Noodles & Co (NDLS) 2014 Q4 法說會逐字稿

Good afternoon and welcome to today's Noodles & Company fourth quarter 2014 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.

Thank you Liz. Thank you and good afternoon everyone and welcome to our fourth quarter 2014 earnings call. Here with me this afternoon are Kevin Reddy, our 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 2015 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 annual report on Form 10-K for its 2013 fiscal year.

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 and good afternoon everyone. During the second half of 2014 and entering into 2015, our focus at Noodles & Company has been to position the brand to return to top-tier growth metrics that has defined the Company over the past seven years.

We have made progress in many of those key initiatives. Which helped us return to positive earnings-per-share growth and increased momentum in two-year comparative of sales growth during the fourth quarter.

We completed Q4 2014 with 1.3% comparable restaurant sales. And given that we had one of the stronger fourth quarters in the restaurant space during 2013, we increased our two-year comparable sales momentum to 5.6% for the quarter for Company-owned restaurants. Or [4.8%] when adjusting for an extra operating day in Q4 2013 due to the fiscal holiday shift.

As we enter 2015, I'm pleased with the progress we are making in several key areas. But also recognize that we are still in the early to middle stages of our work surrounding brand awareness and the communication of our culinary strengths [through our mix].

One of the biggest opportunities that we have been working on is confronting the challenges of lower brand awareness nationally and especially in many of our newer markets with less than 15 restaurants. As we have discussed in the past the strongest variable that differentiates our best performing restaurants has been consumer awareness and restaurant density.

In fact, our more established markets, which are located throughout the country, average 15% to 20% higher average unit volumes then our newer and more developing markets. Also of note, our newer and developing markets share metrics similar to or better than what our established markets had achieved during this time in their own development cycle.

Over the past few years, we have seen the gap between our media spend and those of our largest competitors grow substantially. And with that we have recognized a significant opportunity and need to increased marketing activity. To that end, we began investing resources during the last quarter of 2014 and into 2015 to establish a thoughtful foundation for an increase in spend and earned impressions.

We invested in an important research surrounding our brand as well as the onboarding of a new marketing agency. Over the years, we have partnered with outstanding organizations to help develop creative and our Your World kitchen identity. But we had not engaged a full-scale integrated advertising agency to help bring the brand to life for our customers.

We believe strongly that local relationship marketing that ingrains our restaurants within our communities is still the best way to build long-term loyalty. But we also understand that it is imperative to have a focused digital and traditional media strategy to support these efforts by creating top of mind awareness and articulating the brand to new and existing guests alike.

We know we are being significantly out spent by our major competitors and don't expect that to change in the near to midterm. Having said that, we can and will become a scrappy fighter while targeting increased spend in specific markets. Again, we are approaching our work buying increased marketing in a disciplined manner.

We intentionally spent modestly in marketing during the past several months to allow our new agency, which is Barkley out of Kansas City, to dive deeply into the Noodles & Company story. The team has already been active in supporting our social, media and digital efforts and we anticipate activity on a larger scale towards the end of Q2 and more heavily in the back half of the year. Dave will discuss the anticipated investments at greater depth later on this call.

Another initiative that we feel is important in building brand awareness is catering. Which has been active in all of our restaurants as of the end of August 2014. Our catering performance of 1% of sales in Q4 was in line with our expectations and importantly we continued to validate the ease of execution for our operations teams and the guests.

I'm pleased with the process of our catering initiative given that it has been generally supported solely through the local connections developed by our restaurant teams. The catering initiative will receive more marketing support as we move forward in 2015 and we continue to believe it has the opportunity to be a steady, consistent contributor to topline sales over the years to come.

While the team is working to build brand awareness outside our four walls, we also recognize the need to better articulate our brand positioning and elements of our story inside our restaurants. Keith will discuss in more depth, but from its beginning Noodles & Company has had a strong commitment to quality ingredients that are relevant to a continually evolving consumer expectation.

While this commitment has been steadfast, we have not always effectively communicated these stories, including our many natural and organic offerings. The family-owned businesses, that we have supported over the years and supported us. And the real cooking that is done inside our restaurants to prepare every dish to order. Over the next several months, we plan on streamlining some of our communication within the four walls to better tell these stories.

Another strength of the brand that we feel has not been fully capitalized on is our ability to provide choice within our menu. While we have been recognized for the health of our core menu by several leading national publications, our real cooking also allows us to customize any dish to the particular diet of our guest.

Still, for those less familiar with the brand, they may not be fully aware of this flexibility, which we look to more clearly communicate. I'm pleased with the progress that we have made over the past several months. The fourth quarter saw an increase in two-year sales momentum, improvement in our restaurant level margin performance, and a return to positive EPS growth. Moreover, our restaurants continue to perform at a high level, which Keith will discuss shortly.

While there is still plenty of opportunity, I'm confident that the team is properly focused on the right initiatives to help us return to our long track record of consistent unit, comparable restaurant sales, and earnings growth expectations. Over the years, Noodles & Company has invested in building a national infrastructure and has had proven success in markets from coast to coast. We believe this has laid a solid foundation to support double-digit unit growth for the foreseeable future.

To give us an update on our development efforts and supply chain initiatives, I would now like to turn it over to Keith Kinsey. Our President and Chief Operating Officer.

Thanks Kevin. 2014 was an incredibly strong year for our restaurant development team. We opened 13 Company restaurants in the fourth quarter completing the year with 49 Company openings for a 15% growth over our year-end 2013 restaurant count.

We also opened one additional franchise location finishing the year with 10 franchise openings. During the fourth quarter, we completed the acquisition of three franchise locations in the State of New Jersey. Our franchise partner in New Jersey has done an excellent job opening these three locations. But given the broad geography of the territory, combined with our upcoming entry into an adjoining market of Westchester County, we both thought it was an opportune time to capitalize on our Company's resources to help accelerate the overall growth in the market.

With this transaction we finished 2014 with 439 total Company -- total restaurants system-wide, an increase of 16% over the year-end 2013. Of those 439 restaurants, 386 are Company owned, and 53 are franchise operated.

Our new restaurants continue to perform at a high level. And our Company non-comparable -based restaurants maintain our sales level rate at about 88% of the Company average consistent with our performance in Q3 of 2014, which was our highest in nearly two years.

The pipeline for 2015 continues to look strong. And we still anticipate approximately 12% to 14% unit growth this year. It is important note that we've already opened 10 Company restaurants thus far in 2015. With all those openings occurring in the first five weeks of the quarter.

Although this added some incremental pressure to the pre-opening line during the fourth quarter of 2014, it positions us well to have a strong balanced pipeline for 2015. Our 2015 development will be skewed a bit more towards new in developing markets compared to 2014.

And while this traditionally results in increased short-term dilution, it should provide a more solid base for comparable sales growth as our brand awareness grows in our developing markets. New markets for 2015 include Oklahoma, Phoenix, Upstate New York, and our first entry into International. A location in Toronto, Canada.

Our first Toronto location is slated to open this summer and will be in the incredibly dense TD Center. Toronto shares many characteristics with markets that we are already in successfully. However, we will be very disciplined in our approach to Canada. Our immediate focus is to open and operate TD Center as a solid brand building foundation for further development in the Toronto market.

2015 will also include several openings in coastal markets in California as well as Florida. We have made a couple of operational changes to improve throughput in our San Francisco locations and we plan to take these learnings to our other markets during the next several months.

As Dave noted in the past, we have historically witnessed a modest same-store sales tailwind as our new comparable -based restaurants move towards maturity. During the first half of 2014, the softness that we are seeing in the mid-Atlantic caused that Company pattern to deviate. I am pleased to report that in the fourth quarter, we saw a return to our normal historical patterns.

As our classes of 2012 and 2013, collectively, brand comparable restaurant sales approximately 200 basis points above the balance of the Company. This bodes well as we look to return to our long-term target comparable restaurant sales growth system-wide.

Shifting gears to our supply chain initiatives. During our most recent call we discussed the testing of naturally raised antibiotic free chicken in our Colorado restaurants. A commitment to high-quality healthy ingredients has always been a core tenet of Noodles & Company.

Just a few of the great things we are ready do include 100% of our in-house cooking coming from cage free eggs. Our naturally raised vegetarian fed antibody free pork. The use of RBGH free cream. Organic tea, milk and tofu offerings, and a commitment to partnering with dedicated family-owned suppliers for much of our sauces and cheeses.

Testing antibody free chicken is another step on our long line of improvements to meet the desires of our guests for pure and wholesome ingredients. And we expect to roll it out selectively to additional markets during the upcoming months.

Still, as Kevin mentioned, while this commitment to high-quality ingredients has always been core to our DNA, significant opportunity exists for us to better communicate these stories to our guests, both inside and outside the four walls of our restaurants.

An important initiative for 2015 and beyond is to streamline and more effectively utilize our merchandising within the restaurants. As well as invest in telling the stories to a broader audience in the markets. Now I'd like to turn the call over to Dave to discuss at more length our financial performance during the fourth quarter.

Thanks Keith, revenue in the fourth quarter increased 19% versus prior-year to $108.5 million due to an increase in the number of restaurants including our acquisition of 19 franchise locations during the second half of 2014, as well as a modest increase in comparable restaurant sales.

For the full-year, revenue increased 15% to $403.7 million. For the fourth quarter of 2014, we reported adjusted net income of $3.9 million, a 9% increase over prior year and 81% above fourth quarter of 2012. In the fourth quarter, comparable restaurant sales grew 1.3% for Company-owned restaurants, 1.5% for franchise restaurants and 1.3% system-wide.

Our two-year Company-owned comp sales growth of 4.8% when adjusting for holiday shift benefit that we received in Q4 of 2013, reflects a sequential 80 basis point improvement from the third quarter of 2014. Comparable restaurant sales thus far in 2015 through yesterday, stand at 1.1% system-wide, including 1% for Company-owned restaurants and 2.6% for franchise restaurants.

While our comparable sales growth is modestly below our expectations thus far in 2015, of note we have not yet executed any traditional media spend. And our promotional activity has been approximately 35% less than it was during the same timeframe last year.

As our investment in marketing increases in future quarters, we continue to anticipate full-year 2015 comparable restaurant sales growth between 2.5% and 4% system-wide. We anticipate our adjusted diluted earnings per share growth to be approximately 20%.

Our restaurant level margin of 20% in the fourth quarter was 100 basis points below prior-year. However, as a reminder, our third quarter in 2014 saw a 230 basis point year-over-year decline in contribution margin so Q4 included a substantial improvement relative to trends from the prior quarter.

Our cost of goods sold of 26.8% in the fourth quarter was a 20 basis point improvement relative to Q4 of 2013. We anticipate approximately 1.5% to 2% of commodity inflation during 2015, primarily due to increases in the durum wheat market that affects the cost of our pasta. This increase of 1.5% to 2% is modestly lower than our projections a few months ago, as the durum wheat market has begun to normalize. We are currently fully booked for durum through Q2 and 50% in the back half of the year.

In the fourth quarter labor costs increased 50 basis points versus prior year due to the dilutive impact of our immature restaurants as well as a small increase in the frequency and severity of our health insurance claims. As reminder, our health plan functions on a July to June plan year and we anticipate 30 to 50 basis points of labor pressures beginning in the third quarter of 2015, due to the implementation of the Affordable Care Act.

As Keith mentioned our new restaurants continue to meet glide path our expectations. However as we've discussed the non-comp base in the short-term will continue to have a dilutive impact on our restaurant P&L. During the fourth quarter, this dilutive impact resulted in a 40 basis point increase as a percentage of sales in our operating and occupancy cost line items, which increased to 12.7% and 10.7%, respectively.

We anticipate this dilutive impact to continue through the first half of 2015 before we return to a more historical growth rate and overlap the acquisition of our previously franchise -- previously franchised locations in Indiana and New Jersey. Marketing spend for the fourth quarter was 0.9% of sales, flat with Q4 of 2013.

As Kevin mentioned we anticipate investing in incremental marketing for the balance of this year. Consequently, while marketing expense will remain somewhat muted during the current quarter and much of Q2, we anticipate an increase in marketing spend to between 1.5% and 2% of sales during the final two quarters of this year.

General and administrative expenses of 7.9% was 90 basis points below Q4 of 2013. We completed the full year with G&A expenses of 7.8% of revenue, which is roughly 60 basis points below the prior year when adjusting for nonrecurring IPO related expenses that were incurred in 2013.

We anticipate that G&A as a percentage of sales will be roughly flat in 2015 versus 2014 as leverage on increased revenue is offset by our investment in supporting our new markets as well as our marketing initiatives as well as an increase in the incentive compensation.

Our fourth quarter of 2014 included a write-off of $490,000 due to obsolete inventory related to the dissolving of a relationship we had with an overseas vendor we were working with to provide furniture and fixtures for our restaurants.

Our tax rate of approximately 33% for the quarter and 38.4% for the full-year reflects the renewal of the work opportunity tax credits and the utilization of a 34% federal statutory tax rate. We had previously anticipated a 35% federal tax rate would apply to 2014. We do anticipate that the Company will again be subject to the 34% federal tax rate for the 2015 year due to the utilization of remaining net operating losses. However, as the work opportunity tax credit has not yet been extended into 2015, we do believe the tax rate to be approximately 39% for this year.

As of the end of 2014, the Company had $27.5 million in debt outstanding on our credit facility and cash on hand of $1.9 million. After a challenging start to 2014 the Company made many strides during the year that were reflected in our fourth quarter results.

In Q4 we returned to positive earning per shares growth led by momentum in our two-year comparable sales, improvement in our restaurant level margins, and a solid performance of our new restaurants. As mentioned earlier for 2015 we anticipate 12% to 14% unit growth and 2.5% to 4% comparable sales growth. Although we will incur incremental expense in 2015 due to elevated durum wheat prices, the implementation of the Affordable Care Act, and support of our marketing investments, we'll project returning to earnings-per-share growth of approximately 20% in 2015.

We do anticipate Q1 earnings-per-share to be only flat to modestly positive relative to prior-year before increasing through the balance of the year, as we receive the benefit of increased support from our sales building initiatives. I would now like to turn it over to Kevin for final remarks before we go to Q&A.

Thank you. While we have seen improvements in our operating results as well as key fundamental metrics, we are clearly aware that we have continued work to do which we are intensely focused on.

Despite an improved environment for retail and restaurant companies, it remains very competitive and it's imperative that we continue to improve as we pursue our long-term growth strategy. I'm confident that our team is focused on this mission. And I am pleased with the commitment toward the execution of our initiatives.

We have built a solid infrastructure at Noodles & Company with regard to development, operations, and supply chain, which has us positioned for continued growth throughout the country.

In 2015, we now have for the first time, an accomplished full-service advertising agency to work with our talented internal team. I am very encouraged. With this -- with the early work and progress and critical thinking that I'm seeing. And that gives me confidence as we drive the business forward in the years ahead.

Thank you for your time, and Liz if we could open the lines for Q&A.

(Operator Instructions)

Jeffrey Bernstein with Barclays.

Two questions. One just on the comp I guess through the fourth quarter and thus far in the first quarter. Seems like the industry is seeing more of a -- an acceleration most recently. I'm wondering if there's any reason why you might not see the benefit?

Whether it's from using gas or a favorable year-over-year weather comparison, obviously the consumer seems to getting better. I know you mentioned maybe the lack of media and promotional spend. I'm just wondering if there is any other reason or anything unique that would keep you from seeing that acceleration at least over the first month and a half or so?

Jeffrey this is Kevin and Keith and Dave can jump in if they would like to add something. I think the biggest factor and you're correct, we expect it to be running at a higher rate right now.

I think the biggest factor is that as we pulled back on the promotional spend, and Dave mentioned it's about 35% through the quarter to date. Two days in particular that we were -- two days in particular are over 100 basis points of that.

That promotional spend and we had pretty aggressive promos going last year at both Super Bowl and the divisional playoff day. Those account for probably 100, 120 basis points that we lost against those two days because we didn't run anything against them. Weather's tough to tell. I expected we would get a better lift. That one's tough to analyze. I think there is some indication that where we'd expect to be up we are, where we get hit a little bit more we see some softness, but not in a material way.

I think the other thing that we owned that is influencing it, besides pure promotional spend, that work we see inside the local trading areas is not as strong as it needs to be. I am pleased with our operating performance inside the four walls and our operating metrics.

We need to do a better job and more aggressive job getting outside the four walls and that's taking longer than I expected. I think that's part of the other difference.

Got it. And the other question was just on throughput. Or speed of service I guess, depending on how you want to look at it. But it would seem like in terms of quality and offering and experience and whatnot that you guys are close to the more like casual dining where everything's prepared from scratch relative to some of your [space] casual peers that are so much closer to quick service with the food kind of made ahead of time.

And it seems to make your food more appealing presumably, but I'm just wondering if there is any opportunity to prove whether it's speed of service or cook times to improve throughput whether there's something that could be done ahead of time so as to speed up that four plus minute, I believe, cook time.

I think you mentioned something about San Francisco was doing something to improve throughput. So any thoughts in terms of how you might be able to get more people through the line and make it a little bit more turnkey rather than everything preferred from scratch?

This is Keith and there's a couple things that we're working on. One from a standpoint of what we're doing in the back of house in the restaurant and speeding up how it gets through. The backside, the cook side of the restaurant.

We've got a couple initiatives that we've done and have tweaked from San Francisco and as we've talked about earlier will begin rolling that kind of a system out to the rest of the Company over the next several months. The other piece I think is as we talked about it in prior calls is just the whole thing with online ordering.

Because we can cook that ahead of time, because our packaging is solid, because our food holds very well, it really allows us to have somebody very easily order their favorite, pay for it online, skip the entire line, go pick it up and equalize anybody else as far as speed of service.

So we're attacking it from two ways. One for the person in line and doing that through both the ordering process and also the back of house speeding up that cook time. But also I think the one that we really got to get that person who's really in a hurry to have them order through our online application.

Are you sharing what the San Francisco back of the house initiatives are that you are going to be rolling out to the rest of the system or not yet?

Not yet.

Understood.

This is Kevin one of the things you brought up and I think it was insightful and relevant. We do have a strength, perception wise from our guests, about the -- we serve a customized, made to order meal. And that is a benefit that we need to exploit more.

For those people that aren't familiar with the brand or higher users, they don't realize how fast we can perform at lunch. So we might have to be more deliberate in attacking that opportunity. Because we can perform well there.

But the perception of the guest that doesn't know us and hasn't gone through lunch a number of times doesn't realize how quickly we can prepare a customized made to order dish. So it's an opportunity for us, as well is a strength.

Thank you.

David Tarantino with Robert Baird.

Good afternoon. I wanted to come back to the question on the quarter to date comps and just ask I guess it's surprising that the business isn't strengthening along with the rest of the industry. And I guess is there anything -- I know you mentioned that the marketing spending or the media support is part of that.

But it seems like there might be more to the story. Is there anything you're seeing in your best metrics or consumer feedback that would suggest something maybe more fundamental to the brand that's not working as well as it has been historically?

David, actually we just completed a fair amount of research, which is quite encouraging. In terms of guest feedback on operations metrics, food, perception of the brand.

The one thing that is still continues to jump out at us is when you think about the two big questions around -- that center around brand awareness and why wouldn't you come more often, the first question is not enough restaurants. And that second one is they don't see any of our advertising.

So those really are the two main factors, which I think we're addressing and our real estate pipeline as well as the work we are conducting with the agency. So nothing that jumps out from a -- meeting a consumer needs sake.

There is an opportunity around awareness levels, there's a gap and difference between a more regular guest and a less frequent guest around freshness and quality. Our guests that are in our restaurants clearly rate us very high on that. They recognize and see all the fresh produce and ingredients that Keith talked about.

The less frequent unaware guest doesn't know that. So that is something that we're working on. It's not a fundamental thing the brand doesn't have, it is fundamental connections we have to make. So I think that you look at those -- that's really what came out of the research on a qual and quant standpoint.

Got it. And then I guess the guidance for the year assumes that you do see a pretty meaningful pickup even though the comparisons aren't quite as easy going forward.

So I guess could you talk about your overall confidence level and being able to move the needle even as the comparisons get a little bit more challenging as the year goes on?

Hi David this is Dave I will speak on that one. Actually I think we have quite a bit of confidence in those numbers. When you look at the comparisons -- to your point they get a little more challenging, but actually that doesn't occur until the third or fourth quarter.

The poor weather that we saw in winter of last year actually effected the second half Q1 last year, more so than even the first half of Q1, which we just overlap. So from the comparison perspective I don't think it necessarily gets too much more challenging at least not until Q3 or Q4.

More importantly, as Kevin mentioned there's been so little promotional activity that we have been doing thus far this year as we have allowed Barkley and done this research to get our foundation for building the advertising and marketing investments.

There is not been as much air support as we typically would have. And I think we have a lot of confidence in what we're seeing from the research, from the initial work that we're seeing out of the agency that we have pretty good confidence that will start supporting things as well as catering.

Catering will be a higher seasonal activity during Q2 and then through the balance of the year. The first few weeks in January certainly aren't the height for catering sales.

Great, thank you very much.

Joseph Buckley with Bank of America.

Thank you. Based on the same store sales in the fourth quarter, given the comment about catering being 1% of sales, is it safe to assume that 1% of the como was catering? And then could you talk about the check and traffic components of the core store business?

Sure I will speak to that Joe. Price was overall about 2% through Q4. Catering was about 1%. And all signs from our research shows that was for the most part incremental sales. So pricing up 2%, 1% on catering, that's 3%, so there was modestly negative traffic during Q4.

Notably actually what you saw was what we had expected which would be you had a much more challenging comparison in Q4 versus Q3. And we needed to get that catering lift to overcome that comparison, which we did.

Okay and then two more if I can. Just the decision to cut back on promotions so drastically and Kevin you mentioned the Super Bowl Sunday and divisional playoff days.

Given that catering is so new to you those seem like strange days to not do promotions with the new catering capabilities. Could you just talk about the decision to cut it back so much? And I wasn't sure exactly what you meant down 100% on those two days.

I'll clarify that. We were down -- I think just the difference on those two days alone were 100 basis points to 120 basis points.

The decision to not run on top of them any similar promotion really was about discounting, not wanting to be heavy in that regard. We did expect a little better tailwind from weather. But the catering programs around super Bowls tend to be more our Square Bowl offerings not big 30, 40, people parties as well. So the strength of our program last year was really a focus on Square Bowls, not catering. So there's a slightly different use occasion there.

That's why we didn't do it is to give -- we also believe that the monies we're going to invest in promotion and media spend, social digital this year we want -- we really want to have those focused and aligned with the brand positioning work. And then how we would spend that in markets that I think a lot of great work is going on now.

Which is something that gives me confidence going into the year. Not potentially spend it in an area that is primarily discounting and not really supportive of the message that we're going to drive home the rest of the year.

Maybe just one more if I could. Dave I think you were talking about the margin dilution from the stores not in the comp base and I wasn't quite sure why that was as high as it was. If the GAAP to the AUVs had narrowed and then why it would abate after the first half?

Just a large part of that is just the number or percentage of units that we have in the system, Joe that are immature. We're in a time, we talked about it a lot on the last earnings call, where that percentage is higher than it's been historically.

Especially we've had a 16% growth rate over the last couple of years in just organic Company unit growth. Bringing into play then 19 franchise previously franchised restaurants that were little bit below Company average, so ultimately being diluted as well.

So typically, we've been able to overcome margin dilution because you have the balance of the restaurants that are continuing to mature. In Q4 you had the impact of not just the amount of organic growth we've had but also an additional 19 restaurants that were coming in a little on the dilutive side.

Joe this is Kevin. The other factor that influences that maturity curve is where those restaurants are located. So the percentage of restaurants that we continue to build that aren't necessarily in our core markets, they don't yet have economies of scale to the same degree as our mature markets.

Particularly in food cost and labor. So they're building that. As we develop those markets and fill them in, the economies of scale get much better. And so that's why we have the glide path that we do. It's partly impacted by mix of geography.

Okay, thank you.

Nicole Miller with Piper Jaffray.

Thank you, good afternoon. You said 2% price for the fourth quarter. How much price are you running on in January or 1Q please?

2% as well, Nicole.

For the stores you talked about this year opening, how many are signed leases or under LOI?

We are pretty much -- Nicole this is Keith, we're pretty much [anywhere] like 47 of those are at leased for this year so we feel comfortable that we'll be able to hit the target that we've talked about in the past.

I'm sorry what was that number? What was that figure?

47 right now as far as leased for 2015.

Which is ahead of where we were at the same time last year.

And we -- we've got some that are very close to being signed. We feel comfortable with the range that we've given.

Okay, thank you. And advertising campaigns. Can you put that in terms of percentage of sales and how that relates to guidance? Just wondering how much dollars or percent of sales is in there, in guidance?

Yes, so we talked from the spend side to be about 1.5% to 2% of sales during the final two quarters of 2015. The majority of that being true advertising.

Historically, Nicole when we've talked about that 0.5% to 1% of sales that we've spent over time that's really been support our local relationship marketing. From a true traditional advertising perspective, between outdoor, radio, digital, as well as TV, we have never been much of a player.

And in 2014, most recent data I saw we were well south of a $1 million while a lot of our major competitors were at high multiples towards that. So we will be investing more certainly as we go into especially the second two quarters of this year. From the guidance perspective, we have incorporated that into our expectations for full-year earnings per share.

Some of the activities that we'll be looking at is reallocating some of the local relationship marketing funding that we've in the past particularly on that promotional line. Some of the stuff that we've been doing in the trenches with discounting will now be allocated more towards the investment into media.

Just so I am clear, it's still the 0.1% to 1% in the first half of the year and then it's an incremental 1.5% to 2% or 1.5% to 2% in total in the back half of the year?

The expectations 1.5% to 2%. However what'll be different about the final two quarters of 2015 is that will be primarily media.

Okay, TV?

Not TV. But outdoor radio. To be candid, we are still -- Barkley is still putting some finishing touches on the work there doing. We haven't completely decided what Q4 would look like from a media perspective.

Okay, got it, thanks a lot, appreciate it.

(Operator Instructions)

Andy Barish with Jefferies.

Hey guys. Wondering if you took out the high end of EPS -- the old high-end of the EPS guidance range, 20% to 25%, now at 20%, so what are the items in order that are accounting for that diminution of growth versus prior?

Really Andy, it comes down to Q1 was a little bit softer than we'd expected thus far.

Okay and the marketing change and increase was originally expected in your thoughts?

Primarily, yes Andy. I do think that to the extent that we see some of the success that we hope to see from it we'll continue to reevaluate that.

Okay, thanks.

John Glass with Morgan Stanley.

Thank you. A couple questions. What is the message you hope to communicate with this new campaign? A couple years ago I think there was a rebranding our new branding around Your World kitchen. And is that going to stay in place and you're just kind of hoping to raise the awareness or do you reposition the message around that?

And I know you said this is now a true media spend in the back half and you haven't done a traditionally. I thought you did do some outdoor and radio in the past. How efficient has that been or how instant has that been in driving sales when you have used it if I remember correctly?

I'll touch on that second part of your question first. When we have done it, we've been fairly successful with it, particularly in markets where we have some good brand awareness. People recognize it get. It gets them to think about us more in the decisions that and helps with that visit frequency. So we've been pretty pleased with that. And we're also fairly pleased when we do use some old-school tactics of direct mail and talking with and interacting with our guest or are e-Club.

So we still think those will be components that are used as we go forward. When it relates to the brand positioning and how much of that spend and what we'll do with the investment and equity we have in Your World kitchen and that positioning. That's actually one of the things that we asked Barkley's to really take a deep dive into.

Do we have the right brand positioning? What's the best way to activate that? So that we can create the right meaning of it. The early work and I don't want to presuppose where they're going to come out. They're still working on that and they're going to be providing that to us in the near future.

But I think the early work is that there is good high-level meaning in Your World kitchen. And what we want guests to understand and think about when they hear those three words is fairly strong. But there is a need to sharpen -- to create really a sharper visionary response from the guest with that.

So they may come back with something different. I think they like that and what we're hearing from our guests where we have it on our buildings. And it's -- and we have more visible branding of it is fairly positive. So I think that's a good early read.

I would also add to that John, and Keith mentioned quite a bit during his section, our ingredient story is a very good one. And we think it competes very well in the marketplace and resonates with guests. Our research shows and it validates a lot of our internal thoughts that there is opportunity in making those connections that we haven't done.

And that's not necessarily incumbent upon the significant media spend, that's taking the opportunity to look at all of our merchandising within our restaurants, looking at how we're using social media, how we're using our email database and doing a better job articulating those phenomenal parts of our story. We recognize that's just as big of an opportunity as investment in media.

I think the other piece to that I like about Barkley's is they're that full service as Kevin talked about in his piece, because I think they'll connect all of those different elements. In the past we'd have different pieces but never had a group that really pulled all those elements together. And I think that's what we're really looking for with Barkley.

One last comment. The opportunity and the ingredient story, fresh and quality is going to help us across a lot of occasions. That's an important consumer need an expectation in this space.

We also I think -- doing some early brainstorming and work on how to widen the gap and strengthen our -- how well we are received and compete in the occasion with friends, with families, with kids. We do very well there both at lunch and dinner with groups, we have a lot of equity in the concept of our bowls.

So I think you are going to see -- and that's some of the early insights that we have. And going beyond that might be too premature. But there is some very good opportunities coming out of the early critical thinking.

And just one related question, how do you think about entering more of a heavier year of new market development in 2015? Doesn't that exacerbate the problem a brand awareness a little bit?

Maybe it's a hindsight question where maybe you didn't think these issues were present when you were developing the plans for 2015 or do you think they're not connected? I would think filling in more markets would satisfy the problem that you think customers think that there's a lack of convenience, if you will, for the brand.

I do believe that continuing to fill in the less dense markets will help us. Not all of those deals were going to be contiguous trading areas, but they will help increase awareness as people move through the trading areas of where they live, work, shop, recreate. So I don't think it exacerbates it.

It won't help it, if we were only building in mature markets with high brand awareness. It will help but as we build in markets that have low brand awareness and low-density. The challenge that gets created is probably not in consumer brand awareness.

But just more growth in smaller markets requires you to work with newer, younger teams. Where you don't have quite as big a batch of people. So that becomes really the focus is people in development.

The other piece too is just when you look at some of those markets that we talked about it's just that balance of getting more of a off-season. You're looking at the Oklahoma's, you're looking at more penetration in Florida. Continuation in California. So we'll get some of that seasonal offset that we've always seen historically having so many northern markets.

I do think it's a fair question John. I will point out the one thing that does increase our confidence is the new markets that we've ventured over the couple of years we've been very happy with.

Whether they be in the Bay area, Orlando, the franchise location in Long Island, we've been pretty happy that Your World kitchen positioning, some of the aspects we've done around the dinner service have resonated well there. But your point is taken.

Thank you.

Andrew Strelzik with BMO Capital Markets.

Good afternoon. Just wanted to ask, again, about the restaurant margins. Obviously for the last several years in a row, they've been down and 100 basis points in the fourth quarter.

So given that it's going to be a heavier year of new market development and you're going to be increasing that ad spending in the back half of the year, as some of that dilution theoretically would be going away, is it really just a smaller number of new units in the base that's going to generate the improvement? And what gives you the confidence if you could say again, and where would we expect to see that in the P&L?

Sure, that's a good question Andrew. When you look at our overall population of restaurants, we built 49 restaurants, we acquired 19 restaurants, so there were 68 additional units in this year of 2015. Combined on top of -- I'm sorry in 2014. Combined on top of those 68 restaurants in 2013 we had about 16% of unit growth.

Historically our run rate has been 12% to 13%. We had great opportunities from a real estate perspective, a very strong pipeline. We will be going back towards that more historical 12% to 13% unit growth. So this large pocket of new restaurants from a percentage of our overall base is somewhat exacerbated right now. It's higher than it has ever been.

That will start going away. And what you will end up seeing is that the percentage of restaurants that are new and dilutive to margins get offset by a larger percentage that's actually building the momentum going along the maturity path. As Keith mentioned we are seeing the right trend line there.

We are seeing historical numbers that we haven't seen in prior years. Which is that the newer restaurants come into the base at a faster rate than the rest of the Company. They end up getting much more margin leverage. We're starting to see that come to fruition.

We are still in that spot of not overlapping yet the acquisition of those 19 restaurants some of that higher growth. As we overlap that I think you'll start seeing the margins come back to the direction that we've seen in prior years before we had that little bit faster growth rate.

Okay that's helpful, thank you.

David Palmer with RBC.

Good afternoon guys. How much do anticipate Noodles ultimately boosting food value ingredient quality? You mentioned the antibiotic free chicken move and the move to that.

Is this -- do anticipate that this would be the first step in a series of upgrades or do think most of this is going to be about messaging the quality that you do have on the menu?

Great question. I really believe its what we have already. If you talk about the way we do the fresh produce five days a week and we cut it twice a day inside the restaurant.

You talk about the different whether its gluten-free, whether it's GMO-free, whether it's the organic elements within our restaurants. I think it just goes back to telling the story. There are some things we can continue to look at, we always do to improve but I do think based off some of the stuff we've seen initially from this research we have the elements there.

We've just got to make sure we articulate them and talk to them. Not only from a standpoint of the messaging within the restaurant, but also our team really understands them and is able to articulate them. Because that's where the real credibility comes when you drive that story to our guest.

We'll continue to improve the supply chain where make sense, but we have a great story to tell already. And we just need to tell it and connect it.

Yes.

Just related to your marketing around catering, and the comment that you were talking about earlier, there are certain markets that you clearly have greater density. Many of those you've have comped higher than, with the exception perhaps the DC area, you've comped higher in some of these greater density, higher brand awareness markets.

Do anticipate the marketing around catering later in the year that could be to drive perhaps higher levels of same-store sales in the markets where you have the density to support the billboards? How do you not orphan some of your lower density markets with this marketing? Thanks.

I think it's a good question and it's one we're studying right now is how do you best invest the dollars. Obviously in the bigger markets I think we can get a bigger bang for that buck with what we do.

However, there are still some things we're doing on the other side of that barbell so to speak. And that is an addition of some local relationship marketing teams, some tour guides as we call them internally that are going to help supplement getting outside the four walls in our restaurant.

And that is not going to be a heavy media based effort. It will be a strong traditional community relations effort. So we'll target the generators, the businesses, athletic organizations, schools, that can participate in catering. So I think you're going to see a couple different levers that we use.

One other thing Dave when it comes to actually effectively marketing to those smaller markets, one reason we chose Barkley as an agency and one reason that we were impressed by them from a social media perspective and their ability to engage guests and get them emotionally vested in the brand, we saw the work they had done with Wingstop and some others. And it is an absolute strength of theirs.

And so you're not just talking about the traditional media of outdoor radio which we recognize doesn't have economies of scale in all our markets. We think that this -- we have the right partner that's following us. They'll give us support in the newer and developing markets as well from the social side.

In addition to social, if you look at their work on Sonic as well as Wingstop and DQ, one of the impressive things about that organization is how well they talk to the internal team, as well as external team.

And in those smaller markets, we'll still rely heavily on bringing the brand to life through our own brand ambassadors. And I think they do an outstanding job of internal education and motivation as well as external.

Thank you.

Nick Setyan with Wedbush Securities.

Hi this is Colin Radke on for Nick. A question on COGS. I think previously we were expecting flat COGS year-over-year in 2015.

Given the lower expected [quality] inflation should we now expect some leverage there? And is that going to be effected at all by the rollout of antibiotic free chicken and then maybe if that has any impact on your pricing plans for 2015? Thanks.

Sure let's address antibiotic free chicken first as Keith mentioned it's in Colorado right now. We're looking to selectively add it to future markets through the course of the year. With it there is a very modest price increase probably associated with it. Nothing terribly substantial, certainly we talked through it as we go along and make those decisions.

From the overall COGS perspective that is the one line item when you look at a year-over-year basis where we aren't seeing as much pressure certainly not from the dilutive impact of mature restaurants nor do we have legislation or anything along those lines. We do think there is potential to get a little bit of leverage year-over-year on the cost of goods sold line.

Great, thanks. Very quickly with catering now rolled out, are there any plans to focus more on the rollout of the enhanced dinner service initiative? And is there any benefit associated with that contemplated in your comp guidance? Thanks.

I think that's a good question. We still have work to doing catering that we're going to stay focused on in the first part of the year because we want it to exceed our expectations not fall within it. So we're still focused on that.

We do see and believe that our dinner day part opportunities and the opportunity to build on our strength that we have in that meal occasion with families is going to be improved with hospitality and plus. So we'll gradually move back to that before the end of the year.

Thank you very much.

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