Noodles & Co (NDLS) 2013 Q3 法說會逐字稿

Good afternoon, and welcome to today's Noodles & Company third-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

I will now introduce Noodles & Company's Chief Financial Officer, Dave Boennighausen. Please go ahead, sir.

Thank you, Jamie. Good afternoon, everyone, and welcome to our third-quarter 2013 earnings call. Here with me this afternoon are Kevin Reddy, Chairman and Chief Executive Officer, and Keith Kinsey, our President and Chief Operating Officer.

Let me start by going over a few regulatory matters. I would like to note that during our opening remarks, and in responses to your questions, we may make forward-looking statements regarding future events or the future financial performance of the Company. Any such items, including targeted results for 2013 and 2014, and details relating to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are only projections, and actual events or results could differ materially from those projections due to a number of risks and uncertainties.

I refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's final prospectus for its initial public offering, which was filed on June 28, 2013. This document contains and identifies important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Now I would like to turn the call over to Kevin.

Thanks, Dave. Good afternoon and welcome, everyone. I want to begin by saying that I am pleased with our Q3 2013 performance, which was highlighted by a 45% increase in adjusted net income. More importantly, the initiatives that we will discuss on this call are connecting with our guests, and generating an excellent start to the fourth quarter, positioning us to finish the year strong.

Our team's commitment to bringing our Your World Kitchen positioning to life in our restaurants continues to resonate with our guests. And I remain confident we are creating a completely unique dining experience that will allow us to continue our long track record of exceptional growth. Our total revenue increased 15% in the third quarter on the strength of new restaurant openings, as well as an increase in Company-owned comparable sales of 2.4%.

The Company was able to achieve our 16th consecutive quarter of positive comparable restaurant sales growth, which was driven primarily by an increase in traffic and menu mix, as we only carried 1% price through the quarter. The underlying consumer spend and frequency, without new marketing initiatives or a limited time offer, and less price in Q3, is another indicator of our strong fundamentals and guest loyalty. I am particularly pleased with our earnings growth in Q3, given the investment that occurred in the quarter in support of initiatives for the fourth quarter and beyond, as well as the increase in pre-opening costs related to additional new restaurants.

Turning to those initiatives, I would next like to discuss our World Tour limited time offering, which has been in our restaurants since early October. One of the key differentiators of Noodles & Company is our ability to serve a world of flavors under one roof by being the only national chain that brings together cuisines from throughout the globe. This Fall's limited time offering reinforced that strength, including dishes inspired from the Mediterranean, the Far East, as well as Latin America.

I will start with the dish I discussed during our call last quarter, our Alfredo MontAmore. For years, an alfredo has been the most requested dish from our guests, and we feel the culinary team really delivered a dish that upholds the creaminess and richness people expect from an alfredo, while adding some complexity and uniqueness with the incredible flavor of a MontAmore cheese.

While the Alfredo MontAmore has certainly met all of our expectations and is the best seller of the three, the Asian offering is one that has really captured the attention of new and existing guests alike. Our Thai Hot Pot is a dish inspired by the complex flavors from that region, and the response that we are seeing from guests, particularly on social media platforms like Facebook and Instagram, has been really great. This dish is especially enticing from a visual standpoint, and it has -- with the combination of our 30-ingredient curry broth, the multiple vegetables, the Fresno peppers, pulled chicken and naturally raised pork.

Finally in the LTO, we have our first venture into Latin America with our Pork Adobo flat bread. It's a continuation of the flat bread platform we introduced this Spring, and the spicy adobo flavors of cumin and fire-roasted tomatoes, as well as our pork and Fresno peppers, really provide a nice kick, not just to our guests' tastebuds, but also as a popular add-on.

While we don't disclose specifics on mix, the World Tour LTO has been the most popular LTO we've ever introduced. I feel it is a great representation of one of the key tenets of our brand. These meals offer flavor profiles from spicy to savory, to light and healthy, and include favorites of both kids and adults.

In terms of some of the investments that we made in the third quarter, one I firmly believe in and I'm very encouraged with, is the disciplined expansion of our service platform that reinforces our differentiation at the dinner day part. As those of you who have been in our restaurants know, we prepare all of our dishes to order, and deliver them to our guests on real china, generally within five minutes. This is all executed by some of the friendliest team members in the industry, certainly a higher level of hospitality in the fast-casual space, and it is all done without the need for a tip.

We feel our food and service platforms together set us apart from many of our competitors, but are also aspects of the brand we haven't fully capitalized on. At about 15% of our restaurants, we now have rolled out our hand service program with a team member dedicated to the dining room. They're educating our guests on our menu, they're serving them an extra glass of wine, they are anticipating their needs, or just ensuring that their meal exceeded their expectations. In support of this initiative, there is a focused line of desserts, coffee and tea, as well as improved beer and wine offerings.

While it is too early to ascribe a specific sales lift to this initiative, we are very pleased with the results we are seeing in these restaurants. I can say that due to the importance of the nuanced aspects of the hospitality, our rollout and our training of this initiatives is going to continue to be very disciplined and measured.

Finally, I would like to mention the modest price increase that we implemented at the beginning of the fourth quarter in our company restaurants. As we've discussed in the past, our primary focus will always center around building real transaction growth, something we have consistently delivered over the years.

However, from time to time, we target selective price increases to combat rising input costs. I am pleased to report that as we look at our per-person spend trends since the increase, we have not seen any erosion in attachment or traffic patterns, furthering my confidence on our value position and future pricing flexibility.

These initiatives, and those Keith will address, have allowed us to build sales momentum between the third and fourth quarters. As a result of that, we are increasing our comparable sales guidance to 3.25% to 3.75% for the full year. We feel that our ability to provide outsized net income growth, real transaction growth, and a long runway of expansion is continued evidence of our potential to develop a category of one in the eating and drinking out space.

I'd now like to turn it over to Keith to discuss some of our operations initiatives and new restaurant development.

Thanks, Kevin. Kevin gave you a window into the work we have been doing to capitalize on the employee engagement aspect of our operations team. While we feel this initiative will have a particular impact on the dinner day part, which is roughly 50% of our business, we are also focused on ensuring that we meet our guest needs for speed of service, particularly during the lunch rush. Our design is engineered in such a way that we have plenty of capacity, and can continue to execute made-to-order meals in a short amount of time at a very high level.

That said, we are always looking for areas of improvement. Some of those areas we are particularly focused in on right now are optimizing the deployment of our labor during our heaviest hours, ensuring that we have the night number of registers open at all times, and looking at different preparation methodologies to reduce the number of stations that a certain item must reach during production.

Early results of these initiatives are encouraging. In quarter three alone, we set nearly 200 different throughput records at our restaurants for numbers or orders executed during 15-minute revenue periods.

As we continue to improve our operational efficiencies, we are also leveraging our online and mobile ordering platform that was launched earlier this year. Aside from increasing the flexibility for our guest, online and mobile ordering reduces the wait time at the restaurant. It eliminates many of the time-consuming phone-in orders, and when necessary, allows us to shift some of our business to times just prior to or after the main rush of revenue period. The amount of orders we are receiving through online and mobile platforms has almost doubled over the past year, and we expect it to continue to grow as a percentage of sales for the foreseeable future.

On the development front, the pipeline continues to look very strong, and we are increasing our guidance slightly to 41 to 42 net new company restaurants in 2013. Moreover, we have increased our guidance on the franchise openings from between 9 to 10 restaurants in 2013, a range we again expect to be at the high end, if weather holds.

During the third quarter, we opened 15 company and 5 franchise restaurants, bringing our total net openings for the year to 34 and 7, respectively. As of the end of the third quarter, we have 368 restaurants system-wide, 310 which are company owned and 58 franchise owned.

As we discussed in our last call, although we've made tremendous progress in balancing out our openings amongst the quarters, in the third quarter we had a substantial number of restaurants that opened at the end of the period. In fact, 9 of the 15 company openings were in the last 10 days of the quarter, resulting in all of the pre-opening expense related to the new restaurant, while little of the revenue.

Our fourth-quarter openings look like they're going to be a little bit back-ended, but not to the degree we saw in the third quarter. Overall, we remain ahead of track in our development pipeline, giving us the confidence that we will be able to achieve company-owned growth of 13% to 15% in 2014, while maintaining the flexibility to be selective in our real estate decisions.

On the franchise community, continues to get stronger each day. While we continue to expect to be primarily a company-owned system, our franchise partners are helping us build the brand throughout the country, while executing at the same high standards we hold our company restaurants at. Although our franchise-owned restaurants posted a modest increase of 0.5% in comparable restaurant sales in quarter three, our total franchise AUVs increased at a faster rate than their comp sales, due to the strength of our most recent franchise openings.

As many of you know, we have opened up our first restaurants in Long Island and New Jersey earlier this year. We are looking forward to opening franchise restaurants over the next 12 months in new markets like Philadelphia, Boston, and Lexington, Kentucky. As these markets develop, we anticipate that the potential exists to increase our unit count on the franchise side to increase between 15% and 20% over the next couple of years. We feel very comfortable that the pieces remain in place to meet our targeted growth rates in a smart, disciplined manner that will increase shareholder value over the next several years.

With that, I would like to turn it over to Dave.

Thanks, Keith. For the third quarter of 2013, we reported adjusted net income of $3.3 million, a 45% increase over adjusted net income in the third quarter of 2012. This equates to diluted earnings per share of $0.11. For the fiscal year to date, adjusted net income stands at $8.6 million, a 21% increase.

While there were no adjustments to reported net income for the third quarter, both year-to-date as well as prior-year figures incorporate adjustments related to normalizing expenses and changes in our capital structure related to the initial public offering this June. Our total revenue is up 15.4% in the third quarter, as we saw an increase in company-owned sales and franchise revenue due to a larger number of restaurants, as well as an increase in comparable restaurant sales.

Our comparable restaurant sales were up 2.1% system-wide in the second quarter (sic - see press release, "third quarter"), with company-owned restaurants up 2.4% and franchise restaurants up 0.5%, respectively. Our company-owned quarterly comp contained only 1% of price, as Kevin mentioned, with the balance being driven almost equally by traffic and menu mix shift related to our appetizers and the introduction of our higher priced gluten-free noodle option. We feel our continued positive menu mix shift is a testament to our overall value proposition and pricing flexibility.

The price increase that was rolled out at the beginning of the fourth quarter was around 1.5% to 2%. As a point of reference, in December we began to lap last year's price increase from the rollout of internal merchandising. This was a phased rollout, so our effective pricing will roll off over time.

Barring any unexpected changes though, you can anticipate price of approximately 2.5% for the fourth quarter, and gradually declining to that 1.5% to 2% range from this current price increase as we enter the second quarter of 2014. Due to the momentum we have seen at the beginning of Q4 through pricing and our initiatives, we now anticipate that our comp growth for the current quarter will be between 3.75% and 4.25%.

Our cost of goods sold in the third quarter of 26.3% was 20 basis points lower than the prior year, as a result of modest food inflation offset by the 1% price increase that we carried during the quarter. Although we did implement a price increase entering Q4, we do expect COGS to rise relative to Q3 as a result of seasonal fluctuations in our menu mix, as well as increased ingredient costs, particularly with shrimp.

Labor percentage decreased to 30.0% in the third quarter of 2013, from 30.2% in the third quarter of 2012, with lower incentive-compensation costs offset by modest wage inflation. We anticipate a similar labor percentage for the fourth quarter, as we deleverage on fixed cost during the holidays, which is offset by the benefit of the price increase, as well as increased comparable restaurant sales. Occupancy costs increased 30 basis points to 10.1% of sales in the third quarter, due to the diluted impact of the timing of the new restaurant openings.

As we turn to operating costs, I would like to point your attention to a reclassification that occurred beginning with our third-quarter results. The Company changed how we report marketing expenses between G&A and other restaurant operating costs. This reclass results in the Company reporting just those costs directly related to restaurant-level marketing efforts, which we feel puts us much more in line for an apples-to-apples comparison with the balance of the industry. With this reclass, we are also recasting prior time periods, and would refer you to our press release for a table detailing the impact. As you will see, there is no impact to operating income from this reclass.

With all of that said, operating cost increased 50 basis points to 12.9% of restaurant revenue in Q3. This increase resulted from increased supplies and smallwares in support of our dinner day part and LTO initiatives, as well as increased repairs and maintenance at our restaurants. We do anticipate an improvement from Q3 to Q4 in these line items. Overall, restaurant-level margin for the quarter was 20.7%, a decrease of 30 basis points from last year, primarily due to this increase in operating costs.

General and administrative costs decreased to 7.8% of revenue in Q3 of 2013 compared to 9.7% in Q3 of 2012. However, as you look at this number, when adjusting for items related to stock compensation of our structure prior to the IPO, management fees to our equity partners that were eliminated upon the IPO, as well as severance from an organizational restructuring in Q3 of 2012, G&A cost would have actually decreased only 50 to 60 basis points versus the prior year. This normalized 50- to 60-basis-point improvement is a result of continued leverage on our increase in revenue. We anticipate similar G&A costs as a percentage of sales for the balance of the year.

Pre-opening expense in the third quarter was $1.2 million, a 43% increase over the prior year. As Keith mentioned, this was the result of opening 15 company restaurants in the third quarter of 2013 compared to only 8 restaurants that opened in the same time frame in 2012.

Our tax rate for the quarter was 40.1%, while for the full year of 2013, we continue to expect an effective tax rate of approximately 39.2%.

Looking at use of cash, we, of course, are prioritizing the deployment of our cash to the construction of new restaurants. We currently have about $1.7 million in long-term debt, offset by approximately $600,000 in cash and cash equivalents. We do anticipate that long-term debt will increase a bit over the next few quarters as our operating cash flow is modestly lower than the capital we deploy investing in the restaurants.

For the full year, we continue to anticipate adjusted diluted net income per share between $0.39 and $0.41. This reflects an increase of between 26% and 32% over 2012. Our guidance is based in part on the following assumptions for FY13. 41 to 42 new company-owned restaurant openings, net of 1 closure in first quarter of 2013; 9 to 10 new franchise restaurant openings; net revenue of $348 million to $352 million; comparable restaurant sales growth of approximately 3.25% to 3.75% for the full-year 2013; an effective full-year tax rate of approximately 39.2%; capital expenditures between $46 million and $50 million; and annual weighted average adjusted diluted shares outstanding of $31.1 million to $31.3 million (sic - see press release, "31.1 million to 31.3 million").

Turning our attention to 2014, there are a few things we can share on our initial thoughts. We anticipate comparable base restaurant sales in the low single-digit range, with currently no plans to increase prices during the first half of 2014, given the recent price increase taken in early October.

Given the strength of the 2014 pipeline, we are anticipating between 13% and 15% unit growth for company restaurants and 15% to 20% growth on the franchise side. Ultimately, through our comp percentage and new restaurant openings, we anticipate total revenue for the year between $406 million and $412 million.

As for costs, we continue to expect COGS in the mid-26% range, as our recent price increase offsets inflation of 1.5% to 2%, with much more inflation occurring in shrimp and pork. The balance of our restaurant costs should be relatively consistent with 2013.

For general and administrative expenses, we do have our all-manager meeting in the summer of next year, an event that occurs every two years and has net cost of approximately $400,000. When normalized for that event and for public company expenses, we do expect to increase G&A at a slower rate than sales.

Stock compensation, of course, is a function of any new grants as well as stock price. All things being equal, we anticipate between $1 million and $1.2 million in stock compensation charges. Finally, we would anticipate both pre-opening expense and capital expenditures to rise in a rate proportional to our increases in restaurant developments.

We remain well positioned to continue our strategy of building high-performing restaurants, and investing in initiatives that will drive guest loyalty and shareholder value in the years to come. It also gives us great confidence in our ability to meet the guidance discussed in our earnings release.

I would now like to turn it back to Kevin for closing remarks.

We have covered a lot of numbers and commentary over the last 20 minutes or so together. I would like to just emphasize a few important thoughts before we go to the Q&A.

First, our third-quarter results were led by an exceptional 45% EPS growth, and our comparable sales were quality driven and gaining momentum. Our real estate pipeline is robust, and that our limited time offers continue to be relevant to our guests and deliver inside the box. Our guests are loyal, and brand awareness is growing every day. And maybe most importantly for the future, we have the people, operational and culinary initiative to support long runways of growth.

Thanks for your time today, and I would now like Jamie to open up the lines to answer any questions that you may have.

( Operator Instructions )

John Glass, Morgan Stanley.

I guess some [simple] questions in your comp store sales momentum. First, your implied guidance in the fourth quarter implies a pick-up. Are you seeing that in the traffic part of the business as well as the price increase, which would lead to better comps?

Then when you talked a little bit about the success of the LTO. You talked about it being the most successful series LTOs you've run, but your comp store sales were lower than they had been in prior quarters. Part of that was macro, part of that maybe is comparisons. But how to think about the success of them in the context of driving comps? [Is] it driving (inaudible) traffic in your mind? And did it drive existing guests to trade up, for example?

I will just take the second part of that first, and then let Dave address the first part, John. Actually our limited time offer started in Q4. So it wasn't in place in Q3, which is why one of the reasons I feel good about the quality of our same-store sales growth in Q3, because it was primarily driven by our guests choosing to spend more and participate more within the brand.

I like that, because really, when you look at Q3, it started out, if you guys remember, I'm looking at Black Box and Nap Track. Those tracks showed the industry starting out of slower, and as I mentioned in my remarks we didn't have a new LTO in the third quarter. We actually dropped off about 70 basis points of price.

At the end of the quarter, we had that flooding in Colorado, and we have a substantial amount of restaurants here. In the context of that, I am pleased that we continue to grow real transaction count and frequency in the core part of our business. And when we switched to the fourth quarter, which is when we began the LTO, we definitely saw a pick-up in the spend and traffic which is why -- which is what's given us the confidence, John, of what we are seeing happening in Q4.

John, in relation to the increase that we've seen in momentum from Q3 to Q4, really we are seeing across the board in price, menu, mix, as well as in traffic. It is certainly the 1.75% price is a significant portion of that, but we are actually seeing all of three of those metrics moving in the right direction.

Just one other question. You talked about the store openings sort of back-loaded in the quarter, but how did they perform from a sales perspective, when you compare them maybe to your plan, and maybe any highlights in terms of new market entries in those openings?

This is Keith. From a standpoint of some of the openings that ended up at the end of the quarter, it is a little early. We're seeing some good momentum. We opened up our first restaurant in Houston at the Woodlands, and it is doing very nicely, above our expectation. We are starting to see some of that traction from those later-opening restaurants, but in looking at those it is a little bit early just to tell as far as where they are going to come out by the end of the year.

(Technical difficulties) add one quick thing to that, Those are strong -- it is a little definitely bit early, but they're meeting where our projections are. As we look at 2011 and 2012 classes, which as we discussed in the past, we have a little bit more of a skew towards newer markets in those classes.

They tend to be closer to the 85% to 90% of our Company average, but we are seeing some nice momentum as they are continuing and ramping up on that glidepath. We think the LTO also is a nice opportunity, and we have seen some nice uptick since we introduced the LTO in those newer classes.

This is Kevin. I would just add to that, that we travel and visit a lot of these restaurants. What I am pleased with is that what we want the guests to connect with within the brand voice, the global flavors, the variety, everything being a slightly little nicer than other fast casual places. I am pleased that what we're seeing and hearing from the guest in our new restaurants are the things that important to our future, because they are getting it.

Joe Buckley, Bank of America.

Hanging on a couple of things that you have talked about. First you mentioned the floods in Colorado, and as a restraint on sales. Can you quantify that any way? Were there actual store closures involved for any period of time?

We did have a handful of days of closure, Joe, and it was roughly 10 to 20 basis points in terms of the comp.

Okay. Then question on the marketing, both for the third quarter and the fourth quarter. With a likely new LTO in the in the third quarter, with [marketing] spend down, and is marketing spend up during the fourth quarter as (inaudible) Through the World LTO?

You will see, and (inaudible) needs to kind of filter through that press release, but in general the restaurant marketing cost we have that hit the restaurants are roughly about 1% of sales on a total average. As we look at Q3 versus Q4, I think Q3 was close to that 80, 90 basis point range.

There will be a little bit of an uptick in Q4, but since so much of our marketing is at the local relationship level, ends up actually hitting the discount line through COGS. You're not going to see a very meaningful uptick there.

Joe, this is Keith, and I do think to dovetail with what Dave says, getting in -- and what Kevin is seeing and we've all seen in the new restaurants, is really getting the food out to the guest is really our strength, and getting the Alfredo and the Hot Pot out there and different opportunities to get that food in front of our guest is really the way we drive it. And particularly with LTOs, we really think that is a strong way to get people to understand the breadth of our case inside of our restaurant.

Michael Lasser, UBS.

First on the cadence of the quarter, there is a lot of macro distraction. Maybe you could talk a little bit more about how you saw it flow, and whether or not you felt like some of the issues in the broader economy might have impacted the business as well?

I don't -- Mike, I know a lot of (inaudible) know us well. We don't really spend a whole lot of time on the macro environment, but it clearly was tepid, and there is a lot going on that are on a lot of people's minds. That is okay.

What we saw momentum building, and I think that one of the strengths of the brand, and one of the beliefs of our management team, is that we have the right strategies, the right food, and if we execute at the restaurant level, our guests are loyal. And they stay with us because of that combination of food, people, place, and value.

That was building, and when we focus on that and deliver our own slightly unreasonable expectations, we win. And we were seeing that grow through the third quarter, and certainly into the beginning of the fourth quarter.

My other question is, this year you have had a lot of various tests under your belt with the dining room construct, the menu with limited time offers. What have you learned that could influence any changes that the customer might see and that we might see within your financials over the next year or two? Thank you.

I think a lot of the focus we have is just improving the guest experience. Our limited time offers are really focused on building a broader message about the brand. They're focused on the world flavors and the variety and choice that we put in the guest's hand. I think the limited time offers combined with the new merchandising are really changing how people think about us in a very positive way, and those investments really have already been done. So I do not really seeing any -- we can continue to do that. It is in our core DNA. You're not going to see much financial impact on the expense side of those things, but I do expect you will continue to see us be able to build top-line sales.

The one where we're requiring some investment is that all of our initiatives on the dinner day part. And that is one I think is very unique within the restaurant space, and it is one of the strengths that we believe we can capitalize on in terms of an opportunity in building the dinner day part, and that one requires training. We've add a few menu item. It is a really great cost of entry for what we are doing, but I think you will see us -- you won't see massive impacts on the Company just because of how disciplined we are in measuring and rolling those things out. I think over time that one is going to pay huge dividends, just because of our ability to steal market share from casual dining.

I think the other piece to add on with what Kevin has talked about is from an operational perspective, I think as we think about how we use our teams, how we deploy our labor, and with the success of the rollout of some of the merchandising within the restaurant, it allows us to better talk to our guests and educate the guest on the breadth of our menu. It also helps us operations, as we talked a little bit about this last time, is how it helps us execute better, gives a flow through the ordering process easier, getting the guest to understand the breadth and ability that we do just from our same systems can customize dishes. And I think that is another piece that as we continue to educate both sides, both the team and our guest, is going to be very powerful for us in the future.

Jeffrey Bernstein, Barclays.

Couple of questions. One on the throughput you talked about. Obviously with made-to-order type product and what seems to be demand high, throughput would seem like either the bottleneck are the biggest opportunity. I am just wondering, I think you mentioned some records in terms of 15 minute periods or whatnot.

Wondering any color you can provide in terms of, one, how you measure your throughput, and maybe some ranges of fast versus slow? And where you think the opportunity to is to improve, whether be, like you said, that dining room team member or something else to allow for faster speed of service, and obviously more customers to the line?

Great question. Great question. There are two elements that we can mathematically do it, and we do on the system and the operational stream looks at it very diligently. One, we look at order time. The time that the person comes up to the register, and we go through the process of getting that individual's order down.

The second piece that we track, and that is anywhere -- we target between 25 and 35 seconds on that. I would tell you that with the new menu boards, the pre-boards, that it has really helped us speed that process up because people come up and they know what they want, they know the combinations they can do with that, and they can easily articulate that to our guest -- to our ambassador, and they can ring that up.

The second piece that we focus the time on, and it really helps from a standpoint of being able to take that detailed order that fast, and then our systems are set up to rifle back to the back of the restaurant at different stations, the different ingredients that need to come together to be able to put that dish together. We track that time.

That is our preparation time, our food time. Then we take that dish out. That is anywhere from 4.5 to 5.5 minutes, but typically more in that 5 range, and it gets that dish out to that guest, and the comment that Kevin made, in about 5.5 minutes.

But what we have done with that system, again going back to, is each one of our different areas in the back of the restaurant are set up as stations. So what you do is one piece might fire over for the sandwich over to our protein section. If we're doing a noodle dish, it might fire over to the noodle station. On the saute line, it might fire over to the saute line. We have what we call a silver bowl that helps us break down the dish and customize. All of those elements are built, not only from a standpoint of people and position and deployment, but also from the system's, literally the IT systems that the teams have put together. What has been part of our focus is making the complex easy, and being able to execute that at a restaurant level.

The other thing I would add, because I think it's an insightful question, is that the efforts that we are putting in there are really making a successful, capable system better. At lunchtime focusing on throughput and making sure the human element is in place, the system is well engineered to deliver, as Keith, said the complex, simple and fast.

The Evening day part, our guests are wanting to linger a little bit longer and the opt into a little broader range of offerings and a little higher average check. I am really pleased with how the teams are responding and focusing on capitalizing on those opportunities.

Great, and I'm just, from the real estate pipeline perspective, it sounds like we should expect an uptick in terms of openings. I'm just wondering what you're seeing in terms of availability of real estate, or competition, whether it is getting more or less intense, and whether you are seeing increased real estate and construction cost, or whether things are well managed? It seems like you're fairly happy with the pipeline. I was just wondering some color there.

Great question again. What you are definitely seeing is a lot of the two- and three-tenant type buildings that are going up. The nice thing about that, they are in a lot of the already existing trade areas that have been developed already. So you are not going into green parts of a city or a skirt of a suburb. There is definitely competition looking for that. There's still some of the 2500 square foot operators out there that are looking at, and looking for that kind of space.

In general, though, if you look at some of our most significant competitors, they are already in a lot of these places, or there might be something like them already in a place that we are looking at. Because we have such a unique variety of foods, there's not a lot of people that can exclude us. So there is a lot more opportunities for us to go into the established trade areas where there is a multitude of fast casual there, but not a casual diner -- a fast casual like us, or we are very high because of the strength of our balance sheet to go do in some of these two- and three-tenant type of buildings across the country.

There's a little bit of inflation there, but I think it is by different areas of geography, depending on what has developed. And again the strength of the real estate market there, the construction market, but not a big number.

Got it. Then just lastly, Dave, if I could just qualify what you mentioned in terms of 2014 guidance. I think if I got it correctly, it sounds like revenues you are thinking of mid-teens driven by the unit growth primarily.

But on the cost side of things, if food costs are in the mid-26%s, and I think you said the rest the restaurant-level expenses are consistent with 2013. I'm assuming that was as a percentage of sales. We should think about the restaurant margins seeing modest compression, driven maybe just by the food component, but then the G&A leverage growing less than sales, should really make up some of the difference to the earnings growth?

Yes we would expect that yes, as the new restaurants mature, [year is] a pretty consistent margins overall across the board, maybe a little bit of leverage there, and then we should be able to get significant leverage on the balance of the items throughout the statement of operations.

( Operator Instructions )

David Tarantino, Robert W Baird.

I have a question about the 2013 guidance. You raised the comps guidance but held the earnings guidance. I was wondering, Dave, if you could tell us what maybe some of the offsets are that might not let the increase comps flow through to the earnings line?

Couple of things there, David. One be a little bit of the decrease in net revenue based on primarily the timing of new restaurant openings. And the second thing would be the COGS number going a little bit up.

Okay, great. That's helpful. Then on the new unit performance, I think Dave you mentioned that your opening, or at least the line includes a lot more openings in some developing markets. I was wondering if you could maybe map out how you expect that to work as you look at next year's openings? Are you expecting more in developed markets, or this is going to be a continuing pattern of new markets dominated the mix?

There is, yes, in general, just to somewhat level set, are new markets, but they always end up getting to maturity. But they do have a bit more volatility, and I think most growth concepts, and maybe in our life cycle have the same phenomenon. When we look at 2011 and 2012, and a little bit in 2013 but not nearly as much, there was a skew where we actually had a higher percentage of our markets that were in developing and new -- I'm sorry new restaurants that were in developing or new markets.

But when we look at the 2014 pipeline, that one is going to be dominated more by the mature markets, as well as the filling in of some of the new markets that we introduced in 2011 and 2012. So there's definitely a little bit less volatility that we would expect in the 2014 class.

Nick Setyan, Wedbush Securities.

I know it's just [high] a little bit more on the leverage within the four walls. Holding cost still constant, with comps in the low single digits, even the past you have done a good job of keeping some of the other cost items there pretty consistent year to year.

I just wanted to understand what is unique about Noodles & Company that you're able to, with some of your competitors aren't able to that, they need high comps to do that. And I always think of the occupants in the restaurant operating costs, it's more variable than fixed. Maybe you can talk about what some of those moving parts are that you are able to keep those expenses in line, even with some -- even with low single-digit types of comps.

To me, there's a couple of piece -- this is Keith. I will talk about our ability to effectively leverage labor and utilize that deployment, because I think we have a very sophisticated labor scheduling process that allows us to make sure we add people when we need to add them and deploy them as volumes grow. But only add them to the extent that we need them as the sales and during certain day parts when we get those different pushes on sales.

Same thing on the COGS. I think as we look at some of the dishes and as we try to maximize the type of limited time offers that we have in our system, we are very thoughtful as to what that cost might be, and also from a standpoint of execution within the restaurant, which keeps your waits down and some of your other elements down, that we think about that when we roll those different types of LTOs.

Yes, I was going to jump in and add something here. We have a lot of experienced, excellent operators and over the years together, we've learned what is important. We have the data to understand it quickly, and we react quickly. I think having a good finger of pulse on your business throughout that entire P&L and being able to quickly communicate through our operating infrastructure, and help coach folks that may need help, and to anticipate that, is a big reason why our P&L numbers and our restaurant contributions are so strong, and our AUVs.

Again, in short, I think we know what is important and we have the data to get to it. We study it, and we react to it, as operators should.

The one other thing that I would just add that I think both said, Kevin, is when you look, Nick, at the how our new restaurant, the cadence of our new restaurant timing, that does have an influence overall in our margins. Those restaurants tend to be, they do tend to be a little bit lower in margin out of the gate, and then they continue to grow margin as they mature.

If we look at the last 12 months from the beginning of Q4 of last year, to the end of Q3 of this year, we opened up 49 restaurants, and we had a lot of restaurants opening in Q4 of last year, Q3 of this year. What you see is kind as those restaurants mature, there will be a little bit of an influence on the overall margin in a favorable light as they hit that glidepath.

Paul Westra, Stifel.

This is Chris [Inistran] for Paul Westra. Just wanted to follow up on one more quick question about the unit development, which if we're correct in implying 40 or less next year, a little bit below this year. Is that a function of strong -- with your real estate backlog being strong, is that a function of delays in the sites that you're seeing already, or just being a little bit more conservative?

Actually, we might have misspoke there. It should be a 13% to 15% unit growth rate on the Company side, which should equate to a mid-40%s number.

Right.

Great. That actually helps clear it up. Then just one more quick one. On the enhanced service model, which you mentioned now in 15% of the stores, can you provide any commentary on what you're seeing in terms of results there? Is a dinner only thing? Just really any further clarity you can provide there.

I think, it is still early, but I think what is very encouraging is that we are seeing increase in sales across all day parts, across all days and all day parts. It is something that is resonating with the guests, just in terms of the overall brand perception.

So yes, we were seeing a little bit more growth at the dinner side. We do see a larger percentage of those items being sold at the dinner day part, but we are seeing all day parts go up. And I think what is also encouraging is we're seeing a lot of those sales in the mid, in that timeframe between 2 PM and 5 PM.

I am showing no further questions. I would now like to turn the call back over to the management team for closing remarks.

I think we covered everything. We really appreciate your time and attention in listening to our Q3. We are excited how we started Q4, and ready to get back to work. I wish everyone the best, and we will talk to you soon. Bye-bye.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.