Noodles & Co (NDLS) 2014 Q2 法說會逐字稿

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

(Operator Instructions)

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

Thank you, Candace. Good afternoon, everyone, and welcome to our second-quarter 2014 earnings call. Here with me this afternoon are Kevin Reddy, Chairman, Chief Executive Officer; and Keith Kinsey, our President, Chief Operating Officer.

Let me start by going over a few regulatory matters. I'd like to note that during our opening remarks and 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 or 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. Good afternoon. As most of you have seen from our press release, second-quarter results fell short of our expectations, including a comparable-restaurant sales decline of 0.7% system-wide in Q2. Following the atypical weather impact of approximately 400 basis points in Q1, we had expected to see our sales return to a more typical pattern in Q2. While we saw some normalization at the beginning of the quarter, it was followed by softness in May before gaining momentum in June. Consequently, although sales have improved compared with the beginning of the year, it has been slower to materialize than we anticipated.

We know the core business is well positioned and resonating with consumers. However, there are two particular areas that we are seeing more softness than we have historically. First, 20% of our Company restaurants are located in the mid-Atlantic, particularly the DC Metro area. Our channel checks continue to each show challenges industry-wide in the DC market. While the market continues to be a solid performer for us overall, with some of our highest-volume restaurants, its comparable sales performance has lagged the balance of the country. Second, as you know, one of the strengths of the brand is how we connect with middle-income families, offering favorites from kids to adults in a warm and welcoming environment. While there has been nominal job growth in recent months, we still believe the data points of softness in the middle-income consumer, particularly with families.

Typically, we see similar growth across all days and dayparts, but in the second quarter we saw less improvement sequentially from the first quarter for the family dining occasion. While these two areas indicate that we are not immune to market or consumer headwinds, we still believe we will overcome these influences. Continued focus on improving the guest experience within our restaurants, execution of our initiatives around catering and the dinner daypart, as well as more investment in effective marketing are all the essential to improve on the results from the first part of the year, all of which are already underway.

That said, there are several reasons to be pleased about progress that was made in the second quarter. Comparable sales were positive for the second quarter after adjusting for the Easter holiday shift and our momentum has been steadily building back through the back half of Q2 and into Q3, which is running up 1.3% quarter-to-date through August 12. We have made significant progress in our catering initiative and the rollout plans are on track to be completed this month. We also continue to see strong traction with restaurant development. Our newest markets of the Bay Area, Orlando and Boston, continue to perform strong, which bodes well as we build out these metro areas for years to come.

These positive developments are encouraging and should contribute to trends returning to the levels we had anticipated. We firmly believe that the investments we have made during the recent months are already beginning to bear positive results. We continue to have conviction in our business plan, which calls for 2.5% to 3% annual comparable sales growth over the long term. However, given our results at this point in the year, we feel it is judicious to temper our full-year comp sales and EPS expectations, which Dave will discuss further on.

A few more points about Q2. In April, we launched our spring LTO, which includes an Asparagus di Parma, the return of our Backyard Barbecue Salad, as well as a Margherita Flatbread. As you know, our limited-time offers have been a staple of our menu strategy over the years reinforcing to our guests the commitment to fresh, local, and constantly prepared ingredients throughout the day. While we have not disclosed the offering for the fall LTO, we plan its launch in October. During the quarter we expanded our catering initiative and we'll have it available in all of our Company restaurants by the end of this month. We continue to be pleased with guest feedback and the ease with which our operations team can execute the orders. There is clearly demand for this occasion, and we believe our offering is compelling in the marketplace.

Our operations and marketing teams are now focusing on creating awareness and introducing our catering platform to potential users. Sales have steadily increased in our original test restaurants, and we continue to believe the program can contribute 1% to 1.5% to the top line during the fourth quarter. We also continue to role out our dinner daypart initiative, which is now in approximately 25% of our Company restaurants and is included in all new restaurant openings. We believe the dinner daypart positioning allows us to further differentiate ourselves in the competitive eating- and drinking-out space, while contributing to traffic and average check growth over the long term. Our plan still calls for a full, disciplined rollout of our dinner initiatives to extend through 2015.

In addition to these newer initiatives, we are also making it easier for our guests to engage the brand during their busy lifestyles. Examples range from our steps to increase throughput to our robust online and mobile platform, which allow guests to skip the line. Online ordering has continued to grow rapidly and is currently 4% of sales, more than double what it was just six months ago. While the team is making the appropriate investments to drive sales, we also continue to invest capital wisely in the development of new restaurants.

We still believe that 12% to 13% is an appropriate long-term target for Noodles & Company, but during the past few years and into 2014 we have had the opportunity to bring additional restaurants into the pipeline. To put this into perspective, the 410 restaurants we operated system-wide, at the end of the second-quarter 2014, represents a nearly 60% increase from the end of the second quarter of 2011. Some pretty strong growth. While these additional restaurants add a bit of short-term pressure on the P&L, from margin dilution to the increased investment in pre-opening and G&A support, they our sites we believe are excellent long-term investments to build brand awareness and economies of scale in their respective markets.

Noodles & Company has enjoyed a long track record of predictable sales and earnings growth over the past nine years. While the first half of 2014 has been softer than anticipated, we firmly believe the first two quarters are a temporary interruption of that success. The team has the right focus. It is objective about our results, continues to problem solve and innovate, while taking the necessary actions to build an enduring brand with sustainable growth towards 2,500 restaurants nationwide.

Now I'd like to turn it over to Keith Kinsey, our President and Chief Operating Officer, to discuss the strengths and significant success we are having in the development area, which is so critical to achieving our growth expectations.

Thanks, Kevin. I am happy to report that our path to 2,500 units nationwide, the pipeline for new restaurant development continues to be incredibly strong. We now believe that we'll be on the high-end of our previously stated range for Company development and expect to open to between 45 and 50 restaurants during 2014. Through the second quarter, we are already over half way to that goal, opening 12 additional units during the quarter and now 25 year to date. We are also nearly halfway to our target goal for the franchise openings, which continues to be between 10 to 15 for 2014, of which 5 have already opened through the first two quarters of the year.

During the second quarter, on the Company side, we built our second restaurants in both the Bay Area and Orlando, while our franchise partner in Boston also opened up initially three restaurants in the Metropolitan area. The brand has already shown its ability to be successful on the Coast, but it is exciting to see the guest reaction and early performance from these very dense and highly populous areas. Our entry into Boston has just been one of the exciting developments for our franchise community, as weather-normalized, franchise-comparable restaurant sales came back in line with Company sales during the back half of the second quarter and into the third quarter.

Moreover, the strength of recent openings has resulted in the improved overall average volumes, and their AUV gap versus the Company of 2.5% is the narrowest it's been in several years. One other note on the franchise front was the closing of the Company's acquisition of 16 franchise restaurants in the greater Indianapolis marketplace, which occurred early in Q3 and is consequently not reflected in our Q2 results. The deal, which was funded through our existing credit facility, added over 300 staff members to our team and, net of lost royalties, will contribute approximately $15 million to net revenues on an annualized basis.

Moreover, we are pleased with the real estate opportunity the acquisition affords and believe the transaction will be modestly accretive to earnings next year and beyond. As we mentioned when the transaction was announced, our partner in Indianapolis had already signed a development agreement for Louisville, Kentucky area, which we expect to have an initial opening later this summer.

On the Company side, as Kevin, we have seen some softness in the mid-Atlantic region, where a large percentage of our 2012 and 2013 openings are located. However, we are very comfortable with the real estate and the long-term position of these locations. Collectively, our restaurants that are not in the comparable restaurant base achieved sales of approximately 85% of Company average in Q2, within our historical range. Excluding the restaurants in the mid Atlantic, our new restaurants are surpassing our internal maturity expectations. We are particularly encouraged with our openings thus far in 2014, which have had considerably more geographic dispersity than our previous classes and have outperformed our opening model. We remain disciplined in our real estate selection process and are intensely focused on introducing and building the brand thoughtfully in a sustained manner.

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

Thanks, Keith. For the second quarter of 2014, we reported adjusted net income of $3.7 million or $0.12 earnings per share, a slight decrease from prior year. Revenue in the second quarter increased 12% to $99.5 million, due primarily to an increase in the number of restaurants offset by modest decline for 0.6% of Company-owned restaurants and 0.7% system-wide. Of note, excluding the holiday shift which negatively impacted the quarter by approximately 90 basis points, comparable restaurant sales were slightly positive system-wide for the second quarter.

For the first two quarters of 2014, comparable restaurant sales decreased 1% for Company-owned restaurants, 2.2% for franchise and 1.1% system-wide. As Kevin mentioned, we have seen increased momentum thus far in Q3 with comparable restaurant sales at positive 1.3% through yesterday, August 12. We now project we will complete the year with roughly flat comparable restaurant sales for the full year. In terms of menu price, we ran 1.75% price in the second quarter of 2014 and anticipate the same level of price in this third quarter. In October, we will overlap our most recent price increase and anticipate introducing an increase of approximately 2% with our fall LTO launch. On the earnings front, our earnings per share of $0.12 was below our internal expectations driven primarily by sales deleverage on our accelerated investment in our catering initiative and new restaurant openings.

As Kevin mentioned, we have opened 25 restaurants this year with many more under construction. The acceleration in new restaurant openings compared with the prior year resulted in approximately $500,000 of additional expense in the second quarter, year-over-year, both in pre opening as well as in general and administrative support expenses. Given this increased investment in new restaurants and the reduced comparable restaurant sales guidance that Kevin discussed earlier, we are also tempering our EPS projection for the year to roughly flat growth versus last year's adjusted EPS of $0.40. Our adjustment in EPS guidance compared to our prior call is almost entirely related -- due to our -- is entirely due to our reduction in comparable restaurant sales expectations.

Given our typical flow through, each percentage point change in comparable sales impact EPS by approximately $0.03 to $0.04 resulting in the vast majority of our adjustment in EPS guidance. Additionally due to pre opening of support expenses, in the short term, our accelerated new unit investment will be modestly decremental to 2014 earnings. Specific to the second quarter our restaurant level margins declined 200 basis points to 20.4%. Deleverage on our comparable restaurant sales attributed approximately two-thirds of that decline with the balance coming from a combination of the lost operating day with the Easter shift, the softness in our new mid-Atlantic restaurants that Keith mentioned and increased cost of goods sold.

COGS of 26.8% was 70 basis points higher than Q2 of 2013 as a result of increased promotional activity as well as modest increases in pork, dairy and shrimp ingredient costs. We anticipate COGS to remain slightly elevated in third quarter before falling to the low to mid 26%s during the fourth quarter. Labor costs increased modestly, 10 basis points, to 29.9% in the quarter as lower incentive compensation and health insurance claims offset the deleverage from lower average unit volumes.

Operating costs were 12.5% in the second quarter, 50 basis points above the prior year, due to deleverage as well as increased maintenance costs. Within operating costs, marketing spend of approximately 0.6% of sales in Q2 was consistent with the prior year and while year-to-date marketing spend also stands at 0.6 %, through quarter two, we do anticipate an increase in spend to roughly 1% to 1.5% of sales during the back half of 2014 netting to approximately 1% for the year. Occupancy costs increased from 9.7% of sales to 10.4% in the second quarter due again to dilution from our immature restaurants as well as the loss of one operating day relative to the second quarter of 2013.

General and administrative expenses decreased 700 basis points to 8.3% of sales in Q2, although last year's G&A expenses were significantly influenced by nonrecurring expenses related to our Q2 2013 initial public offering. As a percentage of sales general and administrative expenses stand at 8.1% year to date, and we continue to believe that we will complete the year at approximately 8% of sales, a 50 basis point improvement over last year, once you adjust for nonrecurring 2013 expenses. This projection for general and administrative expenses does incorporate roughly $300,000 to $400,000 in net incremental expense that we will incur later this month due to our all-manager summit that occurs once every two years.

With the opening of 12 company locations and 7 more under construction, pre-opening expense increased to $1 million during Q2. As of the end of Q2, the Company had $9.6 million in debt outstanding on our credit facility, a number of which will rise in Q3, as our acquisition of the Indianapolis market was funded primarily through this facility. Our effective tax rate was 40.3% in the second quarter. We anticipate our full-year 2014 tax rate to be approximately 40% to 41%.

Now, I'd like to turn it over to Kevin for some closing remarks.

Before moving to Q&A, I'd like to highlight a few additional thoughts. We have seen a noticeable increase in promotional activity throughout the industry as well as marketing spend from competition in our markets. As such, we'll be incrementally increasing our spend the second half of the year compared to the first half, as Dave mentioned. Historically, when we deploy promotional and social media tactics, we consistently see a positive response from our programs and our guests. As we've stepped up our local relationship marketing efforts, we've also witnessed real excitement and pride from our team members and enthusiasm from our guests about our food and friendly service.

Being a part of the community and giving back is a big component of our business philosophy. It builds guest loyalty, creates trial, and will be an important aspect in growing our catering business. In addition to the exceptional organic growth, our guest feedback at our new restaurants reflects a connection and understanding of our Your World Kitchen positioning in merchandising. This is a positive and important validation of the strengths of our differentiation.

Final comment about our people. As I work and observe both our operating and central support teams, I'm impressed with the level of objectivity, competitiveness, commitment, and problem solving they are bringing to the table. They are the right aspirations and behaviors needed to create success in this environment. I want to thank you for your time, and let's open up the lines for Q&A.

Thank you.

(Operator Instructions)

John Glass, Morgan Stanley.

Could you talk a little bit more about how you -- you talked about a little more promotional spend in the back half of the year. Is that just spending on advertising or are you doing more price-point advertising? How specifically, tactically, do you plan to address some of the sales weakness you've seen?

John, this is Kevin. We have some initiatives and tactics to address short-term traffic driving and then longer-term brand building, customer loyalty building. The short-term traffic drivers tend to be promotional. We use our digital platform, our e-mail platform to really get some offers out there.

We're also focusing on our fall and winter LTO, which tends to be shorter term in terms of increasing spend, merchandising within the restaurant. We have a few, I think, interesting messaging because this allows us to target different markets with different messages, targeted to some moms, families as well as some of the markets that we think will react positively from our menu nutritional strengths.

Then on the longer-term basis, we're clearly going to be putting some money into the catering background, as well as our core menu, reinforcing just the variety in the flavors and the choice that our guests have. Those tend to be where we're we are currently planning to invest.

Are those methods happening now? Is that responsible at all for the uptick in comps, or is this something that's still to come later in the third quarter?

We actually started testing a few of those tactics in June. Just a couple different messages in different markets, and it did have a positive reaction.

Just one final question. How do you think, in circumstances like this, the question becomes, what about your long-term growth rate? Is that still intact in your view, particularly for 2015? In particular, how do you think about unit growth since it's pressuring the P&L? Maybe or maybe it hasn't cannibalized sales, maybe like your view on -- maybe that's one of the reasons you've seen the comp weakness.

How do you frame up early days 2015, at least from a unit growth standpoint? Maybe talk a little bit more about how you think about the long-term growth right now?

I think that's an important question, John, and one that we clearly study. I think our long-term growth rate is appropriate. I think the ability to grow at a higher rate makes sense provided we are getting quality real estate.

Our pipeline is strong. We have a lot of sites that we look at so that we can pare them down, be rigorous and stick to our site criteria, so I feel good about that rate. It does, as we've said and you've acknowledged, put some short-term pressure on the P&L, but those are clearly the right decisions for the business long-term.

I think the other area that we watch closely is we promote from within quite frequently and a lot of times we'll transfer new folks into those restaurants. So the other area that it puts a little bit of pressure is that the teams are doing a nice job focusing inside the four walls and meeting our operating metrics, which is the most important thing. But when you have a lot of new folks in restaurants, it delays a little bit of the getting outside the four walls. We've also been supporting local marketing a little bit differently than we have in the past.

I will tell you, great real estate is great real estate and somebody's going to take it. If we have the opportunity to grow wisely at a faster rate, when it's available, I think it's the right positioning. I don't think you'll see us, even if we have the opportunity, go much higher, though, than where we're targeting.

John, this is Dave. Specific to the question on cannibalization, we talked about those two aspects that we are particularly seeing softness in and that's in the mid Atlantic and a little bit with families as well. The markets that we're the most established in the Denvers, the Minnesotas, as we continue to build out those markets, we're not seeing any material cannibalization. From that perspective and our overall potentially unit count of 2,500, we still feel very comfortable with that number.

Thank you.

Joe Buckley, Bank of America Merrill Lynch.

Appreciate the thoughts on the mid-Atlantic market. I think you referred to a lot of openings being in that market in 2012/2013. Could you talk about the 2012/2013 stores more broadly? Is that where you're seeing the weakness across the class of opening and maybe in addition to the region?

I'll actually start out, Joe, by talking when you look at the class of 2012 and 2013, excluding the mid Atlantic, we're actually surpassing our expectations. Together, now the DC Metro area and the rest of the mid Atlantic comprises about 30% or 40% of the openings during those classes, so they have a disproportionate influence. As a group, we're a little bit behind the internal model, but excluding those restaurants, we're actually surpassing it. I'll turn it over to Kevin, Keith, maybe talk about how it's changed our development strategy.

The only thing I'll add to that, Joe, and this is Kevin, is that the majority of those deals that created this skew in those classes were signed in 2011 and 2012. As we saw aggressive growth and penetration in that area, we actually scaled back. We have far fewer deals that have opened recently in that area. We may not even have any in that pipeline in the DC Metro area, or if we do, it's one or two. The ability for it to influence the group, really is much smaller today, which allows us to really focus on really the core business and helping those restaurants get to the areas that we believe they should.

Okay. A question on the middle-income family comments. How does that manifest itself? How do you measure that? Is that dinner business or is it the number of entrees per check? Could you fill those comments out a little bit about how you know that's the area of weakness?

I think that's a great question, Joe. To put some perspective on it, we're not going to be able to disclose exactly where we feel it lines up.

There's really three components and you've hit on them. One, is how the different dayparts are performing and the ones that are more heavily reliant on the family occasion. Second, would be those trade areas that we know are a little bit more residential-based, a little bit more suburban. The third thing is looking at menu mix and how that shifts. What we're seeing is some inconsistency in those performance metrics that typically we don't see.

I would tell you, too, that there are, as we look at some of the other retail concepts, not just restaurants, but that depend on that consumer group, they tend to be under a little more stress than normal. There's been some third-party data that still shows that whether you look at income growth, intended expenditures on different items, saving going up, call it paying more out of cash, I think there's still evidence that although that group may be stable, it's still not turned.

One last question quick one, you give us the pricing factor for the quarter. Is that what the check increase was as well? As we try to break that comp down between traffic and check?

Mix was pretty much flat, Joe. So average check is pretty much equivalent with price.

Okay. Thank you.

David Tarantino, Robert W. Baird.

I wanted to see if you could give us a little bit more detail on how much the mid-Atlantic region is laying on the comps? Is there any way you could potentially talk about a basis-point impact? If you pulled those out, what the comps might look like? Anything you can offer there would be helpful.

David, I don't know what to say beyond our prepared remarks, that catering and family, really, we believe those two issues between mid-Atlantic and family, the combined impact of those are roughly the gap between hitting our long-term guidance. It ebbs and flows a little bit, but I think that's the clarity. Don't want to be -- I want to be respectful, give you as much as we can, but don't want to get into much detail. Those two items really represent the gap.

Got it. If you think about it, one factor that you didn't mention or a couple factors you didn't mention are competition. I think you mentioned that as being something you're responding to now. Do you think that there's a competitive threat or competitive situation that might be weighing on the trend line? Secondly, as you review your internal operating metrics, or brand scores, or the metrics that you track internally, have you seen any noticeable change relative to the internal metrics?

We really haven't. I think the internal metrics still look pretty strong. We're pleased with particularly some of the operating metrics on the new restaurants outside of the softness that we shared about mid Atlantic. Actually some of the third-party analysis, there was an, I think it was NRA or NRN report that came out within loyalty within sectors, and we won the category for noodles and pasta.

I'm still very encouraged by what we see and hear from guests. I believe that that really hasn't changed. Our operating metrics, really, are just the learning curves that we typically have always seen as our teams gain experience in their new restaurants.

This is Keith. From a base operating piece inside, we're definitely working on some things to help throughput and optimize how we do things within the restaurant. To Kevin's point, with some of the transfers and some of the new people, we're definitely focusing on training those and making sure when they open up those restaurants they can quickly get to those operating metrics that we want them to be at.

Just going back and circling back on your question on competition, we view that as there's always competition. There's always challenges in the macro environment and we just have to address them. I really haven't seen anything that I would say is significantly material other than marketing spend from some of the bigger players that can advertise pretty heavily in our marketplace. The amount of growth for good real estate in good markets is pretty competitive.

I think we're doing a great job on winning the real estate battle of that. You always get a little bit of trial and impact when restaurants open up near you. I think that's more of a temporary issue. I think from a competitive standpoint, I like how differentiated we are, still believe we are a strong category of one.

Thank you.

(Operator Instructions)

Jeffrey Bernstein, Barclays.

Couple questions. Just one following up on the comp discussion. Just wondering A, whether or not you see other markets maybe like DC that you might therefore be inclined to avoid because of some common theme that DC might provide? Or maybe you can give some color, just granularity in terms of week day verse weekend or lunch versus dinner? Just as you think about future growth, I'm wondering whether there's any common theme that you might want to take away from this most recent quarter's results?

I'll let Dave talk to the numbers side, but from a standpoint of real estate and looking at the different markets -- this is Keith -- no, the ones that we're looking at, the ones that were on our pipeline earlier, we feel very comfortable that those were the right markets. Still feel very comfortable that those are the ones we want to go into from both from expanding what we've already have there and then also the new ones that we'll be going into.

I think you're seeing it bear out in the class of 2014 with the exception of not nearly as many restaurants in the mid-Atlantic area. The makeup looks pretty similar to what we saw in prior classes. The class of 2014 is definitely outperforming both prior classes, as well as our internal model.

From a real estate perspective when you look at week days versus weekend, the internal model that we use as well as our own boots on the ground with our team, we are looking for generators for homework and shop, we're looking at daypart buildup of where we get to our projections. The great thing about our concept is, and this hasn't changed in Q2, we continue to be very strong urban locations. We are strong in suburbs. We are strong in college towns. Yes, there's a little bit of weakness in the family dynamic, but it's still pretty modest. In terms of the overall impact on our real estate, I don't think there's too much there.

Got it. Then just a follow up on the earlier question regarding as we look to 2015, it sounds like from a unit growth perspective there's really no sense of change in terms of your pace of openings. Is there any reason to believe that maybe 2015 wouldn't get back to the way you guys project more longer-term earnings growth of 25%?

Are there any unique investments or does perhaps the competition leave you cautious around getting back to 2.5% to 3% comp next year? Or should we really assume that presumably 2014 is an anomaly and getting back to 25% earnings growth in 2015 is a reasonable assumption?

This is Kevin. I believe it's a reasonable assumption. I think we are focused on what we have to do to get back to that long-term guidance. Several aspects of the business are outperforming, particularly the real estate in growth.

We are focused on the two areas that we really talked about, which is the mid Atlantic dominated by DC, which I do think is a unique environment from just overall restaurant growth, not just fast casual but all classes. Then, just the mentality of that DC area with -- although we could debate whether government spending's really being capped, but there is a reality of its impact on the local businesses and spending in that neighborhood.

I think that the other aspects of our business, that we dig into, that we discern, I feel very good about. We have to turn and address some of those areas that we talked about, but really getting back to a slightly higher level of comp growth should put us on track to meet those expectations.

Got it. Just the last point on, you mentioned the online and the catering, both comments sounds similar to what you said in past quarters. Just wondering when you're not a national advertiser, like what's the approach to get someone to do that online? I know you're happy with it and the catering, but how do you actually incentivize consumers who aren't familiar with it without national advertising and get them to try it to really drive the catering or the online mix?

Part of it is around education, part of it is empowering the teams, because word-of-mouth is and personal recommendation remain very strong. We have a lot of tactics inside the four walls to incent our team members to make personal recommendations that they're passionate about and believe in.

We have approaches to get out into the community, building business to business, using social and digital media. The incentives, sometimes, are a discount. A lot of times, they fall into the education and awareness component.

When you think about marketing spend for the balance of the year, there is going to be a significant portion that's going to be digital media. When you look at those digital media campaigns the creative, very much so, leads the consumer to go towards our online ordering page and order directly from there.

We are seeing increases from that. Still relatively early on, but that's a great opportunity for a concept like us that doesn't have that war chest of marketing to be able to use digital to get something moving in the right direction on online ordering.

Understood. Thank you very much.

Nicole Miller Reagan, Piper Jaffray.

If I understand the advertising budget this year, it sounds like 0.5% in the first half and 1.5% in the back half for 1% for the year. How did that compare by quarter to the prior year? Was it more smooth?

Actually, it wasn't quite that smooth last year either, Nicole. The first quarter of last year, I believe, was 1.4% of sales and then the balance of the quarters were all pretty evenly distributed around 0.6%, 0.7%.

Okay. Thank you.

That understanding's correct though, Nicole.

Thanks. Hi, by the way.

In terms of the July comp, thank you for sharing the current trend and, actually I guess, though the first few days of August. As you look back on last year, how did the months of July, September and August compare so that we can understand if the comparisons are going to get easier or more difficult as you exit the quarter?

The comparisons are relatively even, actually, throughout Q3, Nicole. There is a little bit of noise in there when we add the floods in the Colorado area, it'll end up benefiting the quarter by about 10 to 20 basis points and that occurs in September. Outside of that it was actually pretty even growth throughout the periods last year.

Okay. Just a final question. Back on the catering discussion, it sounds like you were talking a bit about the investment. I'm just wondering the length and duration -- excuse me, same thing, the quantity -- can you quantify what the investment is to some degree and how long? What I'm trying to get at is, does the average check offset what you would lose in margin right away or does it take a little bit of time?

Absolutely. Actually, catering overall is absolutely very accretive to our margins. What we saw in Q2 was, particularly the marketing and merchandising materials, those are the aspects that end up getting expensed immediately, probably in that couple hundred thousand dollar range, in that neighborhood, including all aspects of the catering as well as the training. Training was pretty -- we leveraged technology. We're able to get out and touch those larger markets, but utilized web demos et cetera. So there was a little bit of that as well, but really only about a couple hundred thousand, and that's really an initial net investment that doesn't recur.

Thank you.

Thank you. I'm showing no further questions at this time. I would like to turn the call back to Management for closing remarks.

I think we've done those. I just thank you for your time and perspective. We'll talk to you later. Take care. Have a great afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.