Noodles & Co (NDLS) 2016 Q1 法說會逐字稿

Good afternoon, and welcome to today's Noodles & Company first-quarter 2016 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, Jamie. Good afternoon, everyone, and welcome to our first-quarter 2016 earnings call. Here with me this afternoon is Kevin Reddy, our Chairman and Chief Executive 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 our guidance about our anticipated results in 2016 and details related to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are only projections, and actual events or results could differ materially from those projections, due to a number of risks and uncertainties.

The Safe Harbor statement in this afternoon's news release and this cautionary statement in the Company's most recent Form 10-K are considered a part of this conference call. I refer you to the documents that 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 FY15. This document contains and identifies important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Now I'd like to turn it over to Kevin.

Thanks, Dave, and good afternoon. During our last earnings call, we discussed the strategies we are deploying to create momentum in our results and capitalize on the inherent strengths of the brand. Noodles & Company remains a truly unique differentiated brand with a significant strength with one of the most important and largest future demographic groups -- millennial parents and their families.

Over the last several months of 2015 and into 2016, we have been making strategic investments in marketing, off-premise, development, and operations to create long-term value and build comparative restaurant sales. We have made progress over the last few quarters and I'm pleased to see that continue into the first quarter of 2016. Executing these initiatives will position the Company to build upon this momentum through the balance of the year.

During the first quarter, the Company achieved revenue of $114 million, 8% above prior year, on flat Company-owned comparable-restaurant sales. This comparable-restaurant sales figure includes a 50-basis-point negative impact from the shift of the Easter holiday. Normalizing for the holiday shift, traffic declined 70 basis points during the first quarter, continuing the improvement in traffic trends that we began seeing late last year.

Adjusted loss per share was $0.06, compared with adjusted earnings per share of $0.03 in the first quarter of 2015. Adjusted EBITDA for the quarter was $5.4 million, compared with adjusted EBITDA of $8.8 million in the prior year. Q1 is typically the low point for earnings from a seasonality perspective, and these results were in line with our expected earnings cadence for 2016.

During the last call, we outlined our strategy in four important areas: media investment in support of our Made.Different. brand positioning; the building of off-premise sales; development of our operations teams; and a unit-growth strategy focused on the infill of existing markets. I'd like to update you on the progress of these initiatives, starting with our investment in media.

In March of this year, we continued our media campaign in select areas, targeting approximately 35% of our restaurants in certain medium and large markets. This media campaign continues our work from last fall, incorporating digital, outdoor, and radio channels, as well as our first foray into television advertising. We've been pleased with the results in several of these markets, including Washington, DC, Indianapolis, and Colorado Springs, all of which have seen improved trends versus the balance of the system and Black Box industry measures.

One area where the impact has been lagging, however, has been in our Denver market, home of about 15% of our system. Industry data suggests that restaurant sales have softened significantly in Denver, which has been exacerbated by storms in late March and throughout April. This data indicates that the fast-casual category faced negative mid-single-digit comparable sales during the first quarter.

Our performance in Denver has been similar to what the industry has seen and our media campaign has thus far not been able to break through the headwind the same way it did the back half of 2015. However, we have recently shifted our marketing message in the Denver area to be a little less brand building and more towards the introduction of our Asian Exploration menu items. We've also begun making similar shifts in our message across other markets.

We believe this shift will help drive traffic from lapsed and infrequent users. And, excluding the industry headwinds we are encountering in Denver, we are pleased with the results to date and remain optimistic about the potential of our media efforts, and we will continue to invest in this area during the course of 2016, which Dave will outline later on.

This media campaign is particularly important in building awareness for our menu items, where we have made great progress in the last few months. We've mentioned our recent research and that indicated two categories with the most opportunity on our menu were our Asian and salad lineups. Earlier this year, we introduced a Korean barbeque meatball shareable, featuring Gochujang sauce, as well as a new Pad Thai formulation, which is a popular dish where we have the opportunity to improve the flavor profile.

We will follow that introduction later this month with the launch of two new salad offerings, a Chicken Veracruz and a Napa Market salad. Our test results have been very encouraging on these salads, which will be replacing two other salads currently on the menu. Aside from improving our salad lineups, this launch will also allow us to reinforce our world kitchen positioning through the introduction of a spicier Latin American profile in the Chicken Veracruz Salad.

We will continue to educate the public on our quality ingredients and real cooking. And, as we do, we continue to receive important third-party recognition for the healthfulness of our menu, including some recent accolades from Health magazine, and Men's Health.

We've also been working diligently on enhancing our guests' ability to use Noodles for off-premise occasions, which now accounts for 43% of our overall sales. Our off-premise sales continued its upward trajectory during the first quarter, including online ordering, increasing to 6% of sales. Online ordering continues to represent a great opportunity for us, given how well our food travels for to-go occasions, as well as its ability to act as a throughput equalizer for our guests, relative to the competition.

We've been supporting our online ordering through marketing efforts, such as our Leap the Line promotion on Leap Day this February. We're also incorporating into our design of our facilities certain elements that will make it easier for our guests to order ahead, skip the line, and pick up their food quickly and easily.

Another element of building off-premise sales is our catering program. Catering accounted for 1.3% of sales in Q1, 40 basis points above prior year, in a quarter that historically is lower from a catering seasonality perspective. During the first quarter, we launched a toll-free line for our catering offering and have also been testing delivery and online programs to further support this initiative. We believe we've built a program capable of capturing additional catering business as we enter the very busy graduation season in upcoming weeks.

Additionally, we continue to roll out delivery in a disciplined manner with select partners throughout the United States. While delivery continues to be offered in just under about 10% of our restaurants, in our top locations it has accounted for up to 15% of total sales, and we are looking at expanding this program in future months and are working with our partners to be able to offer it in more locations.

Shifting gears, I'd now like to touch on our development strategy, which Dave will discuss in more detail. There remains significant long-term potential unit expansion for the brand, given our national infrastructure, differentiated concept, and connection with one of the largest, fastest-growing demographics in the nation. That said, our focus on infill of our existing markets and being disciplined in our unit growth is the right strategy to allow our initiatives to gain traction and build the foundation for the next stage of growth.

The last area that I'd like to discuss is our operational initiatives. The progress we have made in operations over the past several months has been tangible, including the launch of our development program, called My Road Trip, which we discussed on the most recent call. This program incorporates a thorough and consistent pathway for our future leaders to develop important skills as they progress in their careers with Noodles & Company.

We've also begun testing a greater use of technology to educate and develop our team members and meet the needs of today's millennial employee, recognizing and capitalizing on the way that learning styles of our employees have evolved over the years. These efforts are critical as we develop our teams internally in an increasingly challenging labor market.

Finally on operations, as we roll out our salads later this month, we are also finalizing the standardization of our recipes throughout the system, which has proven to improve consistency and throughput in our test locations. I firmly believe that our operations teams are better focused and executing at a consistently higher level than in the recent past.

I also believe that our in-fill unit development strategy will allow us to continue to build a solid bench and better support efficient brand-building locations in our maturing markets. Dave will be discussing our real estate pipeline in more depth shortly, as well as the initial results we are seeing from our remodel program.

As we discussed at our last earnings call, we have known that the first half of this year would have more year-over-year earnings pressure, as we have not yet lapped our investments in media and the Affordable Care Act, and have had limited pricing in place, and have been executing on a front-loaded development pipeline. All those have been factors that we expected and were known.

I'm pleased that we've begun narrowing that year-over-year gap in earnings and margins, with our first quarter in line with our internal expectations and another clear sign of stabilization in the business. We continue to believe that we are well positioned to resume earning expansion later this year.

And to give more detail on these items, I'd now like to turn it back to Dave.

Thank you, Kevin. As Kevin mentioned, revenue in the first quarter of 2016 increased 8%, to $114 million, driven by new restaurant development, offset by the closing of 16 Company restaurants during the fourth quarter of 2015. For the quarter, we reported adjusted net loss of $1.7 million, or $0.06 per diluted share, and adjusted EBITDA of $5.4 million.

In the first quarter, comparable-restaurant sales were flat at Company restaurants, declined 50 basis points at franchise restaurants, and declined 10 basis points system-wide. Company results included pricing of approximately 1%, and system-wide results were negatively impacted approximately 50 basis points by the shift in the Easter holiday. From a cadence perspective, excluding the Easter holiday and short-term weather events, comparable-sales results were similar throughout the quarter.

During the first quarter, we opened 15 new restaurants system-wide, including 14 Company-owned and 1 franchise location. We completed the quarter with 507 restaurants system-wide, comprised of 436 Company and 71 franchise restaurants. We still anticipate approximately 50 openings system-wide in 2016, including 40 to 45 Company openings and 5 to 10 franchise locations. Of the 40 to 45 Company restaurants, we expect all but a handful of locations to open before the fourth quarter of this year.

As Kevin mentioned, our real estate strategy calls for the infill of existing markets, as we look to optimize the profitability and the efficiencies in our current footprint. Along with new sites in maturing markets, we have also begun our remodel program. As of today, we have remodeled seven restaurants, as well as replaced exterior signage at several others.

Our initial results are encouraging, but it remains a little too early to understand the sustained benefit from the remodel program. But we are pleased with the initial response from our teams and our guests, and we're taking the opportunity to more fully develop impactful refreshes of to-go and merchandising design elements into future remodels. As we go forward, we still anticipate approximately 75 restaurants to be remodeled nationwide, in total, through 2017, with an average cost of approximately $100,000.

Restaurant-level margin in the first quarter declined 290 basis points, to 13.3%, due to a combination of increased marketing expense, new market inefficiencies, minimal price benefit, and wage inflation. Although we have continued work to do, our 290-basis-point decline in restaurant margin does compare favorably to the 510-basis-point decline that we reported during the fourth quarter of 2015. We continue to expect a decline in restaurant margins during the second quarter of 2016 before stabilizing relative to prior year, as we begin to lap our initial investments in marketing, as well as the Affordable Care Act.

Pricing during the first quarter, as mentioned earlier, was approximately 1%. We anticipate pricing benefit of approximately 2.5% during the second quarter and just shy of 3% during the second half of 2016.

Quarter to date, comparable sales for the second quarter through May 2 stand at negative 0.2% for Company-owned restaurants. The benefit that we have received from the Easter shift and approximately 1% of additional pricing has been muted by three events: late-season snowstorms in our Colorado market; a more volatile industry environment; and our most challenging comparisons of the year, due to the timing of our LTO this year relative to last.

Importantly, thus far in Q2, our comparable sales and traffic trends continue to improve relative to the Black Box Fast-Casual Index. As we move further into 2016, we continue to anticipate full-year low-single-digit 2016 comparable-sales growth, as we are beyond our most challenging comparisons, continue to see momentum in our initiatives, and execute on our upcoming menu news.

Our cost of goods sold of 26.7% in the first quarter was 20 basis points above prior year, the result of modest cost inflation offset by minimal price. We expect cost of goods sold of approximately 26.5% during the balance of 2016.

Labor increased 170 basis points from prior year, to 33.2%. While this marks improvement from the increases we had seen during the fourth quarter, wage inflation continues to hover around 5%, causing approximately two-thirds of the increase that we are seeing year over year.

As we discussed at the last call, inflation of this magnitude has been factored into our annual guidance and puts an incremental $2.5 million of labor pressure on the P&L, or approximately $0.05 of EPS. We expect labor to become more in line with prior year during the back half of 2016 as we lap some of the significant structural increases, such as the implementation of the Affordable Care Act, as well as due to increased pricing activity relative to the first quarter of this year.

During the first quarter, occupancy costs increased as a percentage of sales by 10 basis points, to 11.8%, and operating costs increased 100 basis points as a percentage of sales, to 15%. The increase in operating costs was directly related to an increased level of marketing spend.

Marketing spend in the first quarter was 1.5% of sales, an 80-basis-point increase from prior year. As Kevin mentioned, excluding macro headwinds in Denver, we continue to be encouraged by the initial benefit we are seeing from increased marketing spend and expect an increase in 2016 to approximately 1.7% to 2% of sales. Again, much of the P&L pressure year over year will occur during the first half of 2016, as media began in earnest during the second half of 2015.

Our general and administrative expense of 8.8% of sales in the first quarter was an 80-basis-point increase over the prior year, due primarily to the support of marketing initiatives, increased labor expense, and the filling of vacant positions in the field. For the next two quarters, we anticipate G&A expense to be similar to last year on a percentage-of-sales basis before we gain leverage during the fourth quarter of 2016.

Our tax rate in 2016 will be influenced by the accounting treatment of our deferred tax assets on Canada. While we are very pleased with the performance of our initial two locations in Toronto, particularly with guest acceptance, satisfaction scores, and team engagement, which are some of the highest in the system, we have chosen to take a valuation allowance in Q1 on these deferred tax assets which, given a relatively low overall provision, causes an outsized impact to our tax rate. As a result of this allowance, we estimate our effective tax rate for 2016 to be approximately 50% on a GAAP basis. Excluding this allowance, we continue to estimate a rate between 38% and 40%. Importantly, while this accounting treatment will impact our overall tax rate, we do not anticipate there being any cash outlay of federal tax for full-year 2016.

As of the end of the quarter, there was $74.1 million in debt outstanding on our revolving credit facility, and cash on hand was just over $1.9 million. We recorded $1 million in restaurant impairment, closure cost, and asset disposals in Q1 of 2016, primarily the result of the lease extinguishment expenses related to the closure of 16 restaurants during Q4 of 2015.

Our results in the first quarter, which typically have the most earnings pressure due to low seasonality, were on target with expectations for our previously announced guidance for full-year 2016, which includes: revenue of between $505 million and $515 million; low-single-digit comparable-restaurant sales; restaurant-level margin of between 14% and 16%; adjusted EBITDA of between $38 million and $40 million, or flat to 5% growth; and adjusted diluted EPS of between $0.04 and $0.08.

We are pleased with the progress that we made during the first quarter and continue to have confidence we are positioned well, as the margin profile becomes more favorable during the second half of 2016.

I would now like to turn it over to Kevin for final remarks.

Thanks, Dave. I'd like to start my closing remarks by first thanking Phil Petrilli, our EVP of Operations, who will be retiring from Noodles & Company. Our search is underway for his replacement. Phil leaves a strong legacy and a very solid bench in our Operations teams. And Phil will be working closely with the team as we execute a strong transition plan. And we wish him and his family well.

In closing, I'd like to reinforce the following comments. The Noodles & Company brand remains one of the truly unique differentiated concepts, with an industry-leading connection to the most important and largest future demographic groups -- millennial parents and their families -- a very real, compelling position for the long term.

We are making the right investments to create long-term value and build same-store sales, particularly in the areas of media, promotion, off-premise, people development, remodeling our older restaurants, as well as smart, targeted in-fill growth in the right markets. We have created the right plan, focused on the most important objectives to build real enduring growth, which is generating the positive momentum and green shoots already evident in this extremely competitive environment.

And, lastly, I am pleased and confident with the team's continued focus, objectivity, intensity, and ability to remain persistent towards executing our shared expectations in making improvements.

As always, everyone, thank you for your time. We appreciate it and respect it very much. And, operator, will you please open the lines for Q&A?

(Operator Instructions)

David Palmer, RBC Capital Markets.

I was wondering if you could touch on how you're trending with regard to take out versus dine in and dinner versus lunch?

Sure, David. From a take out perspective, we continue to see increases primarily in the online ordering platform. That's been a little bit more driven on the lunch occasion, as we've been trying to really target those folks that speed of service is so critical. And really, as we said, online ordering is the throughput equalizer for us. So we've had a little bit more traction on that front.

That said, we continue to believe there's a lot of opportunity in both dayparts. Actually, to go is a little bit higher for us at dinner than it is for lunch, because of families coming home and getting it on the go. So we think there's opportunity across all dayparts.

And just building on that, right now I think most of that is being driven by online and the app, with some organic growth in that. I think as we make some of the physical plan changes in that area of to-go and pick up, that will help accelerate it, as well.

And just building on that, I know you will try to improve the prospects of getting delivery going. Could you talk about the future of delivery for Noodles? Obviously, your food travels well. What are the challenges and opportunities you see with delivery? Thanks.

Sure. It's a somewhat fragmented marketplace, when you think of all the different partners that are out there doing delivery. We do have a very strong partner in OIo, which is our online ordering platform. We're working very closely with them to be one of their initial, if not their absolute, initial first client, to be able to utilize their platform from a delivery perspective.

From the challenge perspective, I would love Kevin to weigh in, as well, the most important thing is absolutely making sure that the guest experience is right and that the food gets delivered correctly on time and hot. So that's something that we certainly are vetting very closely with all of our prospective partners.

Yes. I think there's two realities. One, as Dave mentioned, the third parties are a bit fragmented. It's a small percentage of the system. But where it can, it works well.

The other area of opportunity is when does it make sense for us to deliver internally? And we've made adjustments to our policies, to our insurance coverages, we're putting some catering leads in restaurants, some local field community sales specialists to help us take advantage to mine those opportunities. And we now have the ability for some key team members to be able to participate in the delivery of some of those catering orders and to be compensated a little differently for that. I believe that's going to see us remove some of the current barriers that existed to that and will give us a little more incremental lift and accelerate it at a slightly faster pace.

Thank you.

David Tarantino, Robert W Baird.

Dave, could you clarify some of the components of what you're seeing so far in Q2? I think you mentioned the Easter benefit, and then also extra pricing that you're expecting in Q2. So could you talk about what's in the numbers so far? And then if you have an impact for the estimated weather impact, perhaps you could talk about that, as well?

Sure, David. So as a reminder, where we're set quarter to date, from a company-owned perspective, we are at negative 0.2% from same-store sales. The Easter shift has been a benefit of a little bit over 100 basis points thus far in the quarter. And from a pricing perspective, somewhat similar in terms of the benefits.

Where we are seeing some drop has been a little bit in the industry environment, which as we look at our channel checks, as we look at Black Box, has been showing some softening. We have seen our trends relative to Black Box actually improve from both a traffic and a comparable sales perspective.

The actual quantification of weather, haven't done a lot with that yet. I can tell you that Colorado, in particular, had snow about twice what the average is, and it's unfortunately been coming on Fridays and Saturdays, which are our two busiest days. But we've not fully quantify that yet.

Got it. That's helpful.

David, this is Kevin. I think too, when you think over the last four or four and half weeks, with the Easter shift and a couple of those storms in there, there's been a fair amount of volatility on a day-to-day basis. What we do feel comfortable with is that the guidance that we had previously put out there is the right guidance and we should hold that guidance for the year.

Yes. The one final thing I'd mentioned when you think of the components of the quarter to date same-store sales is that our comparison was the most challenging that we have, actually for the full year of 2015, if you look at the comparison. So our comparison was a positive 1.5% quarter to date, up till yesterday. And that gets softer as we go through the balance of Q2.

Great. That's helpful. The comments imply that you haven't yet taken the price increase in Q2 or if you did, you took it very recently. So I guess --

We took it recently, that's correct.

Okay. Thank you for clarifying that. Given the desire to get back to positive traffic and how choppy the industry's been, perhaps could you talk about what's giving you the confidence to take such a level of price increase, move it up towards 2.5%, at this stage of the game, and why not be more patient on that front until you see signs that traffic is starting to come back in a positive way?

David, this is Kevin. I think we have been historically, I think you're aware we've been very patient. We probably ran six years just slightly above 1% a year. What allows us to feel somewhat comfortable is we've got a lot of detail on our customer, OSAT scores, we read a lot of the comments, we stay close to the guests. So we see those improving.

We also have been announcing some new menu news and new ingredients, improved ingredients, some more premium products in our newer recipes. So we feel there's value there. We have some room, based on both research and reaction within our test markets.

So it's a very good question. We're cautious about it, we don't think we've been piggish about it. We think it's also necessary in some of these markets with greater labor pressure.

Yes. And to add to that, as a reminder, we actually went about 15 months without increasing price at all, until the very, very tail end of Q4, we did a modest increase. We introduced the kids meal. That was a very important part, as Kevin mentioned, with the menu. And that really has had a very strong impact on our value proposition.

We did do a modest price increase, as we've shifted our strategy to have three smaller chunks during the course of the year, instead of one larger one, we did shift that strategy and have our first one really at the beginning of Q1. We monitored very closely to see how did that impact traffic, how did that impact mix?

Did not see a negative response to that. And that's continuing in the few weeks that we've had this most recent price increase. Even as we've had that increase, our gap relative to Black Box from a traffic perspective has improved.

Great. Thank you very much.

Andy Barish, Jefferies.

Can you give us where you stand on the investment back into some food items and how that will shake out, what the overall commodity basket for the full year?

So from a food items perspective, we're about 80% on contracted right now, Andy. There's some produce items that we're not able to do so. The commodity environment, in general, is relatively favorable. Where you'll see us mostly do investment is going to be in the steak product, actually. And I think you'll see in the summer actually us launch an antibiotic-free, naturally raised, actually a different cut that we feel really good. It's been testing incredibly well.

So that's going to be our next step from an investment in our food quality. As we said on the call, we still expect that we'll be able to actually get some leverage on the COGS line and get down to about 26.5% for the balance of the year, and that includes even the investment in stake.

And we factor that in, into the guidance and what we're forecasting. And it's actually, I think in the environment that we're in and the outstanding work the supply chain team is doing, we're getting a good outcome to accelerate some of our objectives there.

And can you give a quick update on kids meals and what impact that's had on the business, if you care to quantify? And then does marketing coverage move up as you move through the year, from that 35% to a somewhat higher level down the road?

I'll address the kids meal, and then if Kevin can talk on media and if we're going to expand beyond the 35%. From the kids meal, we have been very pleased with some of the results we're seeing in terms of increasing frequency, because we have seen that value proposition and the value scores from our family guest increase. Difficult to quantify the absolute overall impact on same-store sales, but we have seen of those guests that are ordering kids meals, that are they are coming a little bit more frequently.

Yes. On the 35% of the market restaurants that are really receiving some of the more traditional broader media, that number's probably going to stay close to the same, maybe a tad of increase. We are touching a greater part of the system, because we are clearly doing social, digital and other channels, our e-club, and that's being activated across the entire system. So we're reaching probably closer to 45%, 50%, easily, of all of our restaurants. And it's only our smallest ones where we're really driving through local relationship marketing.

And I think it's an important part of our infill strategy. Because what we're going to see as we develop and execute on that strategy is you'll have a lot more markets that will start getting into the economies of scale necessary to do more media. So I'd expect over time, that will continue to go up.

Thanks, guys.

Andrew Strelzik, BMO Capital Markets.

Wanted to first ask, are there any metrics that you can provide about the Asian Exploration and also the renovated Pad Thai? It seems like, particularly on the Asian Exploration, it's more aggressive from a taste profile perspective than maybe some of the recent LTOs prior to that. And I'm wondering, is that a bigger differentiator such that you're getting better performance and now you're talking about, with the Veracruz, another more aggressive taste profile. Is that where the innovation is going because you're seeing better performance there?

Yes. It's a bit early to release product mix numbers and everything else. But what we are seeing, clearly I think stronger profile, we're reaching a little bit further in terms of the taste profile, spice levels, excitement around that. That is what we're hearing back from our guests, is that they appreciate that, they like it, it's making the dishes a little more unique and a lot more credible.

So I think you'll see the culinary team continue to push the envelope a little bit, still serve the mainstream with a twist. And you'll see that definitely in the Veracruz salad and the Napa salad.

And then you mentioned the pricing coming with menu news and now that's going to be accelerating. Should we read that as the pipeline of innovation is more robust or there's pretty significant news on the horizon, or is there really no correlation there?

There is going to be absolutely more innovation. I think the Gochujang sauce that we incorporated into the Korean meatball absolutely has other applicability through our menu. So we are currently looking at an item that we could be launching in later this summer.

But we will be going into more of a consistent, maybe a trimester approach to our LTOs, focusing on the salads next, and then introducing potentially a Gochujang sauce-based item later on in the year, as well. As Kevin mentioned, we're not going to sacrifice, though, some of the inherent strengths of the brand. You know we have that with the mac and cheese, with the pesto cavatappi and some other dishes.

So we felt that it was most critical to fix the Asian and salad lineups, which we feel we've actively done. And then you might see us move more towards really reinforcing some of the inherent strengths in some of those comfort items.

And then my last question, you mentioned the first foray into TV, and I'm wondering, your perception of how that was received and if maybe that might open up new, maybe more select, but still new marketing opportunities going forward? Thank you.

Yes, I think it does. We're running in a mid size market. Certainly I think when you can impact all the senses of sight and sound and everything else through TV, I think our food and experience communicate in a much more impactful way. And we're looking for ways, in some of those medium to small markets, where we can buy that channel more efficiently to maybe put some more muscle behind it, because we definitely are seeing awareness go up and traffic go up in a measurable way.

Yes. And I think that the brand positioning that we launched last fall was Made Different. And that's what we think makes us so special, and TV is a great avenue for us to really get across those aspects, as Kevin mentioned.

Great. Very helpful. Thank you very much.

Jason West, Credit Suisse.

Dave, I want to clarify on the pricing comments, I thought you said you're running 1% quarter to date, but you took the price increase a few weeks ago. Just trying to understand if I heard that right.

Yes, we ran 1% during Q1. And then when you compare Q1 to Q2, we layered on an additional about 1.5%. So the full quarter for Q2 is going to be in the neighborhood of 2.5% year-over-year, and then we might have a very modest price increase one more time later on this year. Does that help?

But the other 1.5%, the new 1.5% was taken earlier in April, it sounds like?

That's exactly right. It happened a couple weeks ago.

Okay. Got it. And then bigger picture, it would be helpful to get your guys' perspective on what you think is happening with the industry. Is the weakness you've seen in April, was that similar to what you saw in March, you were already seeing that, or is this a new phenomenon?

Do you think it's really concentrated in the weather markets, like Denver? Are you seeing a more broad-based industry trend in this direction and in some of the other markets where you guys operate? I think you guys have better visibility on the segment Black Box and things like that than we do.

Yes, there is so much noise when you look at just a four- or five-week timeframe. You had the Easter shift, which has its own impact that it has just on that particular day, but that can often linger in for a little while after that. Weather certainly has hit in some of our markets.

March was relatively strong, so we didn't see any softening necessarily there. I can say, as we've talked about, the Black Box index seemed to indicate some softness during Q2. I think some of our other folks in the industry have also been pointing to a little bit of softness, as well. But again it's only four to five weeks, Jason, so we don't -- we've seen a little bit of momentum in the right direction in the last several days, but it's a pretty small sample size.

Yes. I think the assumptions within your question are more right than wrong. Clearly, it's the deceleration happened a little more in April, not so much March, a little more skewed towards markets that had some severe weather and some storms. And I think the other industry factor is that the promotional activity and levels tended to pick up much more aggressively in April across the sector, instead of the first quarter, with maybe the notable exception of one brand that's been heavily discounted.

Yes. The only other thing I would add to that was when you look at the comparisons in two-year growth, this was our most difficult comparison was in April. And I think the industry also probably had some more challenging comparisons. So I think from a two-year prospective, it might not be as off as it may first appear.

Okay. That's helpful. And then you mentioned there another large brand that's had some issues. On the last quarter you said if you look, you're not seeing any real statistical difference when you're near that brand or not. Just if you can give an update on if you're seeing any benefit or detriment as Chipotle is trying to fix their issues? Thanks.

Again, we have a large amount of our restaurants that are within a quarter mile of a Chipotle. And as we've sliced and diced and analyzed our restaurants that are in their trade areas, we have not seen any difference in their performance relative to others. So we don't currently see anything.

Denver is an interesting case study, I think, for the entire fast casual space. At the same time, when you look at Black Box, it had been slowly declining before any news broke out last fall. So it's hard for me to really gauge if there has been an impact.

I don't think we have any more specific data to come to a different conclusion than that.

That's helpful. Thanks.

Jake Bartlett, SunTrust.

Dave, just to start, and I hate to go back to the pricing, but I'm still a little bit confused about the cadence of when you took the pricing, because feels like second quarter, if you just took 1.5 point and you started with 1 point, then you're not going to have 2.5% as an average throughout the quarter. But the real reason for the question is because it seems like you're taking less pricing than you intended to as of the last call.

So is that right, that before I had it that you were going to take 2% to 3% in the second quarter, had taken some additionally in the first quarter. Maybe just clarify those two things, whether you've dialed back your pricing strategy a little bit and maybe just clarify exactly when you're taking this pricing?

Sure. So the 2.5%, we're running really just barely north of that, as we said sit today, 2.6%, 2.7%, in that range. So the 2.5% that you see is a weighted average for the second quarter.

From dialing back, yes, there was a little bit. We expressed the range of where we expected we could land. We did ultimately decide to go on the low end of that range. Looking at some of our traffic trends that were going in the right direction, we wanted to continue that momentum.

The commodity environment was becoming more favorable. So we did end up on the lower end of the range that we discussed at the last call.

Okay. And then to clarify the Black Box data out of Colorado and Denver, is that indicating that fast casual is losing share from the overall pie and others, like QSR, are gaining share?

It's so hard to tell, because Fast Casual Black Box has a very large presence there. But at the same time, they don't have one or two of the largest names. So I think I'd be it would be inappropriate for me to say what's going on from the overall category perspective.

Okay. And then maybe if you could talk about some of the changes you're making on the marketing front and the messaging. It sounds like you're going more towards product-specific traffic driving message. But you also made the comment that you're thinking of doing that in some of the other markets.

Maybe just discuss the reasoning for that. Are you moving away from the Made Differently message or the more wholesome food message or anything like that, or anything we should read to your marketing strategy?

It's a good question for clarification. We deeply believe in how we launched our Made Different brand positioning. That is going to live through everything that we do. We clearly have it online and in video and social and digital.

What we believe is more appropriate is to tell that story in conjunction with new menu news. So what we're doing is making it, we're building on that same foundation with specific new menu news, new product launches, new and improved ingredients, where it makes sense. We believe those more specific messages tend to fall more into traffic driving and promotional activity than more simply brand building.

So that's how we're doing it. We're not leaving it, but we're making it more specific and elevating it to a more actionable place. So we see it as the natural continuation of the brand positioning.

Great. And then last question, I might have just missed it, but did you mention what you expect or what you've seen from the remodels and what impact you've had on sales, the sales lift, and also whether these 75 units are going to be all company-owned over the next two years?

So the 75 restaurants that we're referencing are on the company side. We're working with our franchise community, sharing our best practices and what we've learned, so that they'll be able to follow suit. We haven't disclosed what the actual overall impact is.

I think generally the research that we've done, and when we've done remodels in the past, is you'd be looking for about a 5% lift on $100,000 type investment. And we're right in the ballpark there of where we'd expect to be. And we think we can actually increase that as we start incorporating more merchandising and to-go elements. But unfortunately, Jake, it is a little bit too early to really understand what the overall impact is going to be on the system from a sustained perspective.

Got it. Thank you very much.

John Glass, Morgan Stanley.

Just first back to the second quarter, based on your comments where pricing is now and quarter-to-date comps, is it your expectation that traffic will be declining at a higher rate than in the first quarter and the second quarter?

I think ultimately, John, it's early to tell. There's been so much movement from an Easter perspective and some of the holiday shifts. And again, the comparison gets significantly easier as you go through the balance of the quarter. So I would not necessarily say that we expect to have a traffic decline.

Quarter-to-date through Q2, relative to Q1, yes, the math absolutely shows that there's been a decline. But I think from a two-year perspective, we've been pretty consistent. So we think the full quarter absolutely could still be showing the upward momentum.

Okay. And if Denver is a little off from a market perspective, were the other markets, or what other markets were offsetting it from an improvement standpoint this quarter, last quarter?

Where we're seeing the most positive momentum has been in the markets where we're either doing the infill strategy and building brand awareness and these efficiencies, or they've been in the markets where we've been doing media. Those have been the two areas, and one reason why we're continuing to execute that strategy that we've described earlier.

And I just want to make a quick comment about Colorado, because it's clearly a market that's under a little more pressure nationally and within the sector. But a couple reasons why I'm confident we're going to show improvement in Colorado and consistently throughout the rest of the year.

First and foremost, it's a market where we have excellent top of mind awareness. We really have outstanding real estate here and a great footprint. I think we're entering the summer with one of the strongest operating teams we've had in the last few years.

We're clearly supporting a competitive environment with media and promotion. And the remodels that we're doing, I think are smart and targeted.

So all of those things on top of a market that may be under pressure, but at its core and foundation is an excellent market, with good brand awareness and excellent economies of scale. It gives me confidence that we've got the right things, within a very difficult environment, to improve over our peer group.

Lastly, 2017 development, I know you talked about early this year, front loading it, and you said it's going to be lower next year. Where are you in the thought process about 2017 now? Has there been changes in how you think about what you want to spend on restaurants on a per restaurant basis or finding prototypes, just given a newer reality of lower EVs, any thoughts on either of those, please?

Sure. We'll start with the 2017 pipeline in general. So we absolutely are shifting similar capital allocation from new restaurants into more remodels. You can expect a slower growth rate in 2017, John, than what we expect to see in 2016. It will still be meaningful, it will still be in that mid- to high single-digit range. That said, we're focusing on the infill of existing markets. And when you have an infrastructure that already has 35 states, as well as Toronto, really talk about one restaurant per market on average, and in most of the markets not having any more than maybe two, so feel very comfortable with where that pipeline is.

From a prototype perspective, of course we constantly evaluate where we have opportunity to improve the economics and the efficiencies of our buildout. We have been doing more food courts, and we've been very pleased with some of the results that we've been seeing there. So that's something that we are pursuing a little bit more aggressively. But overall, we feel like the box of economics are in a reasonably good spot, as we look at the infill of existing markets.

And just lastly -- go ahead.

I was going to say, the development team has done a very, very good job at being predictable and hitting the numbers that are in the [resac] package, and they're continuing to look for efficiencies, not just to lower the cost of the investment, but as we look longer term with the labor pressures, it's an area for us to make sure that the back of the houses are as small, as efficient as possible, that we have equipment that allows us the highest productivity in the amount of steps between each station of what you need is as tight as possible.

So there's clearly a lot of critical thinking going on there, but not a conscious effort to say we need a smaller box because AUVs are stabilizing. We still expect to build AUVs, and we want to build the appropriate size box for that opportunity.

And I'm sorry, I promise my last one, would any opportunity to refranchise those sub scale markets, is there a market to refranchise those markets so that you don't bear that cost of building it out?

We've looked at and continue to look at the markets to make sure that is it worth the investment to get economies of scale, can we get there in a reasonable timeframe? We're talking to both new franchisees and existing franchisees, where we think we may grow slower and it might make more sense for somebody else to have a more efficient G&A.

But nothing specific on the horizon going forward. We still believe that we'll be predominantly company-owned. But we are fortunate to have a small, but exceptionally impressive group of entrepreneurs and we think we'll just keep looking for those great entrepreneurs and find the right fit when we come across them.

Thank you.

(Operator Instructions)

Joe Buckley, Bank of America Merrill Lynch.

Just a couple of follow-ups. I think you mentioned it was an LTO mismatch in the second quarter, somewhat behind the relatively slow sales in April. Is that correct? And if so, could you elaborate on that a little?

Sure. So last year at this time Joe, we did launch the Buff Bowls. And our Buff Bowls have had a nice, steady niche audience. We did a good amount of promotion when we originally launched those at the very beginning of Q2 of last year.

This year, the salad launch that Kevin discussed, that is going to be later on in May. So from a timing perspective, they didn't quite overlap, and one reason why we had the tougher comparison during April.

Okay. And then would you have handy what, I think you mentioned off-premise sales were up to 43% and online sales 6% in the first quarter. Do you know offhand what those percentages were in the first quarter a year ago?

Sure. So from an online perspective, it was about 3.5%. And overall, to go is in the 41%-ish range. So it's been up a couple hundred basis points.

Okay. And it seems like you are promoting the online pretty aggressively. Could you talk a little bit more about that and how you're trying to convert more of those off-premise customers to doing it online? And maybe connected to that, is the catering, can you do the catering online yet or is that still the toll-free number?

We do have catering online. And we are definitely promoting it through the website and everything else. The targets to build it, we mentioned the Leap the Line and the Tax Day promotions. Those have been very strong.

So we're going to continue doing that. We're clearly targeting the high-volume lunch businesses. We've got our teams talking to those guests. We're pinging them, where we can, through social digital media. So it's really a much more aggressive outreach targeted to that super heavy user of that space, and I think we'll just continue to see it grow organically.

Yes. The only thing I would add to that on the catering side, there are platforms that do delivery on catering. Our food does do well when it's a small, we call it a la carte catering.

When you have a full buffet, though, like when we're doing a very large group, when you're doing a graduation party, something along those lines, we do think the human touch of being able to be there, set it up, talk to the guests, make sure that everything is going well, that's something that you don't necessarily want to outsource. So from that perspective, we're still developing, more so in the internal mechanisms, internal processes that allow us to execute the catering offering.

Okay. Last one, you mentioned delivery at some of your best stores, it's a 15% mix. What kind of stores are those? Are those urban stores or any particular characteristics stand out?

Generally, they're central business district locations. And college locations, also, we see some nice success, from a delivery perspective.

Okay. That's helpful. Thank you.

Keith Siegner, UBS.

Just a quick one on value. With the fourth quarter numbers, you talked about how the value scores had gotten better, after lagging, the kids meals had helped to kind of cement in that value proposition. First quarter, we saw a huge change in the industry's approach to value, significantly more competitive behavior. You talked about you're taking less pricing than you originally discussed, but it's still a good amount of pricing.

How do you think you stand in terms of relative value position now? Do you have any contingency plans in case this tough value focus continues a little longer against weakening industry conditions? Where do you stand on value and what's the plan? Thanks.

I would start off, I think certainly we do have a pretty smart and really nice plan when it comes to promotion. So you saw some that Joe alluded to in terms of our online promotions we've been using with our email database. We have been utilizing a little bit more direct mail.

So from a promotional perspective, without discounting the brand to the extent that it would impact the value proposition, we've certainly been very targeted from that perspective. Also, we're in the nascent phases of a loyalty program, which we've looked to actually be potentially testing in the next couple of months. That's something we think would be absolutely a very important vehicle in really driving home the value proposition and building guest engagement with our customers.

Yes. And we believe from the research and data that we're collecting is that our kids meal has really strengthened the value with probably one of the most price-sensitive groups out there, which is the family. So we feel good about what we've seen there.

And the reality is, and I know there's always a lot of talk between how related is price to value, they're certainly correlated, but we also see that strong operations, exhibiting the behaviors that create great hospitality and becoming someone's favorite restaurant, the better your core operations are, the better you are at those areas, they positively impact value ratings. So it's not just price. We're keenly watching that indicator. But as our other measures around customer satisfaction and OSAT scores improve, we feel confident the right metrics are headed in the right direction.

Thank you.

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