Noodles & Co (NDLS) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to today's Noodles & Company First Quarter 2015 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. You may begin.

Thank you, Latoya. Good afternoon, everyone, and welcome to our First Quarter 2015 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 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 FY14. 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 it over to Kevin.

Thanks, Dave. We appreciate that you have joined us today to review our Q1 2015 results, as well as the opportunity for us to share what we are focused on to build sales and long-term value. We completed Q1 2015 with system-like comparable sales of 0.9%, and adjusted diluted earnings per share of $0.03. Q1 finished with positive momentum in March, while rebounding from severe weather in February, at a time when much of the industry saw deceleration.

I would like to begin discussing strengths of the Noodles brand in terms of the consumer and system strength within the industry. I'll then touch upon key initiatives we are driving to return to our historical range of comparable restaurant sales results before turning comments over to Keith Kinsey, our President and Chief Operating Officer. First, Noodles & Company will celebrate 20 years of serving guests this fall. We also anticipate this anniversary will mark the 20th consecutive year of consistent double-digit organic unit growth, clearly a rare and significant milestone.

Our predictable and reliable growth can only happen with considerable infrastructure strength, strong relationships with developers, and a differentiated consumer experience. Over the past 20 years, we have seen success in markets across the country in diverse trade areas. In fact, our top 20 highest revenue restaurants span 13 different geographical markets. Most recently, we experienced exceptional openings in new markets of Phoenix, Orlando, and Montana. This substantial unit growth fuels double-digit revenue growth, validates consumer engagement, and supports the ability to meet our long-term unit growth expectations.

Another strength of the brand is Noodles' ability to resonate with guests of all types through our distinct approach to craft cooking, our service model, and most importantly, the quality ingredients and flavors offered in our menu. The fresh vegetables we prep throughout the day, our quest for real ingredients, clean labels, and cooked-to-order meals meet the discerning desires of guests today. Continuing to communicate these strengths will enhance guest perception and loyalty. Third-party recognition by Parent magazine and Health magazine are further evidence of our ability to meet these discerning needs.

As the brand matures within markets and reaches levels of brand awareness, we continue to see strong guest attachment. For example, our central region, our largest region, and the one with deepest densities, continues to perform well, and is at historical norms for comparable sales growth. In fact, the majority of the system actually performed above our long-term comparable sales target in the first quarter.

Excluding softness that we have seen in markets in three areas of the country, Colorado, the DC metro area, and Austin, comparable sales were up 3.2% Company-wide for the quarter. We are confident that we understand our opportunities in these markets, and are aggressively working on returning them to the success that we are seeing in the balance of the country.

On the people front, our seasoned team has managed and led through many phases of the restaurant industry, and we continue to attract and hire successful competitive leaders throughout the organization as we grow. Finally, our internal and external consumer metrics indicates strong operating and guest sentiment. Reinforcing the brand continues to resonate with guests as we move from initial trial to regular user.

Now I would like to shift my focus to a few areas important to accelerating sales in our growth. As operators, we always start with how to improve the in-store execution. In particular, we are making progress on our throughput and deployment initiatives that we believe can improve the overall guest experience significantly. We are in the final phase of testing, and we will begin rolling these changes to the system beginning in July of this year. Keith will touch on these in greater depth.

Our catering program has continued to grow, and we have added the ability of guests to order a la carte dishes to meet the needs for smaller groups requiring greater flexibility. Recent sales are north of 1%, momentum is positive, and we expect catering to contribute additional sales well into the future.

On the culinary front, we'll continue to introduce dishes that highlight our seasonal ingredients, cooked to order. Currently we are featuring our BUFF Bowls, four versions of current favorites packed with vegetables and protein, and low on carbohydrates. We feel that BUFF Bowls have great potential in increasing our frequency with existing guests, and broadening our reach to new customers. It's too early to assess the potential long-term impact, but we are encouraged with guests and team member initial response.

In terms of development, we continue to be pleased with our performance in new markets, and feel that these investments will benefit our long-term objectives. That said, we are shifting the pipeline to a greater mix of building out our substantial footprint in existing markets. This will aid overall brand awareness, with the mix shift beginning with 2016 openings.

We've also made investments in technology, especially in the development of successful mobile order-pay, application, and on-line systems. We'll expand those technology efforts, particularly in guest segmentation and guest targeting. Additional insight into guest behavior will allow us to better engage and deploy relevant marketing campaigns.

Finally, our branding, marketing, and promotional work with Barkley will begin activation in the second half of the year. The messaging will include brand strengths such as our cooking to order, real ingredients, and our strength with parents and families. We will be more active in media spend, social digital presence, and promotional activity than ever in the past. I'm very pleased how this work has progressed, and believe it to be a critical addition to our differentiated offerings and core operating strengths.

At this time, I would like to turn it over to Keith.

Thanks, Kevin. As Kevin mentioned, our new restaurant pipeline remains excellent, and we continue to be pleased with the performance of new markets. In recent weeks, we opened our first restaurants in Montana, Arizona, as well as our third restaurant in the Orlando market, all of which have opened well above Company average.

We opened 13 Company-owned restaurants and three franchise locations during the first quarter, completing the quarter with 455 restaurants system-wide, 399 of which are Company owned. We continue to anticipate 50 to 60 openings system-wide in 2015, representing a 12% to 14% unit growth. We anticipate that 2015 will mark our 20th consecutive year of double-digit percentage unit growth, and are excited at the potential to approach 500 restaurants at the end of the year, a milestone that very few concepts are fortunate to achieve.

As mentioned in prior calls, we expect that our 2015 openings will be skewed more towards newer markets, including our first opening in Toronto early this summer. A skew towards new markets does result in some additional investment in certain line items, particularly labor, pre-opening, and general and administrative expenses. But it positions us well to gain leverage in 2016 and beyond, as well to begin to fill in these markets with additional openings in the future.

Our total non-comparable sales base achieved sales at 87% of Company average during the first quarter. As we have discussed in the past, whenever you have a significant amount of new markets, you see more variability as you build brand awareness in these areas. We did see some of that impact because of this in the quarter one; but we are very confident in the real estate selection and the consumer acceptance we have seen in these new locations.

On the people front, we continue to strengthen our operations and field support teams. We have recently created a new position, Director of Field Talent, with their focus on assisting the field in identifying, hiring, and developing future leaders within our restaurants. This individual brings a significant amount of industry experience and has hit the ground running. We have also hired two new operations executives, one in the franchise side, and the other in the Company operations, both from brands well-respected in the industry.

Moving on to some of our operational initiatives, we continue to work on simplification and streamlining of some of our kitchen design, deployment, and cooking procedures to help enhance throughput. Our overall throughput remains on par or better than much of the fast-casual, a significant achievement given that every dish is cooked to order. Still we believe it is important to continuously identify opportunities, particularly at the height of the lunch revenue period. We have begun the process of expanding several of our improvements that we began testing late last year, including modest recipe standardization, and tweaks to our cooking methodology on a couple of our critical dishes.

Combined with the continued benefit that online ordering provides, and increased focus on deployment during the peak hours, we feel we can have a meaningful impact for that guest who is particularly pressed for time, resulting in a significant long-term growth opportunity.

On the ingredient front, we are excited to announce that by the end of the third quarter of 2015 we anticipate removing all artificial colors, flavors, and preservatives from every one of our soups, sauces, and dressings. We also continue to test naturally raised antibiotic-free chicken in our restaurants, and are working with our suppliers to potentially expand this nationwide over the rest of 2015 and into 2016.

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

Thanks, Keith. Revenue in the first quarter increased 18% to $105.8 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 first quarter of 2015, we reported adjusted net income of $900,000, or $0.03 of adjusted diluted earnings per share. Adjusted EBITDA increased 5% to $8.8 million during the quarter. In the first quarter, comparable restaurant sales grew 0.8% for Company-owned restaurants, 1.4% for franchise restaurants, and 0.9% system-wide.

To provide some texture into Q1 sales cadence, if you recall, during our last earnings call we noted system-wide comparable sales of 1.1% quarter to date through February 18. We ultimately saw a negative impact from weather in the last half of February, before rebounding in March, which was our strongest month of the quarter. We are seeing positive sales growth continue into Q2, and we are excited about the progress of the initiatives that Kevin discussed earlier in the call.

Our restaurant-level margin of 16.2% in the first quarter was 110 basis points below prior year. The decline in restaurant margin was primarily due to deleverage on lower average unit volumes due to immature restaurants, which can be seen through a few line items on the P&L. As a reminder, due to our geographic penetration and seasonality, the first quarter traditionally has meaningfully lower margins than other quarters throughout the year, so it is not necessarily indicative of our full-year results.

Our cost of goods sold at 26.5% in the first quarter was a 50-basis-point improvement relative to Q1 of 2014. This improvement was primarily the result of many pricing taken in Q4 in 2014 outweighing commodity inflation during the first quarter. We continue to anticipate approximately 1.5% to 2% in commodity inflation during 2015, primarily due to increases in the durum wheat market, affecting the cost of our pasta. This increase is in line with our prior projections, and I would like to reiterate that we are fully booked for our durum wheat needs through 2015.

In the first quarter, labor costs increased 70 basis points versus prior year. As discussed in prior calls, 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, due to the implementation of the Affordable Care Act in our restaurants. This equates to roughly $500,000 in additional expense per quarter.

During the first quarter, operating costs and occupancy costs increased as a percentage of sales by 20 and 50 basis points respectively. Marketing spend for the first quarter was 0.7% of sales, a 10-basis-point increase over Q1 of last year. As previously mentioned, we anticipate investing in incremental marketing for the balance of 2015. Consequently, while marketing expense will remain somewhat muted during much of Q2, we anticipate an increase to between 1.5% to 2% of sales during the final two quarters of this year. This investment equates to an approximate $1 million spending increase over prior year for each quarter.

General and administrative expenses of 8% was a 20-basis-point increase over Q1 of 2014. 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 investments supporting our new markets and our marketing initiatives.

While Noodles & Company has had very few impairments over the years, GAAP results for the first quarter of 2015 included non-cash impairment charge of $5.9 million related to eight restaurants. Progress at these underperforming restaurants during the first quarter was below expectations, as they trended below the rest of our asset base. Importantly, they were generally outliers from a development cost perspective, meaning that their asset cost was too high relative to their sales potential. We feel confident that we now have the right people, processes, and procedures in place to significantly reduce the risk for additional development cost outliers on an ongoing basis.

Our tax rate for the first quarter on a GAAP basis was 39.5%. For the balance of the year, we anticipate an effective tax rate of between 39% and 40%. As of the end of the first quarter of 2015, the Company had $22.5 million in debt outstanding on our credit facility, which has a borrowing capacity of $45 million. Cash on hand was $1.6 million. Kevin and Keith outlined the strength of our pipeline, and our operating cash flow and borrowing capacity is more than sufficient to meet our development plans.

2015 does contain incremental cost winds, such as the rise in durum wheat costs and the implementation of the Affordable Care Act. More importantly, though, we are investing in the initiatives that Kevin discussed earlier that we feel will have short- and long-term benefits to our strategic objectives. While some of these investments are already in place and improving our trajectory, we also recognize that others will need time to reach their full potential.

Thus, given our first-quarter results, we have revised guidance for full year 2015. We currently anticipate 12% to 14% unit growth, low single digit comparable sales, 18% to 19% restaurant level margins, and approximately flat adjusted diluted earnings-per-share growth.

Before I turn it back to Kevin, I do want to provide a bit of more texture into that guidance for flat adjusted EPS growth. As a reminder, in our prior earnings release we introduced that each percentage point change in comparable sales impacts the full fiscal year by approximately $0.04 of earnings per share, or $1.2 million of net income. Consequently, this guidance for full year 2015 incorporates our first-quarter sales trajectory, with a modest benefit in the back half of the year from our activation of our marketing strategy.

I would now like to turn it over to Kevin for final remarks before we go to Q&A.

To summarize, I would like to emphasize the following points. First, we remain a high-growth concept that has laid an initial footprint in over 30 states, with the ability to expand approximately five times our current size while gaining economies of scale. Second, our success was coast to coast. High growth always comes with risk, and our growing pains are primarily associated with three markets that we are approaching aggressively to return to the success of the balance of the country. The remainder of the system is gaining momentum, and ran over 3% comparable restaurant sales in the first quarter.

Third, we'll be building brand awareness, both through real estate and marketing, in the months and year ahead. In the 40 markets our system competes in, we only have six with 20 or more restaurants. The upside from our brand awareness initiatives should be meaningful. Lastly, our operations, people, and marketing initiatives are very specific, and we are intently focused on daily execution, both of which are important to propel us into the next phase of our growth cycle.

Thank you for listening and your valuable time. Latoya, if we can please open the lines for questions.

Thank you.

(Operator Instructions)

The first question is from Sam Beres of Robert W. Baird. Your line is open.

Hi, good afternoon, and thanks for taking the question.

First, I would like to ask for a little more perspective on the three markets you mentioned that have been weighing down the comps here in Q1. We think we heard about the metro DC market a little bit before, but an update on that, as well as a little more color on what's exactly happening in Denver and Austin, as well?

Sure, Sam. This is Kevin.

In Austin, Austin's a strong independent restaurant market. We've reached eight restaurants in that Austin area, which now I think we have to become a more active member in those communities, now that we have a base. We've introduced a field marketing specialist to help us focus on getting outside the four walls and more involved in the communities to help and partner with ops. We've also added a second multi-unit manager there who lives in Austin, grown up there, and has demonstrated success with other concepts. I really think it's the time and nurturing to become a local concept, and overcome the resistance of a national brand.

In DC metro, that's been a part of the country that we have seen softness, not just across the industry, but one we've been focused on. Our earlier challenge stemmed from opportunities, I think internally in staffing and operations. We feel that that has been much improved today, and we can now start moving beyond the functional components of the dining experience. We're at a point, because of reasonable restaurant densities, we'll be able to deploy, I think, all facets of the marketing activation plans that we've been working on with our agency at this point. That's really where -- the level we're at.

Turning to Colorado, Colorado is a strong market in general. It's a strong macro brand awareness market for us. There's really two influences that I think are worth mentioning. The first is that there's been a lot of growth in fast casual expansion over the years from a lot of concepts. That, as it relates to us, we have to be probably more aggressive in our competitive counter-marketing plans against those openings.

The other implication of what we have seen in those densities of penetration is that we have some older restaurants here that we've just got to refresh. We'll have to be little more aggressive in our remodeling. One of the nice things about Colorado is because of our densities and brand awareness, we think it's a great market to be deploying some of the larger-market media activation plans that we're working on with Barkley.

The other aspect of Colorado that is influencing the numbers near term is really our own growth. We have been fortunate to acquire strong fill-in trading areas in a very maturing market. These are excellent long-term locations, but they come with some short-term cannibalization. I believe we're probably reaching maybe one restaurant per 70,000 people in Colorado, well below and with deeper penetration than our longer-term plans. But very good locations. We're glad to have them, and we're glad to keep competitors out.

Thanks.

A follow-up on the current comps trajectory. Dave, you mentioned positive comps here so far in Q2. Provide exactly a little perspective on what that means, even addition relative to the level you saw in March? Also, a little perspective on exactly what level of acceleration you are expecting in the second half of the year to hit the full-year guidance?

Sure, absolutely, Sam.

When we look at positive comps right now, we don't want to disclose the exact number. We're so early into Q2. When you look at the marketing calendar, weather, and potential other influences, we think it would be a little too early to be discussing the actual number thus far in Q2. When it comes to the guidance, we talked about the change that we have in our guidance really takes the trajectory that we saw during the first quarter, and does have some modest improvement in that second half. The guidance is for low single digits, so as you can imply maybe a little closer to the 2% to 3% range during that back half.

Great, thank you.

Our next question is from Joseph Buckley with Bank of America Merrill Lynch. Your line is open.

Thank you. I would like to revisit the three problem markets again. Isn't Colorado your original market, maybe your longest-standing market? I think DC has been established for a long time. Austin, I think, is relatively newer. But is there any common thread between the three? You mentioned a series of issues potentially for each one, but is there any commonality in terms of the problem areas?

Joe, this is Kevin, and others can chime in. When we really looked at the distinct reasons influencing each, I think they are different. Austin, like I said, you are 100% correct. It's a newer market, and it really is one that has tremendous loyalty to local independents, and you've got to earn your way into that, and we're in the process of doing that.

Colorado, still a strong market for us and we're running positive same-store sales. The challenges were impacting. When we open a restaurant, a Noodles opens closer to another Noodles. It's greater impact than anybody else that opens near us. In some cases we actually get positive synergies when competitors open. We tend to impact ourselves, but we look at net new returns, and they are smart decisions, so we continue to do that.

I just think with all the growth that you've got to always have your A game, both in operations and marketing. We've got some spotty areas that are a little bit dilutive on that. The good news is we go13th month against our own openings, which is positive.

I would also add to that, Joe -- this is Dave speaking. When you look at the investment in marketing that we're going to be doing in the back half of the year, these are three markets we think will respond very well to it. From a DC metro and Austin perspective. Even though we've been in the DC metro area a long time, brand awareness is still relatively low, given how spread out the geographies are.

Austin we're relatively new, and as you mentioned.

With Colorado it's really the top-of-mind awareness, bringing people in to see all the exciting and new things. We've been in Colorado for 20 years, and we probably have not spent as much as we potentially could in terms of bringing more top-of-mind awareness to the brand.

Two other quick ones. Were the eight units that you impaired, where they in those three markets?

There was a couple -- there was a few restaurants that were in those markets, but ultimately the impairment was in a mix of markets that were both new and old. We did have a few outliers in the newer restaurants that were really from an outlier perspective on the development cost side. That's really where we saw that.

Okay, and then one more question. The enhanced dinner service, I guess I would call it -- I'm probably not calling it the right thing, that you were pretty focused on. I think maybe you put it on hold while you rolled out catering. Could you update us on the status of that? Is that still being expanded into new markets?

Yes, hi Joe. This is Kevin.

We have -- you are right. We put it on hold. We wanted to focus on catering. We have not really moved it back to the top of the list yet, primarily because we want to stay intently focused on specific action plans. We're also waiting to see really from a total brand positioning where we end up with our ad agency and the work we're doing jointly together, because it might have some influence on design. We don't want to spend money in advance of that, that we may make tweaks to.

We think keeping it on pause right now is the appropriate thing to do. We've got several things we're working on that are very important and should work. We still absolutely believe it has long-term differentiating and upside impact for us. It's really a matter of team execution and when you slot it in.

Okay, thank you.

Thanks, Joe.

The next question is from John Glass with Morgan Stanley. Your line is open.

Thanks.

First, can you talk about your early thoughts on 2016 development? You talked about going back to some of the existing markets. How big a shift do you think this will be percent-wise versus say 2015 in existing versus new markets? Has there been consideration yet, or at what point do you need to see evidence that suggest you'd need to slow down overall unit growth, as you sort through some of the issues?

Hi, this is Keith.

From a standpoint of 2016, it's in the high 60%s right now as to where we'll doing more of the stronger markets, existing markets, versus the new markets in 2016 pipeline. We're still building that out, but early read is in that probably north of 65%, and maybe into the low 70%s as a percentage of where those restaurants are going to be, and we feel pretty good about that.

As far as slowing down, we still -- even looking at some of the impairments, we still feel really good about the real estate we're selecting, the process of the infill that we're doing, the markets that we're going to into the future. Really, it's about making sure that from the other side of the equation, the cost side, that we feel really good that the team we've got in place right now is going to be able to achieve those numbers that we have built into the model, and we won't have that pressure on the development side that forces some of the recognition we did this quarter.

Go ahead.

John, I'm sorry. I apologize. It's Kevin.

I was going to say we've never really chased a number, to hit a number at any cost. It's really been about trying to make sure we're making the right individual real estate decision for the long term. I think we feel that the actual shifting in the mix, that we've already been working on in the pipeline, because obviously they impact 2016 openings, that pipeline we started working on nine months ago to a year ago.

We think that actually will take some pressure off ops and people, because it's really when you open your first restaurant in a new market and you're setting up supply chains, distribution centers, new teams, potentially relocating people, that's a little more stress and disruption to the team. When you -- As we move back towards really building out the footprint that we have, I think that will take some pressure off our ops team. We are looking at how we balance that out, so one market doesn't get overloaded. I think it's a good question and it's one we look at every time we sit down and talk about strategy from new markets, and it's one we look at every time we approve a deal within a market.

When were -- you mentioned the impairments, some were in newer markets, some were in older. When were the stores built? Generally, how old were the stores you impaired?

It's really a mix, John, of older restaurants and newer restaurants. Some of them would have been even as old as almost 10 years. The newer restaurants had a few more, but those were again really development cost outliers. As a reminder, our net cash investment is generally $750,000 to $775,000, that's net of TI.

These outliers were really north of $1 million in terms of their construction costs. Again, we feel we've got the right processes to reduce the impact, or the potential of those happening in the future. Those are where you saw the newer restaurants, was really the development cost side.

Final question. You talked about Colorado being a weak market. It is surprising, because brand awareness really is -- that's your strength there. One of the issues you highlighted earlier on was weak brand awareness as being an issue. When you compare -- if you compare, say, Colorado to the other dense markets, are you seeing any signs of weakness there? Chicago area, Minnesota, Wisconsin, whatever the top three or four, whatever the top three or four, the big markets -- are they all appreciably better? Are they closer to that 3% and Colorado is the one outlier in the mature markets, or is there some signs that maybe some of those issues are bleeding into some of those other markets, as well?

No, we're not really seeing that. We do have good brand awareness from restaurant densities. But I would tell you with all the new concepts and the new shiny toy and all the additional marketing that comes with that, the top-of-mind awareness for the occasion, we can be a little more aggressive in, John.

We have positive same-store sales. Our same-store sales would be almost double what they're running if we weren't impacting ourselves, as well. It really -- I called it out because of the fact that it's a mature market that we're continuing to build in, and we're happy with those sites, but impact on ourselves is greater.

Actual guest scores, operations, food-wise, remain really strong. We see a few comments that we're getting a little long in the tooth in dining room; but nothing that concerns us that this is a issue with the mature market. Actually, in some of our markets that are almost just as old, they're already running and continue to run now. They're back to historical norms. I don't see a broader issue, other than mostly our own impact, and the ability to focus a little more on Colorado.

I would also add, John, to that. We all know that Colorado is a pretty competitive market place with fast casual. In the past we have talked about how the average fast casual that's in the top 10 in terms of system wide sales spent on average over $12,000 a year per restaurant in 2014 in traditional media.

We were below $1,000, so there's a pretty significant GAAP there. In Colorado that gap is actually just as large, if not larger, even with the amount of restaurants we have. We recognize -- there should be a significant potential upside as we begin to get more top-of-mind awareness in that particular market.

Thank you.

Thank you. The our next question is from Jeffrey Bernstein of Barclays. Your line is open.

Great, thank you very much. One follow-up on that one, and then a couple of questions.

The comment on Colorado, I think you said a couple times it's still comping positive there. But I know you highlighted that the overall comp for the Company-operated stores was a 0.8, and I guess the other markets, the non-three challenged markets are comping up north of three. I'm surprised Colorado can still be positive if that's one of the weaker ones, and the overall comp is only a 0.8. Are the other two markets severely negative to be able to drive that average? I'm just trying to figure out the disparity between the three challenged markets?

Sure. No, I apologize for that, Jeff. The actual -- Colorado is running slightly negative. It's not running positive same-store sales at the moment.

Okay, and the other two, are they running --

Those three markets are all running slightly negative same-store sales year to date.

Got it, thank you. My other -- my two main questions -- one, I'm wondering, I think you gave reference last quarter to tests in San Francisco around through-put. Keith, I think you mentioned something about recipe and cooking technique changes being rolled out this summer to maybe improve through-put. I'm wondering if there's any insight you can offer there that -- I know you mentioned it would help the time-starved consumer. What should we expect in terms of that roll-out?

Yes, what we're looking at is, we're beginning the roll-out here in May. We're going from seeding additional restaurants across the system. We're doing that additionally with some of our new plate ware that we're doing at the same time. It's going to get into a lot more focus beginning in this summer. Hopefully by the end of the quarter, or October, fourth quarter time, we'll have it pretty much rolled out across the system.

What actually is it? Is it just pre-cooking some of these things or not using certain ingredients?

No, it's -- yes, one is standardizing some of the ingredients so it's easier for the prep sides. In some of the recipes we had just minor differences as to the weights on some of the vegetables and some of the sauces. What we did is standardized that so it's much easier to train and much more consistent as to what you do prep in the morning. That's helps from a consistency and favor profile on the recipes, and also training.

The second piece is we've accelerated some of the process relative to heating up as the person orders the dish, we just -- we do what we call our dunk method, which helps heat up the noodles faster, and then goes on to saute. That takes time, because we don't have to keep it on the line as long as saute, We can caramelize it quicker. That helps speed up the whole process in the kitchen side of the business.

Got it. My last question is just a clarification on what you said earlier. I know that -- I think you last reported the fourth quarter and the back half of February, I think you said the weather in the back half of February then got worse, but then May got I guess materially better.

I'm just wondering what surprised you in those couple of weeks of February that led to such a sharp earnings revision to the down side. It would seem like as of -- looking back, as of February 19 -- the earnings growth was still reasonable to assume 20%, and March seemed to be okay. I'm just wondering, it seemed like a sharp reduction.

Sure. As we noted, we're 1.1% for the Company same-store sales through February 18. We ultimately at that time felt it was a little too early to be considering that the overall trajectory. Ultimately with February, the last two weeks in particular in Colorado, we saw a lot of snow. February actually ended up being the snowiest February in the history of the state.

As we -- excuse me -- as we look at the full quarter, those numbers in just those two weeks had a pretty significant impact, but ultimately even though March rebounded, it was still a little bit softer than we had expected. We didn't want to make too early of a call that quickly into Q1, but we didn't have the trajectory that we expected.

Got it. Thank you.

Thank you. The next question is from David Palmer of RBC. Your line is open.

Thanks, good evening. I wanted to ask you about the food investments. It seems to be that there are two ways to invest in food. One is cleaning up the labels, and another is to simply give more, larger spec of protein, for instance.

It sounds like Noodles is testing or introducing new things -- both ways of increasing the food value, with the artificial ingredients removal, antibiotics-free, and then also the introduction of BUFF Bowls. What seems to be working? At the end of this journey, do you think you will have a significantly higher food cost?

Thanks.

This is Kevin, and I'll let Keith jump in as well.

I tell you, I think the quality of ingredients, non-processed, are very important. All the work that our supply chain team has done and continues to do, I think just support a strong story and positioning about ingredients that still is a differentiator today. I think more and more companies, as well as the agricultural system, will move in that direction. That is working.

We still want -- we don't think we get enough credit for all the things we're doing today, and we will focus more on that. Really, the BUFF Bowls, I think innovation in the culinary supply chain is really about highlighting that we cook to order, that we bring in fresh seasonal ingredients. BUFF Bowls are really just another way to eat four favorites that happen to be focused on highly nutritious, lots of vegetables, high protein.

We have a pretty good lineup of proteins, between our organic tofu, antibiotic-free chicken, naturally-raised pork, and so forth. I think they both resonate, and they resonate to sometimes different consumer groups, but both are equally important.

Yes, this is Keith. One of the things -- and I think Dave has talked about it in the past, too -- the fact we have such a broad basket. If you look at the pasta and the grains, and you look at the proteins and the different meats and beefs, I think that's -- the creams and the cheese. What's been very successful has been our team's ability to balance out that basket and take the seasonal highs with some of the opportunities on some of the seasonal lows.

Yes, there can be, at times pressure on some of the price, like Dave talked about the durum wheat, but given the fact that even with that, we're still able to stay within that 1.5% to 2% range. I think that's a consistent barometer for us in the future. Even as we improve our ingredients, they're still in that same basket, that we'll be able to keep our COGS under control.

Where I'm going with this is in those markets, like a DC or a Colorado, and you have that competition, perhaps those other fast casual chains are re-framing your food value, and they're giving literally more food costs as a percent of sales than you might be, and in addition to doing those things to market to that ingredient quality. I wonder if this is all about that food value equation?

We have not -- we have done a fair amount of research on that. We really haven't seen that come through in the research. It is something we constantly monitor on a fairly regular basis. We think our portion size are pretty good, pretty accurate, in terms of what we hear back from the guests. We do have a favorable food cost on our P&L to other concepts, but I think that's more management, back of the house, not necessarily price value related to the guests.

No, we do a lot of value added. When you think about our process and the way we pull things together, we get a lot of raw ingredients into our system, and then we add a lot of value added to it -- a lot different than some of the others who just assemble it to order. I think that's the other piece. Our labor is higher, and it's because we do that other piece that brings the dishes together. I think if you look at them in total, it's pretty much in line with everybody else. It's those special things we do with the ingredients that makes it's a different dish when it comes out.

Thank you.

Thank you. The next question is from Keith Siegner of UBS.

Thanks.

A high-level question, stepping back for a minute, and thinking about the restaurant-level margins over the last couple years. They've come under pressure pretty consistently since 2012, even in some years when you were on target in terms of comps. As we think about that restaurant-level margin going forward, and you've highlighted things like competition, and having more fast casual competition. The last question actually dug into this, too. We've talked about certain parts of marketing needing to be spend more.

If we think about this trade-off between say traffic growth and margins going forward, what are your targets for restaurant-level margins out the next couple years? Is it to hold them and stabilize while growing traffic, or is it to return that margin up to something more like 21%? How should we think about the high-level plan there?

Sure. I'll answer that one, Keith.

I think priority one is actually to hold them and stabilize them. When you look at our overall margin make-up, we've always talked about needing to be at about the 2.5%, 3% of same-store sales in order to maintain margins. Clearly the initiative that Kevin spelled out is clearly to clearly address that.

The second thing I would note is the overall impact of the immature restaurants. The 2.5% to 3% target we talked in terms of maintaining margins, that's predicated on about 12% to 13% unit growth, in which case you have the same-store sales leverage overcoming the dilution of the immature restaurants. During the past couple of years we've had higher than that growth. We've been closer to 15% to 16%; on top of that, a couple of acquisitions that were a little bit dilutive, as well.

You have had some exogenous factors that have impacted it and put the margin under pressure. I do think the first priority is to stabilize and hold by getting that same-store sales number back up towards 3%. From there we feel very comfortable that the concept can leverage margins again to get back north of 18% and 19%, and back to where our historical numbers were.

Thanks.

Thank you. The our next question is from is from Andy Barish with Jefferies. Your line is open.

Hi. Can you give us a little more color as we get closer to the launch on the marketing plan? What medium is it going to use? I take it multiple, but any insights into the focus of the campaign, and are you going to cover the three markets you mentioned that are currently challenged?

Yes, Andy, this is Kevin. I don't want to get too far into it, because we haven't finalized and announced the specifics even internally yet. We're still working closely with our partners at the ad agency. What I can tell you, though, is that we know we have strong brand equity with parents and millennial parents and families, so we believe that will be one of the primary targets of what we do.

We also know we have strength in terms of just the fact that we do real cooking. We have this craft around this French method of saute. We don't get enough credit for the wonderful things we're doing in supply chain. Those will be themes that I know will be a part of the creative and execution that we bring to life.

The three markets that we talked about will be all targeted and impacted by those. Clearly, DC and Colorado allow us a little broader rage of medium, where you'll see social, digital, and some traditional areas, such as billboards, possibly print, possibly radio. You're not going to see us on TV. But clearly using some more market-wide activities.

I think in the small markets like Austin, we'll look for ways to get outside the four walls. We'll look at billboards. Then we'll have some smaller markets that actually are very favorable for billboards or buses or whatever that we'll use. We're looking at both the needs of certain markets, and we're looking at what markets may have strong ability to exploit different media channels.

Thank you.

Thank you. The next question is from Joshua Long of Piper Jaffray.

Thank you. I want to see if we can talk through the components of the first-quarter comp. I appreciate the break-out between Company and franchise, but any sort of additional detail you can provide on pricing or mix shift that you saw during the quarter?

Sure, Josh. Mix shift was pretty negligible. It was pretty much flat. Price was at that 2% level that we've been running in the prior quarter, as well. You did have modestly negative traffic incorporated.

Thanks, Dave. As we look out over the rest of the year, you've got some visibility into the commodity side. It seems like that's more or less playing in line with the script that you had been thinking about earlier in the year. How are you thinking about pricing, and has that changed at all with the plans around marketing to come in the back half of the year?

Sure. As a reminder, we overlap our most recent price increase as we go into Q4 of this year. It's a little too early. We haven't decided if we're going to accelerate that, or if we're going to make any changes to that particular structure to have it continue to 2% or not. You can imagine it will be in the ball park. We'll certainly keep you posted if that changes.

Got it. Keith, thinking about the through-put initiative that you discussed in your prepared comments, I was curious if there's additional items that you will be working on as you go throughout the year, if the focus is really going to be around ongoing standardization of the recipes, and working through through-put in cooking items. I didn't know how many more initiatives there might be on the list to work through, through the back half of the year?

The big ones are those. I think we'll implement those, as we said and we talked about, we'll continuously look at other opportunities, whether we bundle some of the jobs and look at how we bundle some of the ingredients. But we do really feel that if we can get these couple things in, they're going to help us out to a level that then we can build on that afterwards. But these are very I think effective ways to get some time taken off the process of cooking, but without hurting the recipes or the dishes themselves. We'll stay focused on these two.

Understood. Last one for me, I think it was mentioned during the prepared comments about becoming more active with promotional activity as we get into the back half of the year, and leverage the relationship with your marketing partner. I was curious if that was meant more as you will have more leverage or more ability to get the message out there, or if that was actually indicating a change in how you might look at LTOs or just more traffic-driving initiatives?

Not really a change in LTOs. I think what we're already beginning to do is, we were pretty good at utilizing social and digital in the past. We're really trying to be more active to boost some of that -- boost some of our catering, our search. We're trying -- we will be, I think, deploying a little more targeted data with the people in our e-mail database.

Our technology's going to allow us, I think, to be more segmented and reach people through technology a little bit better. The broader issue on promotion, it is a channel that Barkley is working on with us, whereas we have done that 100% internally in the past.

Understood, thank you.

Thank you. The final question comes from Nick Setyan of Wedbush Securities. Your line is open.

Thank you. Can you tell us how many stores exactly we're talking about in those there under-performing markets, or what percentage of the comp base we're talking about?

Yes, it's roughly 30%, Nick.

30%, okay. When we talked about Colorado for the first time, at least, is what I've heard. Is that like a new phenomenon in terms of divergence, or has that kind of divergence existed over the last few quarters? I mean, has cannibalization and some of the other things we've talked about, is that a new phenomenon, or has that been the case for the past few quarters?

Sure. Colorado -- again, all of our proven markets, I think the question was asked by John earlier in terms of what we're seeing with our more penetrated markets outside of Colorado, and generally we're seeing strength. Colorado was performing slightly below the Company average, but still positive. Actually in Q1 they were closer to flat.

It's really the magnitude of the number of restaurants that we have in that market that has such a significant impact. But it has been slowly a little bit lower than expectations. This quarter a little bit more impacted, partially by the weather we saw in late February. But it is somewhat a newer phenomena for us. The cannibalization that Kevin mentioned, a lot of that has to do with two or three restaurants that were introduced into the system in 2014.

Got it. Just back of the envelope, if it's 30% of the comp we're talking about, we're talking about close to a negative 5%, if the rest of the comp is running 3.2% or so. Are Austin and DC just that bad relative to Colorado?

DC is performing worse than Colorado in total.

All right, thank you.

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for participating. You may now disconnect. Good day.