Noodles & Co (NDLS) 2014 Q1 法說會逐字稿

Good afternoon and welcome to today's Noodles & Company first-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to introduce Noodles & Company's Chief Financial Officer, Dave Boennighausen.

Good afternoon, everyone, and welcome to our first-quarter 2014 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'd like to note that during our opening remarks and in response 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 2014 and details related 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 annual report on Form 10-K for its FY13. 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'd like to turn the call over to Kevin.

Thanks, Dave, and good afternoon. As we discussed at our previous earnings call, the first quarter was one of unprecedented weather throughout much of the United States. Noodles & Company was particularly impacted by these weather patterns, as nearly 80% of our restaurants are in the Rocky Mountain West, Upper Midwest, and Mid-Atlantic.

Unfortunately, the wintry weather persisted beyond our last earnings call and into March, resulting in a 1.4% decline in comparative restaurant sales at Company restaurants for the quarter and a 1.6% declines system-wide. This impact was approximately 400 basis points to top-line revenue. Dave will discuss at greater length, this on the call. But adjusting for weather, we believe the underlying trends remained positive during the first quarter and we have seen a gradual return to more normal patterns now that the weather is finally behind us.

More importantly, we continue to make progress on many of our initiatives and we feel confident that we will be able to build comp sales momentum through the balance of 2014. We were able to achieve a 10% increase in revenue to $89.5 million and a modest increase in adjusted net income during the first quarter. This is due to our focus on new unit expansion, our core business, solid P&L controls, and our philosophy of thoughtful investment.

While we are in the early stages of the second quarter, I'd like to report that comparable restaurant sales are gradually returning to prior levels. A couple of weeks ago we launched our Spring LTO, which includes an asparagus di parma, the return of our backyard barbecue salad, as well as a margherita flat bread.

Our limited time offers have been a staple of our menu strategy over the past several years, reinforcing to our guests our commitment to fresh ingredients, such as asparagus, as well as our promise of preparing ingredients throughout the day. As an example, in the backyard barbecue salad, our teams receive fresh ears of corn and actually shuck and sheath the corn in our restaurants. Our philosophy of showcasing real ingredients and real cooking continues to generate positive traffic at increased frequency year in and year out.

One of our newest initiatives, catering, is one that I'm particularly pleased with. During the past few months, we have further refined our catering test and validated our operations and box economic expectations. We have just now rolled it out to one-third of Colorado, as well as a few other select restaurants throughout the country. The initial response is very encouraging, not only from our guests, but also our operations teams.

We believe there is a clear consumer demand for this occasion and our offering will be compelling in the marketplace. Due to the positive reaction of our operations teams and consumers, we now will be rolling out catering fairly quickly and expect it to be offered in 100% of our Company restaurants no later than August of this year.

As we introduce the offering within those markets, we believe the overall benefit to sales will be modest at first introduction, but steadily and continually growing. We anticipate catering to have a significant opportunity to contribute to AUV growth during the back half of the year and into 2015.

We also continue to roll out our dinner daypart initiative, which is now in roughly 20% of our Company restaurants and is included in all new restaurant openings. As we accelerate the introduction of catering, while maintaining our focus on core operations, throughput, and more aggressive local relationship marketing, we expect the full roll out of our dinner daypart initiative to extend through and into 2015.

As you know, our intent is to create a Category of One within the eating and drinking out space by providing a world of flavors under one roof at a compelling value that meets the needs of consumers' busy lifestyles. Our menu innovation, constant focus on core operations, and the creation of a differentiated and elevated service model all support this objective.

Now I want to take a moment, because I want to reinforce and remind everyone that we are not changing our previous guidance for the year or expectation for 25% annual earnings per share growth despite a very difficult Q1. In the near term, we expect to invest in our initiatives and more focused promotional activity, resulting in being incrementally stronger in Q2 and requiring a strong second half of 2014 to achieve our full-year expectations.

As we continue to build an enduring brand, Noodles & Company must accomplish two things simultaneously. The first is maintain positive momentum in our core business and recover when it's occasionally interrupted and continue our runway of sustainable growth to 2,500 restaurants nationwide. I am confident in both those areas. Now I'd like to turn it over to Keith to discuss the strength and very positive trends of our new restaurant pipeline.

Thanks, Kevin. During the first quarter of 2014, we opened 13 Company restaurants, as well as one franchise restaurant. We remain on track to meet or be at the high end of our guidance for 42 to 50 Company openings, and 10 to 15 franchise openings for 2014. Our team has done a tremendous job building the pipeline for 2015 and we are even a better situation sitting here today for the coming year than we were at this same time last year.

During the first quarter, we opened restaurants in three new markets -- Company-owned restaurants in Orlando and the Bay Area and a franchise restaurant in Lexington, Kentucky. We are now entering new markets with the full complement of initiatives that we have enacted over the past few years, including our new merchandising highlighting Your World Kitchen positioning, our dinner daypart initiative, and the evolution of our open kitchen design.

These changes have allowed us to more effectively introduce the concept to new guests who may not be as aware of the brand and we are excited about how it resonates. Our initial entries into Orlando and Bay Area are both performing well above the Company average and we look forward to building the brand with additional openings over the balance of the year in these large markets.

We have discussed in the past that, historically, our non-comp-based restaurants typically had AUVs at that 85% to 90% of Company average. During the height of the winter, particularly considering a mature percentage of the newer restaurants in the Mid-Atlantic, we saw this figure dip towards the lower end of that range. However, with the success of our recent openings in California and Florida, and the continued maturation of our most recent classes, our non-comp AUV trends have approached the higher end of the range during the last half of the first quarter, and thus far, into the second quarter.

On the franchise side, our Lexington, Kentucky restaurant also opened up with a full roster of merchandising and design. We and our partner are very pleased with the results we're seeing there at that restaurant to date. The franchise community as a whole continues to operate at a high level, despite the challenges mother nature threw at them during the first quarter. While comparable restaurant sales declined 3.3% at our franchise restaurants, it is important to note that 100% of our franchise restaurants that are in that comparable restaurant base are located in the heavily impacted Midwest.

During the next several months, our franchise community will be developing the brand in several markets, including our first restaurants in Boston and Philadelphia, as well as new units in Long Island, Hartford, and the New Jersey area. We are excited to expand the presence of Noodles in the northeast with our high-quality franchise partners.

Finally, I'd like to give an update on the balance of our new restaurant opening calendar. As mentioned in earlier calls, the first quarter was backlogged with 13 Company restaurants operating an average of four operating weeks a piece. We anticipate the calendar to be much more balanced for remaining three quarters of 2014. On the franchise side, we continue to anticipate 10 to 15 openings for the full year 2014, but given the area development agreement schedules of our newer groups, the majority of those openings will be likely during the last half of the year.

The success of our openings thus far in 2014 is further evidence that the brand continues to evolve in a way that better communicates our points of differentiation with our guests. Moreover, we remain incredibly disciplined in how we approach development, applying rigor to our site selection and taking a thorough approach to how we build what we believe will be one of the enduring brands of the next few decades.

Now I'd like to turn the call over to Dave to discuss at more length our financial performance during the quarter.

Thanks, Keith. For the first quarter of 2014, we reported adjusted net income of $1.4 million or $0.05 earnings per share, consistent with the first quarter of 2013 despite the approximate $0.03 impact of weather. Revenue increased 10.1% to $89.5 million due primarily to an increase in the number of restaurants in the system offset by our modest decline in comparable restaurant sales.

Our comparable restaurant sales declined 1.6% system-wide in the first quarter, with Company-owned restaurants down 1.4% and franchise restaurant down 3.3%. Our Company-owned comp of negative 1.4% included the benefit of 2.2% associated with price, offset by the negative impact on weather during the quarter. During the past earnings call, we discussed that, assuming normal weather patterns during the last week of February and throughout March, total revenue and comparable restaurant sales would be negatively impacted by approximately 300 to 350 basis points for the full quarter.

Unfortunately, as everyone is aware, poor weather this winter persisted well into March and we believe that the overall impact was closer to 400 basis points for the quarter. Again, as Kevin mentioned, the lion's share of our restaurants are located in areas particularly impacted by weather in Q1 -- 39% of our Company-owned restaurants are located in the upper Midwest states of Illinois, Iowa, Wisconsin, and Minnesota; 20% are located in Colorado and Utah; and 19% are located in the Mid-Atlantic.

Looking forward, as we enter the second quarter, we are now running 1.75% of price from last year's increase, which we will overlap in October. We have not yet determined when our next price increase will be and at what level, but we would anticipate it would be somewhere in line with the timing and level of prior price increases.

As a reminder, Q2 will have one less operating day due to the Easter holiday shift, which will negatively impact comparable restaurant sales by 80 to 100 basis points. For this past Q1, the benefit of the shift was offset by the loss of a day from the New Year's shift for our calendar. Q3 and Q4 will have no shifts in operating days year-over-year.

Despite the weather challenges from the first quarter, we continue to anticipate full-year comparable restaurant sales of 2.5% to 3%. This, of course, implies stronger comparable restaurant sales for the balance of the year, which we feel comfortable with, given the initiatives that will be rolled out in the upcoming months.

I will note, however, that as we look at the timing of catering taking hold, how the comparisons shape up during upcoming quarters as well as the holiday shift negatively impacting this current second quarter, we expect flat to low single-digit comparable restaurant sales in the second quarter, before increasing to low to mid-single-digits during the back half of the year.

In terms of earnings guidance for the full year, we are also maintaining our prior guidance of approximately 25% earnings per share growth for 2014. Again, though, we expect much of that growth to occur during the second half of the year. Now back to Q1, our restaurant-level margins declined 130 basis points to 17.3%, almost entirely the result of the concentration of our restaurants and the impact of weather.

Overall, the teams did a solid job adjusting inside our restaurants. However, aside from the obvious deleverage that occurs on fixed costs, such as Management, wages, and rent, there are few other key line items that were negatively impacted. Utilities, as an example, from percentage of sales basis, increased 60 basis points from Q1 of 2013 to Q1 of 2014. Other line items that were negatively impacted in Q1 include costs of goods sold, as we had more waste during particularly slow days, common area maintenance, as snow removal costs increased, and cleaning supplies, as it takes more attention to remove the salt and snow that gets brought into our restaurants.

Cost of goods sold of 27% was 50 basis points higher than Q1 of 2013 as a result of increased promotional activity, as well as the aforementioned waste associated with particularly low volume days. We anticipate that COGS will settle in nearer our historical trends during the balance of the year.

Labor costs were flat at 30.8% as fewer health insurance claims offset the deleverage from lower volumes. Operating costs were 13.8% for the first quarter, flat versus the prior year. Increased utility costs as a percentage of sales were offset by a decline in our marketing spend of 80 basis points to 0.6% of sales.

We continue to build the brand primarily through local relationship marketing and by using food as our currency, much of which ultimately hits the cost of goods sold line in the form of discounts. Consequently, we have only a modest amount of more traditional marketing spend. Given the negative impact the weather can have on the efficacy of media, such as billboards and radio, we shifted much of our expected media spend from the first quarter into the latter part of this year. We still anticipate our full-year marketing spend to be approximately 1% of sales.

Occupancy costs increased from 10.4% of sales to 11.2%, due to increased common area maintenance, as well as deleverage. General and administrative expenses decreased 110 basis points to 7.8% of the sales due to leverage on our overall revenue increase, as well as the elimination upon IPO of Management fees paid to our equity sponsors. We now anticipate G&A as a percentage of sales for the full year to be approximately 8% of sales.

With the opening of 13 Company locations compared with nine during the prior year, pre-opening expense increased $200,000 to $1.1 million during Q1. As of the end of Q1, the Company had $6.6 million in debt outstanding on our credit facility and our effective tax rate was 41.5% in the first quarter. This tax rate is higher than typical due to the treatment of our transition from a 34% to a 35% federal taxpayer. We anticipate our full-year 2014 tax rate to be approximately 41%.

Now I'll turn it over to Kevin for some closing remarks.

Just quickly, I want to share perspective on the current environment and what we believe to be important. Noodles & Company has delivered top-tier results for high-growth concepts consistently over time. That track record was interrupted in Q1, primarily by the unique circumstance of weather.

Our brand strength continued to resonate with our guests and our brand positioning for the future remains the right platform for continued growth. As such, we will remain diligently focused on restaurant operations and our teams, as well as earning the loyalty of our guests, while thoughtfully expanding the brand to capture the white space ahead of us.

As we deliver on these expectations and generate our long-term earnings growth of 25% annually, we believe Noodles & Company remains one of the most compelling high-growth restaurant brands in both the consumer and investor landscape. I want to personally thank you for your time and let's open up the lines for Q&A.

(Operator Instructions)

Jeffrey Bernstein of Barclays.

Great. Thank you very much. A couple of questions. Just one from -- obviously, the weather got a whole lot of attention from yourself and your peers, and you mentioned on a couple of occasions, you've seen a gradual return. I'm just wondering, why do you think maybe you wouldn't see an immediate bounce back or -- some of your peers have spoke about, once the weather subsides, you actually see outside sales growth just because of the demand for the product once the weather gets better.

So I'm just wondering, one, do you see a bounce-back in the days immediately following the weather? And two, why do you think you didn't get a [bounce]? Just seems like you're setting yourself up for a tougher rest-of-year, if you're still on target to hit that 2.5% to 3%, it might setting yourself up for too much of a stretch in the back half.

A couple things, Jeff. We have seen, even through the first quarter where you might have some restaurants closed for a particular day or parts of a day, then the next day could be very strong, sometimes there's -- you get a pent-up demand effect. But a lot of times people just are moving on to different patterns so you come back to more of a longer-term normalized rate rather than outsized rate. So, it's not really consistent enough for us to bank on that and to project it that you're going to get outsized returns.

The other thing that we're looking at, as it relates to Q2, is even though we're steadily building it -- the Business -- and seeing how it's returning, we really are up against our toughest comp. It's a 4.7%, with the Easter shift, you're approaching 6% on a two-year growth basis when you're flat. So we think when you look at that year over year and the fact that, even though we're accelerating some of our initiatives like catering, that building upon that return is actually probably more conservative to not believe that's going to happen immediately.

Jeff, I would say -- this is Dave. As Kevin mentioned, this is the most difficult comparisons we actually have through the year is during this most recent [core] four weeks and a little bit into [P5], as well. And with the Easter holiday as well, it's just a little bit difficult to go through the entire noise. We're certainly seeing a bounce-back, but to what level is still a little bit to be determined.

Okay. And then, just separately, I know you mentioned the Spring Limited Time Offer. Just broadly speaking, as you think about those LTOs, I was just wondering how you balance the benefit presumably from the new product news, which presumably drives traffic, versus what would seem like it would be more of a throughput issue, each time you have to roll out some of these things and redo the training and the consumer comes in next time and something they liked last quarter isn't there. How do you balance the benefits of the LTOs with what presumably would be maybe some bottlenecks or throughput or some more disappointment when things remove?

Jeff, this is Keith, that's a great question. Part of it though -- and the way we do our limited time offers is it's really not a lot of added items or SKUs to that particular dish. If I think about the asparagus dish, it's basically adding just the asparagus into our SKUs. And we've done that dish before, we've done a little bit of a modification to it, but operationally, it fits right into the same mold of how we execute that dish.

So, other than adding an asparagus to it, all the other elements going through -- saute, adding the sauce, and then getting it out to the guest -- actually is very similar, so it's an easier train. It works very well from the standpoint of the freshness and reinforces our focus on getting fresh ingredients into the restaurant. And, operationally, we can train it pretty effectively and the team can embrace it pretty easily.

One of the other things we do, Jeff, is that, when we know a limited time offer is going to expire, we will provide the talking points and perspective to our operating teams to help them recommend a dish that will have some similar ingredients, similar flavors. So, if someone comes in and says, god, I just love that adult mac and cheese -- truffle mac and cheese, or something -- we'll try to help, we'll anticipate that and we'll encourage them in moving to a different dish. We're very successful at that. And when it's done with a strong personal recommendation, it has very little downside -- at least that's our experience.

Got it. Thank you very much.

Joe Buckley of Bank of America.

Could you fill in a little bit more your excitement about catering. I know you said one-third of the stores in Colorado and a few other stores, but how many stores is it currently in? And maybe if you could talk about the experience from an average check standpoint or a sales [list] standpoint, just to give us some perspective?

Sure thing, Joe. This is Dave. It's in about 15 to 20 restaurants currently. And then, on the average order size, it's roughly about $300 is what we're seeing is somewhat the median order. It's still pretty early on, but we're pretty excited with what we're seeing from the percentage of sales. It's in the 1% to 4% in our test restaurants.

The exciting piece, too, Joe, as you look at that, is part of it is the operational ease in which we've been able to integrate it into the way we do our business and actually utilizes our equipment at a time in the restaurant when we're not using it before the real retail starts.

Okay. And then, just two other catering-related questions. Are you delivering? And, some of the other companies that have gotten into catering have described it as being very profitable, much more so than in-store sales. Would that be the case for you, as well?

I'll talk to the margin side and then let Keith and Kevin talk about delivery. From the margin perspective, we certainly think that catering is accretive. It's a little bit different than probably how it -- the dynamics function for other concepts. Since we are doing true chafing dishes, there is a little bit more smallwares and supplies that are part of our package. So, from a margin perspective, COGS are solid, labor is very positive, as well, but you do have a little bit more supplies and smallwares. So, it will be accretive, but maybe not to the level that you see at some of the other concepts that maybe are sandwiches or something along those lines.

Yes, Joe, this is Keith. Yes, we do deliver. We have an upcharge of $25 on that typically, but it's really at the discretion of the individual or the company asking for it. We will, in a lot of cases, have them come and pick it up. But if they need it or want it, we will deliver the food.

Okay, thank you.

David Palmer of RBC Capital Markets.

This is Eric Gonzalez in for David Palmer. Can you maybe talk about some of the other factors, other than weather, that impacted sales? In your prepared comments, you mentioned a shift in media spend, but we were wondering if some of the 4Q sales drivers, like the Thai Hot Pot perhaps faded as growth drivers in 1Q. And then, separately, food inflation seems to be a popular topic as of late. Can you discuss some of the moving parts within your food basket as it relates to inflation, and maybe how has your outlook changed in recent weeks?

Sure, I'll tackle the some of the other trends we saw in Q1, and then, Keith, if you can touch on some of the inflationary pieces. Couple things that I would point out. The first one would be that, from a price perspective, we actually went from about 2.5% price in Q4 and then just gradually fell off it as we rolled over in the phase-in of Your World Kitchen merchandising, so lost about 30 basis points worth of benefit when it came to price.

In terms of the marketing spend, last year was about 1.4% of our sales. This quarter it was about 0.6%. We had tested some media in different types of media platforms in Kansas City, Colorado, as well as Austin, Texas, last year. We're very pleased with the learnings we got there, thought that it probably impacted overall Q1 counts by about 50 basis points.

At the same time, as we talked about in the prepared remarks, there was definitely concern about when you're going into -- since most of our markets are cold-weather markets, you can certainly lose some of the effectiveness of that media spend, when you do it during the winter months. So we purposely shifted some of those dollar figures to where they'd be -- some of that dollars spend to where it would be later on in this year versus Q1. Those were the two big takes, I would say, aside from weather.

Yes. And, Eric, this is Keith. As far as looking at some of the commodity issues, where we're looking at some of the pressures -- and Dave has worked them into the numbers already -- is a little bit of the inflation on the pork side and then on the shrimp that we've always talked about in the past. What we're looking at right now, we're about 80% locked up and we're really looking at 2015 as far as getting those contracts. We're fine with beef through the end of the year, and so actually, we're looking at trying to get our 2015 perspective or COGS together right now.

This is Kevin. One other just last comment and thought on marketing and weather. I haven't heard yet enough numbers for restaurants that have a similar distribution we are, but I know some of those markets were very, very difficult. When you lose one-half a day or potentially a day a week, those are tough numbers to recover from.

But one other thing to remember and note, on marketing, is our size versus what a lot of entities we're typically compared with that may spend north of $10 million or more a quarter in marketing and advertising. We are still at a size where we don't have economies of scale, and it isn't really a thoughtful investment to try to buy transaction and throw a lot of money at that. We really build the business organically through our restaurants, trying to build loyalty, increase frequency, and then, through LRM out in the trading areas, sprinkled in with the right, more market-wide promotions and aggressive targeted promotional activity and social media.

So we don't -- one thing is we're not influencing trends in a short-term way through significant marketing dollars. And, at the same time, we aren't seeing the flip side of that, where you might have an impact to margins because of a significant increase in spend or having to repeat something on that same cycle every year. We really are building the Business day in and day out through core operations and building a solid guest base, which we think has been and proven to be very successful over time.

David Tarantino of Robert W. Baird.

Just a couple of questions. The first one is really on the guidance for the year -- and I know you mentioned that you're expecting or at least needing better trends in the back half to deliver the guidance -- and I'm just wondering how to frame that up. Is it run rating the trend line you think you're going to be on in Q2 and then adding on catering? Or is there something else to consider in terms of sales drivers in the back half that maybe you haven't talked about?

I'd say, the first thing I would look at is the comparisons, David, especially as we look at Q3, which was our softest comparison of the full year. So that's one component of why we would anticipate, at our normal run rate for Q2, there will be a benefit as we go against a little bit softer reads later on into the year. And then, catering is certainly a significant component. Kevin, maybe you could mention a couple of the other initiatives that might be driving some of that comp growth.

The first -- even within catering, there's a range that we're seeing in the rollout that we think will build and we have some confidence some markets will be at a higher end than what we need to influence the run rate and be accretive to it. The other thing is, we just mentioned we didn't spend much in Q1 in marketing at all. We do have some tweaks in focus to our core fundamental marketing with our tastings and our hero lunches. And we have a couple programs that are a little more aggressive going forward and introducing to the brand and getting, not just brand messaging out, but targeting some key generators within the neighborhoods, and further getting the messages about a variety -- healthy to indulgent -- out to the guests.

So, we believe, from our experience in testing some of those things and similar programs, that we'll get some incremental lift from increased promotional activity. And then we're still slowly and methodically continuing to introduce [plus] in those restaurants and dinner dayparts.

That's not going to affect the entire system, but it will affect, mathematically, the markets that we put it in. And in the restaurants that we have opened with that -- as well as, especially, converted -- we're seeing at the low end, low single-digit delta from trend lines and from market on the small side. All those singles, doubles, potential a triple in there collectively added up create a clear path where we believe we can see us reaching those levels.

One thing, too, David -- this is Keith -- when you talk about two of our core mechanisms or way we build the loyalty that Kevin and Dave talked about, and the tastings and the hero lunches. If you think about the weather, that has one of the bigger influences because, not only does it affect the existing guests coming into our restaurant during those days, and those closures, but a lot of those promotional activities that we had set up, having those guests come in, developing and continuing to reinforce those relationships that we want to build with those two methods, really influences also -- and influenced our ability to do that in the first quarter. And I do think, coming back with the weather, as Kevin talked about, we'll be able to do that much more methodically and be able to predictably plan it as the guest comes into our restaurant, because we won't have the weather issues.

Great, that's helpful. And then, Keith, you mentioned that you're seeing good trends in -- through the markets you entered, the Bay Area and Orlando. Could you just maybe comment, generally, on how strong the openings there have been and whether that increases your confidence in how the brand's going to work as you move into some of those new areas where brand recognition is low?

Yes, as we talked about, definitely above our Company average. The acceptance and the guest, as far as talking about coming back for the brand, the -- we just opened up another restaurant in the Bay Area in San Ramon today -- we'll see how that one's doing. But, it does give us a lot more confidence as to accelerating some of the growth there, particularly the fact that it's in warmer weather.

We're looking at, for the offset, what we just saw this year, as far as the weather patterns in the northern part of the country. But we definitely have a lot of confidence in opening in those markets, continuing to open up those markets, and looking for opportunities. And we're very pleased, as we said earlier, with the volumes that we're seeing.

What we're seeing really take hold, David, is all of the work that had been done in the past couple of years, in terms of the dinner daypart initiative, Your World Kitchen and that messaging, it's really resonating with guests. So, as we're entering into new markets, we're really coming in with the full arsenal of what the vision of the brand is to be.

At the same time, that's helping out also our new restaurants and in existing markets. As Keith mentioned, we've gone from the lower side of the range of 85% to 90% of Company average and we're now moving towards the higher end. It's certainly not just the restaurants that are in California or in Florida; we're also seeing that in our established markets, as well, and we're getting a little bit of momentum as that catches hold.

Great. Thank you.

John Glass of Morgan Stanley.

Just a few follow-ups. One is, are sales positive now? You talked about a gradual ramp, but are we seeing that now or are they still trending negative from the first quarter?

They are positive.

Okay. And, I know you tried to quantify -- you quantified the weather impact -- do you actually have any or enough pure examples of where weather did not have an influence in the first quarter, and can you maybe cite what those sales were?

Absolutely. The one thing that's a little bit tricky is when you look at the 20% of our restaurants, John, that aren't in those areas. They tend to be in smaller markets where we don't have as much presence in, to where they were already outperforming the Company -- that's places like San Diego, Sacramento, Raleigh, Cincinnati, those types of markets. And, what we're seeing is they're continuing to have their very positive trends. The one caveat being is just that it's not a large sample size -- it is a collection of smaller markets. But their trends maintained very consistent from Q4 to Q1.

And then, just -- maybe you said this -- but how much are you depending on catering to drive sales in the back half? Did you put a number on what it needs to be -- how successful it needs to be in stores that it's in, in order to achieve the back half?

What we've mentioned earlier in the call was that we're seeing a range right now of 1% to 4% left in the test restaurants we have. We've got a couple nice outliers on the high end of that, where some managers have really embraced it. So we're modeling at the lower half of that. So, at about that $300, not being too aggressive in how many we do a week.

I don't think we're -- I think we're being realistic in that it will start, our teams will embrace it, they'll get to the right influencers, the right folks that are making those decisions. Then -- and the nice thing is this includes a lot of suburban restaurants, for the most part, in the mix. It's not -- these are not heavy downtown with heavy business where it's obvious because there's a lot of low-hanging fruit. It's more in that lower 1% to 1.5% range is what we'll probably need to get from it.

And it's a phase-in. So it's not like it's one date and it all starts happening -- we've definitely phased it in.

Just [understand], the 1% to 1.5% is the aggregate impact to your overall comps or just the restaurants that have catering?

Aggregate.

Okay. And then, just finally, your G&A is now at the low end of your range originally for the full year, so what's the difference there? Is it just bonus accrual or conservative (technical difficulty) early on?

Sure. Part of it's bonus accrual, part of it just adjusting to as the weather hit, in terms of, just as we expect the restaurants to be able to adjust their spend, we expect that our corporate-level folks will be able to do the same. And then, a little bit on the marketing side -- most of marketing spend ends up going through the restaurant expenses. But there is some design, some creative, that ends up hitting on the G&A line, so that was a little bit of a give as well. They were all similar-type magnitudes.

Thank you very much.

(Operator Instructions)

Nicole Miller Regan of Piper Jaffray.

This is Josh on for Nicole. I wanted to see if we might circle back to the catering and the dinner daypart initiatives. Both sound very interesting, but as you move into some of these newer markets or maybe in areas where your guests may not be accustomed to those particular dayparts from using the Noodles concept, was curious what, from the operational side of things, you're doing both maybe in store or even from a marketing perspective to ease that transition and get them into adopting that new daypart?

Josh, this is Keith, that's a great question. What's so good or exciting about it is the fact that we're teaching them from square one with the merchandising, with having that all as a part of the first day they walk into our restaurant -- we're teaching it not only to the guests but to our teams. So our teams know that, that's just the way we do it at Noodles & Company.

We go to the [pre-board] and we talk about the menu; we take them to up the register and we talk about the difference, the ingredients, or the customization; we talk about the plus; we talk about the beer; we talk about the wines; we talk about the desserts. So, they're learning it from square one, and they don't know Noodles other than that. So, when they talk about the brand, they talk about all of the different things we have to offer, they're talking about those elements from day one and I think that's very powerful. And all the marketing, merchandising, design -- all those elements reinforce it, so it helps it from square one to really define the brand the right way.

I almost think it's easier. When you have existing team members and existing consumers that are used to interacting and behaving with you in a certain way, they first react to, okay, it's different, there's another option. They mentally process it, they think, well, I liked engaging the brand for this occasion and I don't know that I want to switch. Or -- you just have a few more moving parts.

When you just open up and it's a very natural conversation at the register, somebody orders, and you ask them if they want a glass of beer or wine, and you say: Once you get seated, you don't have to get back in line, that gentleman or woman outside in the dining room will be happy to get you a second glass or bring you dessert if you want to participate in it. It's more about a nice discovery than it is about, something's different, do I like and do I want to opt into that difference.

Makes sense. Thank you very much for your time today.

Thanks, Josh.

Andy Barish of Jefferies.

Question on the first-quarter development actually, the number of openings was higher than we have modeled. Was that just some units slipping in late, to your point on operating weeks on average for those opens?

A couple things, Andy. We had a nice momentum coming out of Q4. And then, as far as some of those opportunities to open them up earlier and get those into Q1 and then balance out the rest of the year, we saw that as an advantage, and we took it.

Okay. And so, I just want to be clear, the next three quarters should be relatively similar number of openings, prorated?

Yes, that's accurate. And then in terms of the operating weeks, consistent, as well, except for when we looked at the overall cadence of the openings, you did have one or two that were originally in the Q2 expectations that ended up in Q1, so that's a little bit of an impact.

Okay. And then, on your overall commodity basket, are you still in the 1%, 1.5% range or does -- I assume produce is one of your -- part of your 20% that's not contracted. Does that present a little bit of scariness out there?

Right now we're comfortable with that 1% and 1.5%. What we've done with the LTOs and some of the other food items will shift depending on what goes up in the produce arena, but so far so good. Particularly on the asparagus, we've got some pretty good pricing on that. So, I think we're still comfortable with that 1% to 1.5%.

Thank you.

Nick Setyan of Wedbush Securities.

I just want to follow up on cost of sales. You've given us a lot of numbers, and I know you talked through it on a couple of previous questions, but I just want to go back to your comment around going back to normalized trends like we've seen in the past. Does that mean in the low 26% range? Does that mean directionally mid-26% range? Could you maybe just clarify that?

Generally, mid-26% range, Nick. And what we see from us, just from a menu mix perspective, seasonality-wise, Q3 generally is our lowest cost of goods sold, we are in the low 26%s. As you get into Q4 and people shift a little bit more towards soups from salads, it might be in the high 26%s, but it is still within in a pretty tight range.

Got it. And then, on the labor side, particularly in the second half, I know you're not as impacted by the California law, but I know Minnesota there's some things going on. Can you maybe just talk about what, if any, impact there is, and also next year with what you're thinking about healthcare?

Sure. We're certainly looking at both of those items very, very closely. From the minimum wage perspective, we just have a small percentage of our team members that are currently at minimum wage. What we're looking at right now is how the individual states end up doing their legislation. California is a pretty minimal impact for us -- we only have -- we have less than 10 restaurants there, around 10.

States like Minnesota, those are a little bit more meaningful for us. As we continue to monitor that, we'll certainly be giving a little bit more updates on how that would impact us. We see some compression as minimum wage increases and some of our competitors that are on the lower end of the wage scale have to go up, but it's generally not been too meaningful. But certainly some of these states are looking at relatively high jumps.

On the Affordable Care Act, we've talked a little bit about it in the past and we expect it to be roughly a 30- to 50-basis-point impact to labor, starting in the middle of 2015. We actually have a plan year that goes from the middle of the year to the middle of the year, so it won't impact us right out of the gates starting in 2015.

Ultimately, as we go through our team members -- a typical restaurant having 20 to 25, and then you start weaning away the folks that don't already work 30 hours a week just through our natural course of events, folks that are under 26 -- you end up with a much more modest amount of people that are impacted by the legislation or by the mandate. So, it's still going to probably in that 30- to 50-basis-point range, and I'd say minimum wage is still a TBD.

Thank you.

At this time, I'm not showing any further questions. I'd like to turn the call back to management for any closing remarks.

I don't think we have any, Sam. We appreciate everyone's time today. And for anybody in the Boston area, we open our first restaurant in Shrewsbury tomorrow, so feel free to stop on by.

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

Thank you.

You're welcome.