle authority, and optimize price.
Restaurants with digital menu boards have already begun some tests; for example, a modestly higher base price but lower protein price.
“This is the time for us to look at overall transforming the menu, the layout structure, and the pricing structure to really optimize it for the long-term,” Boennighausen said. “Over the course of time, I think you will continue to see an accretive nature to the benefit of that, especially as we kind of transform some aspects of the menu and are able to be more compelling.”
Contact Alicia Kelso at [email protected]