Noodles & Co (NDLS) 2016 Q4 法說會逐字稿

Good morning welcome to today's Noodle's & Company fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder this call is being recorded.

I would now introduce Noodles & Company's Vice President of Finance, Sue [Daggett]. Please go ahead.

Thank you. Good morning, everyone. Welcome to our fourth-quarter 2016 earnings call. Here with me this morning is a Dave Boennighausen, our CFO and Interim Chief Executive Officer.

Let me start by going over a few regulatory matters. I would 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 2017 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. The Safe Harbor Statement in yesterday afternoon to news release and the cautionary statement in the company's most recent Form 10-K and subsequent filings with the SEC are considered a part of this conference call. Including the portions of each that set forth the risks and uncertainties related to the Company's forward-looking statements.

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 FY15 and subsequent filings we have made. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

We anticipate the annual report on Form 10-K for FY16 will be filed later this week. Now I would like to turn it over to Dave.

Thank you, Sue. Good morning everyone. Yesterday afternoon we reported Q4 2016 financial results. Including an adjusted net loss of $1.1 million and adjusted EBITDA of $6.8 million. As pre-released in early February we also reported total revenue of $129.4 million, a 10.5% increase over the prior year.

Comparable sales for the quarter decreased 1.3% system-wide which included a 1.8% decrease in Company owned restaurants, partially offset by a 2% increase in franchise locations. In conjunction with our pre-release, we also held a call discussing our strategic initiatives and financing activities. This morning, I would like to give you an update on those activities, as well as provide more texture on how we see the business progressing.

Noodles remains a differentiate concept in an increasingly crowded marketplace. With our world kitchen positioning we offer globally inspired flavors from near to far. Cooked to order using high-quality fresh ingredients prepped throughout the day. We also have a strong core of incredible team members and hundreds of profitable locations. That said, as we have discussed, there have been three strategic areas that we've been focusing on to improve our performance and to increase shareholder value.

First, simplifying our operations to improve execution and to increase labor productivity. Second, regaining our culinary prowess through investment in our core menu. And third, addressing underperforming restaurants from recent classes that have negatively impacted the Company's performance, particularly those opened in the last three years in new markets.

We have made significant progress in all these areas which I will update you on today's call. I would like to start with the improvements that we're seeing in our operational execution. During the past several months, we have taken several actions from streamlining our menu to introducing new cooking procedures that help our team members better execute the concepts.

The improvement that we have seen has been meaningful. In August of 2016, our SMG guest satisfaction top box scores stood at 66%. Well below the industry average. Since that date, we have me consistent and steady progress. And in January, we scored 71% overall top box satisfaction, on par with the industry average.

We've seen improvements in all major categories. Including overall satisfaction, taste of food, and cleanliness. Speed of service, which benefited directly from the streamlining of the menu has improved 600 basis points during this timeframe.

At the same time, we've been making it easier for our team members to execute the concept. We been placing tremendous importance of bringing our values to life inside our restaurants and improving our development program for team members. As a result of these actions, we have also seen significant improvement in our turnover figures.

Last summer, turnover was the highest levels we have seen in recent years. Monthly turnover annualized stood at nearly 200% for hourly team members and was greater than 50% at the manager level. These figures have improved dramatically. With the last two months of 2016 showing an 80 basis point decline at the hourly level, and 20 basis point improvement from managers from the summer levels. Resulting in turnover dropping to 120% and 30% respectively.

I'm incredibly proud of the success that we're seeing in this area. And I'm pleased with strength of our team at all levels. As operational metrics have improved, we've also made great strides in regaining culinary prowess within our menu, which has been our second area of focus.

In mid-February is launched two new dishes. An Adobo with pork or chicken, as well as Thai Green Curry, that replaced underperforming items. These dishes help reinforce our world kitchen positioning and have been well received by guest and team members alike.

Meanwhile, we've been testing further improvements to our menu in select markets. Which include enhancements to most of our core dishes through the introduction of larger sauce portions and more flavorful ingredients, such as oven roasted tomatoes. These tests have been complemented with other concept tests.

Such as a more seamless design for to go guests, as well as guest bussing stations. We've been pleased with the results we're seeing from this tests. And anticipate for the rollout to much of the system through the balance of 2017.

The third area of focus has been addressing the underperforming units, which I would like to update you on our progress. During our February presentation will discuss the targeted closure of approximately 55 Company-owned restaurants. As noted in our earnings release, as of yesterday March 1, we have closed 39 of these units.

These 39 restaurants have been a significant burden to our financial and our human capital resources. During the FY16, the 39 restaurants that were closed collectively had negative restaurant level contributions of $6.3 million and they negatively impacted contribution for the Company by 210 basis points. The impact of these 39 restaurants on Q4 was even more pronounced with negative contribution of $1.8 million and a 220 basis point impact on the Company's contribution margins.

Looking at the larger group of the full 55 restaurants targeted for closure, they negatively impacted the full-year contribution by $8.2 million. And contribution margin by 290 basis points during 2016. During the fourth quarter, their negative impact was $2.4 million and 300 basis points respectively.

To help us complete the balance of the restaurant closures, we are taking further measures to address our capital needs. Including our filing of February 9, 2017 of a registration statement on form S-1 with respect to shares of our class A common stock.

Finally, we've begun the process of refranchising certain Company-owned markets. Specifically these are markets in which we have begun building infrastructure and obtained modest success in building brand awareness but we feel they would be able to flourish and grow under franchise ownership that is able to provide greater focus on their success. We have engaged The Cypress Group to assist us in these franchising efforts.

Overall, I'm confident that we've made significant progress on our three main areas of focus and believe strongly that we are successfully positioning the Company for much stronger financial performance in the future. I would now like to walk you through our guidance for 2017 which we introduced in our earnings release yesterday afternoon.

As we disclosed yesterday, our adjusted EBITDA for 2016 was approximately $26 million. Our adjusted EBITDA expectations for full-year 2017 are between $33 million and $35 million. A significant increase over 2016's results.

There are three primary actions that have already occurred which give us confidence in our adjusted EBITDA guidance. First, is the organizational restructuring that occurred in August of last year. We anticipate that during the first two-thirds of 2017, we will have approximately $1.5 million of cash savings relative to prior year from this action.

Second, as we pursue a more moderate unit growth rate, we anticipate that pre opening expenses will decline approximately $2 million from 2016 to 2017. Finally, and most prominently, we anticipate significant savings from the closures of underperforming restaurants. Given the timing of the closures that we just completed, we anticipate a roughly $5 million to $5.5 million benefit to 2017's adjusted EBITDA relative to FY16 from these 39 restaurants.

As previously noted, we are also pursuing additional measures to address our capital needs. Which allow us to execute the remaining targeted closures and these could also bring additional upside to our 2017 results relative to 2016. Currently, our guidance does not incorporate any refranchising activity, nor additional closures from the 39 already announced.

We anticipate revenue of approximately $465 million to $475 million in 2017. However, we would like to note that this figure could change meaningfully depending on the timing of potential future closures, as well as our refranchising activities.

We anticipate comparable restaurant sales for 2017 to be flat to slightly negative. Through Tuesday, February 28 comparable restaurant sales quarter to date stood at 1.4% system-wide. Including a 1.9% decline in Company-owned restaurants partially offset by a 1.3% increase at franchise locations.

During the fourth quarter of 2016, we outperformed the Black Box industry index for the first time in several quarters. A trend that is continuing thus far in 2017. We anticipate restaurant level margin of between 14% and 15% in 2017 compared with 12.8% in 2016.

As you would expect, the primary cause of the anticipated increase is the closure of underperforming restaurants. For the go forward portfolio, we anticipate modest labor inflation to be offset by a slightly more favorable commodity environment as well as reduced discounting.

Longer-term, while we expect there will continue to be wage inflation we do believe there is also potential for meaningful improvements in our labor efficiency, given certain initiatives. But we also recognize that many of these are in test and may not be fully realized until later in 2017 or beyond.

For new unit development we anticipate 14 to 17 restaurants to be open system wide in 2017 including 12 to 15 Company-owned locations. Of note, nine new restaurants, including eight Company-owned restaurants to have already opened in 2017. As discussed earlier, our new openings in 2017, as well as those that we would anticipate in 2018 will be centered in lower risk, healthy established markets.

Given the timing of new restaurant development, as well as the benefit of closures, we do anticipate the cadence of 2017 earnings will be such the earnings will remain under pressure during Q1 of 2017. We currently anticipate restaurant level margin of approximately 10% to 12% during Q1 and Company EBITDA adjusted of approximately $4 million. Post Q1, we anticipate significant adjusted EBITDA growth over prior year, during the balance of 2017.

We recognize that share count and correspondingly adjusted earnings per share is somewhat of a moving target given potential capital raising activities. Of note, we anticipate adjusted net income of approximately $1 million to $2 million during 2017. Our share count as of the end of the FY16 was 27.8 million both on a basic and diluted basis.

As announced in February, we completed a private placement with L Chatterton, issuing 18,500 shares of preferred stock that are convertible into 4,252,873 shares of the Company's class A common stock. And also warrants entitling L Chatterton to purchase an additional 1,913,793 shares over time. The private placement, and the recent amendment to our credit facility, has given the Company the flexibility needed to implement many of the strategies that we have discussed today.

I am incredibly pleased with the progress that we have already made in improving the execution of our concept, and positioning ourselves for future growth. Moreover, we anticipate that the additional financing activities we're pursuing will also allow us the ability to further implement our plan to improve our guest experience and our earnings profile.

Still, while we will certainly garner significant benefit from the removal of the financial burden and the distraction of underperforming restaurants, I'm most excited about the progress the team has been making on our operational and culinary initiatives. We believe that we can meaningfully drive results for a long time to come. Through our efforts to build a top-tier team development program, enhance our menu offerings, develop labor efficiencies through guest bussing and other initiatives, as well as increased focus on the off premise occasion. We have already made significant progress but know we're just scratching the surface on this concept's ultimate potential.

Thank you very much for your time today. Now, I'd like to turn it over to any questions that you may have. Candace can you please open the lines for Q&A?

Absolutely.

(Operator Instructions)

Gregory Francfort, Bank of America.

Hey, guys. Just the first one: Can you talk a little bit about comps at the underperforming restaurants versus the existing base? And maybe if you had removed those stores last year, would comps have been meaningfully better?

Sure, Greg. These restaurants were slightly underperforming where the balance of the Company was from a same-store sales perspective. Today we are at about 20 to 30 basis points.

Got it. And then just, as you thought about the stores to be closed, how did you assess which ones would be closed or not? Was it stores that were negative EBITDAR, negative EBITDA? And does it fully wipe out the negative cash flow stores, or are there any more remaining?

Yes, certainly, the number of restaurants that we've ultimately targeted is approximately that 55. How we looked at it, exactly as you mentioned, Greg, in terms of really focusing on those restaurants that were losing the most from a cash flow perspective, certainly taking into consideration what the rent profile was. It was not entirely all the characteristics in the criteria we looked at. Certainly also looked at momentum, looked at where we felt the trade area was and the potential of those sites, but ultimately the cash flow.

And the human resource distraction was also an enormous component. Many of these restaurants tended to be in smaller markets that were newer markets that have been a pretty significant distraction for a pretty small percentage of the Business.

Got it. Then maybe, can you just talk about the menu cleanup? I think you had removed sandwiches, and I don't know if maybe what else you have done. And I guess what are you seeing from a guest perspective, just in response to maybe some of the menu item cleanup?

Sure. So a lot of these were actually affected in October of last year. And so what we did in that time frame was remove the sandwiches lineup, the BUFF bowls lineup, as well as we streamlined our catering offering. All of these have had pretty significant benefits in our execution at the operational level, speed of service, just our team members having a much better experience in terms of executing the concept.

From the guest perspective, also very minimal, if any, resistance that we've seen from these changes. These were items that were relatively low velocity, as you can imagine. During this most recent LTO, we did remove two underperforming dishes to make room for the Adobo, as well as the gluten-free Thai Green Curry. That said, we're closely monitoring it.

There's one dish that we might actually be bringing back in future months, in a reformulated version to improve that profile. But the guests I think, overall, we have had plenty of research and our own belief that it's been a little bit overwhelming in terms of the number of items that we've had on the menu. So the guest feedback has been generally positive.

Great. Thank you very much.

Thank you. John Glass, Morgan Stanley.

Thanks. Good morning. Dave, just first, would you remind us what the average unit volume of the closed stores were? And what the resulting average unit volume of the system will be excluding the 55 closed?

Yes, John, the average unit volumes for the restaurants that are closed have been approximately $700,000. From an AUV perspective, a lot of it depends on what the timing is and if we are able to effect the additional closures that we've targeted. But I believe there's about a $75,000 to $100,000 pick-up in overall Company average unit volumes when you remove all of those targeted restaurants.

Great. And then with respect to the refranchising, how are you thinking about that? What's the target number of stores you think might be available to refranchise?

It's a great question, John. So there's no specific number that we have set. And we still do believe that in the near future, we will remain primarily under Company ownership. As a reminder, where we sit today is about 86%. So we will certainly move a little bit more towards franchise penetration, but not meaningfully to where you would see those numbers flip or anything along those lines. Most of the efforts that we're focused on for these markets, or ones that we believe have absolutely tremendous potential, they're going to flourish under franchise ownership that can be laser focused on their execution.

We do expect, John, that the process is going to be pretty lengthy. In terms of when the refranchising actually affects, we would expect it's probably the last half of 2017, as well as through 2018, just to make sure that we have the absolute right partner. And so we feel very confident that these are markets that are going to flourish under franchise ownership.

The number itself, we will have more texture as we get farther along in the process. And you can also see, as we said, we engaged The Cypress Group. There will be more information to come soon on their efforts.

And just lastly for me, can you bridge from the EBITDA guidance you provided down to a cash flow or free cash number, taking into account the charges in CapEx? And do you think the financings that you have will leave you with -- or how big a net positive cash position? Just a sense of what the underlying cash flow health in the Business is with all these moving parts?

Certainly. What we do see coming out of this is, when all the activities are done, the cash flow profile of this Business will be incredibly strong. Given the much lower unit growth rate, given the capital infusion that we will have, and the ability to remove the drag that we have had from those underperforming restaurants, we anticipate that we will be significantly free cash flow-positive as we go further on to the year.

There is some challenges, in terms of guidance, which we will have more texture on in future quarters. We don't know what that upcoming capital raise could be. So that could meaningfully change things.

We did disclose a data breach assessment that we took a charge for. The timing of that, and what the magnitude is, could also change. And that could be very late this year and even into 2018. So, we don't have specific timing on the cash flow.

One other final moving piece would be lease extinguishments. As we've said, we expect $24 million to $29 million of costs associated with that. The timing of that is really -- we have a good idea on what it would be, but it's a little bit unknown in terms of how those negotiations ultimately play out.

So, I apologize. It is a long way of saying we can't give a detailed bridge. But that's just because there are too many moving pieces. But I can tell you I feel very comfortable with the cash-flow profile that we're going to have when all is said and done.

Okay. Thank you.

Thank you. Sam Beres, Robert W. Baird.

Hello, good morning. Maybe quickly on the 2017 guidance, Dave, why not include the remaining 16 closures and the impact of those in the 2017 guidance? Is it just uncertain timing, and that's the reason for that? Or are you concerned that you might not be able to close them?

Certainly. The S-1 that we filed early in February on the intent of that capital raise would be to allow us to effect these closures expediently. That said, we recognized that we can't speak much beyond that, in terms of the S-1 filing. But we recognize that it is not a certain event.

And so, how we look at it is, we would still close these remaining restaurants; we would do it over time though, as the cash-flow profile continues to improve. It would be over time versus in a specific time frame. So that's the biggest reason is just from a timing perspective, it's a little unknown.

Thanks. And maybe just a follow-up on the refranchising: Obviously, not entirely nailed down, but as you think about it, do you think the refranchising can be accretive to EBIT or maybe EPS?

Absolutely. We think in the short term, potentially not as much. But as you start, the expectations would be that they will be able to grow at a faster rate than what we would as a Company-owned system in terms of those markets. So they will be accretive as you begin to develop more restaurants in those areas. We think the actual effect of those restaurants themselves from a lost cash flow stream relative to royalty revenue would probably be relatively offset in the short term.

Great. And then maybe one last one: In terms of some of the operations improvements you're working on, it sounds like some encouraging progress on guest satisfaction and turnover. But maybe specifically, how long do you think it takes for those execution benefits to really gain traction with consumers and maybe lead to increased visits over time?

Certainly. This is something obviously we've studied a ton, and those in the industry have studied a ton. How we see the cadence typically go is that in a market or a restaurant that is struggling, and when you turn it around, what you first see are the people metrics start to improve, which we have certainly seen that in terms of our turn-over numbers, very pleased with what we're seeing there.

After you see people metrics improve, you typically then see the operational metrics improve. We have seen that in our internal metrics, whether they're transaction times, food waste, labor management, et cetera.

After people and operations improve, then you start seeing guest satisfaction scores improve. That's what you're seeing with the SMG results. And then finally, that's when you start getting the sales traction.

From the timing perspective, I think there's still obviously some uncertainties in terms of when that completely begins to benefit the system. But I think we're very confident that those first three steps we've made a lot of success in. And our performance relative to Black Box index, despite overlapping significant amount of discounting, has improved. So I think we are already seeing some of those results. And I would expect that those will continue through 2017 and beyond.

Great. Thanks for the color.

Thank you. Jake Bartlett, SunTrust.

Great. Thanks for taking the question. Dave, on the guidance for same-store sales and where you currently are, core to date, what gives you the confidence that things are going to accelerate? Are you seeing some strong performance or stronger performance from those new LTOs? Or what is giving you the confidence that you're going to accelerate from the level you've seen quarter to date?

Certainly. Good question, Jake. As we said, our system-wide same-store sales thus far is about negative 1.4%. This is at a time -- and the guidance is for flat to slightly negative. So what our guidance incorporates is a modest acceleration in our same-store sales performance.

We feel pretty comfortable, given that the numbers we have been posting have been as we've overlapped a significant amount of marketing. So we will stop having that headwind, if you will, from a same-store sales perspective. I'm also given great confidence when I look at the guest satisfaction and operational metrics that are absolutely moving in the right direction. And finally, what we're seeing is that we will be able to do some modest level of marketing on an ongoing perspective, as we've now got operations in a manner that we feel that, as we bring guests there, they will have a great experience.

So I have a good amount of confidence. We're not going to get ahead of our skis in terms of what the expectations for, in terms of the inflection point and what that ultimately drives. But we do expect there will be some modest improvement.

Okay. And then as you assess the strength of the brand and the relevance of the brand, is there a core number of stores that have been doing much better than the overall result that gives you confidence of the relevance? And also how do you think that just the increased competition within fast casual from store openings and that sort of thing from competitors is affecting you? Maybe the comp on the core strength of the brand.

I feel as strongly as ever in the core strength of this brand. We're so unique, so different. We had so many of the macro consumer trends and desires.

We didn't talk a lot about it on the call yet, but the to-go experience, our food travels well. It's a natural for that. And that's where guests are moving. We are already seeing ourselves at 45% of our Business now being done off-premise. We feel really well positioned there. The core strength, when you look across the country, so many different markets, so many different restaurants that are highly, highly profitable with great cash-on-cash returns and great cash flow, that I feel very comfortable with where we're positioned.

From the competitive landscape perspective, I don't think I am saying anything new that everybody knows that fast casual itself has seen a significant amount of new players, as well as growth from the existing stalwarts. I expect that will continue. I think it's one reason why, while our same-store sales has been relatively consistent, we have actually seen ourselves create a gap or improve significantly relative to where we were at versus the Black Box index. So I expect that will continue over time.

What I love though is that there is no direct competitor for what we're doing. And I think the efforts we're taking to make the guest experience better and to further enhance our menu is going to continue to position us for a pretty nice, healthy growth for many, many years to come.

Okay. And then, lastly, with the store closures, and how it is going to boost restaurant-level margins, can you help us out in terms of the impact on the various line items? I would imagine that, because these are dispersed stores, that it will help COGS. Maybe just give us a little help on the moving pieces on restaurant margins.

You're going to see benefit throughout. When we look at the guidance that we have for full-year 2017, to put a bit more texture, I think it's going to be somewhat evenly split actually between cost of goods sold, where we expect some benefit, not just from the closures, but also from a little bit more favorable commodity environment.

Labor, certainly, these are restaurants. But if you think about it, it is $700,000 of average unit volume, have not been very efficient. So we can expect a 50 basis point to 100 basis point benefit in the labor line.

And then occupancy, another one of the major fixed costs, which, on the AUVs that you're talking about, that one will also improve significantly. So I do think it will ultimately, Jake, be spread pretty evenly throughout the P&L line items.

Helpful. Thank you very much.

Thank you.

Thank you.

(Operator Instructions)

Andrew Strelzik, BMO Capital Markets.

Hey, thanks a lot, good morning. First question I wanted to ask is on marketing. You're talking about how much more competitive it is, and the number of options out there. And understanding the differentiation of the brand, but you're taking down marketing again, after last year talking about how you needed to get more competitive on that front. So when you're thinking about marketing in the context of building AUVs over time, and acquiring new customers, how do you balance those to the downward trajectory of marketing versus that piece?

So that is something we certainly have quite a bit of thoughts on. Ultimately, there is an enormous opportunity for this brand when it comes to brand awareness. We have such a unique, differentiated concept, which is such a huge benefit in the long term, but that also means that you have to work harder to build brand awareness. And we traditionally have not spent very much resources in terms of bringing the brand to life from a marketing perspective. The marketing that we did do over the past year or two, I think ultimately our operations were not in a place where, when we were bringing guests in to experience the brand, they were getting the best experience.

How we have been pretty clear with our strategic focus is, first, we needed to get operations back to a level that we felt, when we did activate the brand through marketing, that we would be really giving a great experience in bringing loyal guests into the equation. I feel we are pretty darn close to that. And I think you will start seeing us actually activating a marketing level spend that is higher than where we are at today. But that said, we felt it would have been foolish to be doing too much marketing until we've got some of these initiatives in place.

What you can expect from a marketing perspective is, what we will be doing in the short term is trying to accelerate a lot of our digital media, direct mail. We will be doing traditional media in some of our more established markets. And then we will expand from there as we go through time. But I think there absolutely still is an enormous opportunity for us from a brand awareness perspective.

Okay. And you talked about some of the tests that you are doing around the menu and bussing and to-go and things like that, streamlining the to-go. Can you give us some numbers in terms of what percentage of the store base that is being tested, and now you said it's going to roll out further. Where should we be by the end of the year?

Sure. There are ultimately different aspects of the tests. With guest bussing in particular, we've been putting that into some of our newer restaurants, as well as some of the select test markets.

We're seeing cleanliness scores improve right off the bat. We feel that's one that is an absolutely logical one to pursue, as well as the more seamless to-go design. It's still right now only in a small percentage of our system, maybe 5% at the most. So we would expect that those two items will move relatively quickly through the system and be done through, in 2017.

The enhancements to the menu, which also include a different layout, a different pricing structure, improvements and investments in some of the food quality, those are the things that, before we go nationwide, we want to make sure we absolutely have right. So those will take more time. And I would expect that they will be done in a cadence over a set steady disciplined manner, with iterations improving at each step. And that will be done over the next probably 18 months or so.

And then my last question, if I could squeeze one more in? This year, you're going to have a step up in the margins because of the closures. But I guess I'm just wondering, underlying, ex the closures, when you think about the margin progression over the next 12, 18, 24 months, labor is not going away. But you have some efficiencies you think you can get.

It sounds like some favorable commodity movements this year, but maybe not as much going forward. And then obviously the big question is on comps. Do you think that 2018 might be the year where we finally start to see the margin structure underlying stabilize or even start to improve, recognizing obviously that the comps are the big question?

Certainly. The closures obviously have a significant impact on the short and medium term. From the P&L perspective and the economic model, labor is the component that there's a lot of hard work to be done. We believe there is tremendous upside in our labor efficiencies.

Currently, since we do real cooking, we do everything cooked to order, accordingly, we have a pretty complex system in terms of how it is operated in the back of the house. We have done a great job designing it over the years to make it as efficient as we could be, but we know that there is another step-level progression that could occur. And that's one that is going to take quite a bit of testing, looking at different pieces of equipment, processes, et cetera.

We think there's meaningful upside on the labor side. At the same time, we don't want to incorporate that into guidance yet because there's a lot of work to still be done to make sure that we ultimately land at the most efficient solution. But labor is where, to the upshot of your question, labor is where we feel there is still good opportunity for us to improve margins.

Great. I appreciate the thoughts.

Thank you. Jordy Winslow, Credit Suisse.

Hello, thanks. This is Jordy on for Jason this morning. Dave, I had a question on the comps. What do you think explains the gap between Company and franchise stores? And how much variability in the Company comps overall are you seeing across different markets? Then I had one follow-up. Thanks.

Sure. So let's first talk on the franchise side. I do absolutely believe that they have, because of their size, their scope, they're certainly committed to what we're working on, that they have been able to implement our initiatives probably a bit faster than we have been able to on the Company side. So, I think they're starting to see the benefits of that a little bit earlier than what we're seeing in the larger system.

That said, I would also keep in mind, it is a pretty small base. So, franchise same-store sales tend to be more volatile just based on that smaller segment. So, while I absolutely believe part of it is their implementation of our initiatives quicker than potentially the Company side, there is a part of it that is small sample size.

From a regional differentiation, it's actually been relatively consistent. We still continue to see some challenges in the Colorado market, which, as we have discussed in the past, have seen as much of an influx of fast casual competition as probably any other part of the country. So that's one that's been a little bit of a laggard, if you will. But seeing, overall, there's not been a very big volatility between the different geographies.

Got it. Thanks. And then one on the openings -- 12 to 15 for the Company this year. Is that the right run rate to think about over the next few years? Will that come down further? And is there more room in the established markets you have today to sustain that kind of pace?

We certainly believe that there is plenty of room in the markets that we already are in. So we think there's plenty of white space potential, even without going to new markets.

That said, we have a lot of initiatives that we are working on that we've made a ton of progress on. We want to make sure that we've seen those through fruition before we begin to accelerate growth again.

So for 2018, expect that the growth will be again focused on healthy established markets that we already have a good presence in and are lower risk. The number might be a touch lower than what you see in 2017. That's probably as far as I would go in terms of the expectations.

I do believe this brand though, again, the differentiation, the fact that we do, have seen so much success in so many different types of markets and restaurant trade areas, has an enormous white space potential. So while there will be this temporary kind of pause to make sure we've got the execution of our initiatives, we still have a long road ahead of us in terms of white space.

Thank you.

Thank you. David Palmer, RBC Capital Markets.

Thanks. Good morning, Dave. Just going back to the store closures, obviously the benefits of those, the other side of that is when those stores are bad, they were really bad. And when you're looking back on the placement of those stores, the format of those stores, what do you think are the lessons of that and how you choose your sites, if it is the site selection, going forward?

So, we think the selection process itself, often the real estate was actually, on the whole, collectively strong. We have talked about in the past that one of the lessons we have learned is we don't do as well in some of these urban neighborhoods.

I think more important that we've learned is, the execution from an operations perspective is absolutely critical. And I think the rapid expansion, not having a commensurate investment in our training and in our operations teams, that's been more the culprit of the restaurants that ultimately were underperforming, more so than any concept or even a real estate selection process.

When we do start to re-evaluate unit growth, especially into new markets, what I do think you can expect is for us to be more likely to go into contiguous markets where there is more ability to gain brand awareness and to probably be doing it in a way that we build the saturation point with the number of restaurants we have, making sure that we have the bench built to execute at a high level. I would ultimately answer your question by saying, the biggest thing that we're taking away from this is just how critical it is to have operations up and running, gain some level of brand awareness to really get a market moving.

I would say some of the markets that we've entered in the past couple of years that we've seen a lot of success on, are markets where we have had strong operations from the get-go, and the real estate has been very strong, and we built a number of restaurants in a short amount of time to get some of those efficiencies. Markets like Phoenix, markets like Orlando, those are markets where, from a real estate perspective, we opened several restaurants in a relatively short amount of time and had great operations to back them up.

The thinking is that operations is the major thing that you can do to swing your bottom quartile stores, but perhaps, in the case of some, you didn't have the luxury of waiting financially. You have to chop off that tail, try to help the others that sit above that, whatever line you drew. Is that a good summary of what you're doing?

Yes, that's exactly right, Dave. The team members that we've had in these restaurants that have closed, they are great team members. Ultimately, over time, we have built the teams to be much stronger and they've done a nice job. But unfortunately the cash flow losses that we are currently overcoming and the burden and the long road it would take to build brand awareness and to bring these markets where they needed to go, we ultimately felt that was not worth the resources or the distraction.

And just a quick follow-up, you mentioned the 45% of your Business being off-premise. It seems like your food travels well, and that it should be a way that you can win. Forgive me if you discussed delivery, are you still in touch with that? How's that going? And are you comping positively with your take-out/delivery business currently, such that maybe we can see the future with that side?

Yes, that's a great point. We haven't talked about it as much because our main focus has been on the core execution of the concept. I believe to-go and off-premise is an enormous opportunity. We have been comping positively on the overall off-premise occasion. Online ordering is up to 8% quarter to date thus far in Q1, which that just stood at a few percent a few years ago.

From the delivery perspective, still only in about 10% of our restaurants. We've been using third-party providers. We are working closely with those folks to expand. As all of you know, there is quite a bit of movement in that industry. But we absolutely still think there is great opportunity. And that will be -- continue to expand; I think more to come on how we approach it.

One aspect that we have been really focused on, and we talked about, was when you do order from Noodles & Company online, that is a throughput equalizer for us. You come in, you skip the line, pick up your food, and you can go out. What we're testing is a more seamless design where it is obvious were you go as a guest. If you prepaid, you'd literally just go to a shelving area, pick it up and you're out. That is such a benefit for our brand, that you can expect that particular initiative will continue to expand relatively quickly.

Thank you.

Thank you. Jake Bartlett, SunTrust.

Hello, just pulling up on that thought or the line of thinking about why the stores are closing, I looked at the franchise system and they are largely in these kind of smaller markets with just a handful of units. Is it the fact that they have been able to operate better and, therefore, those stores are doing okay? Or is it possible that we could see some franchise closures going forward?

There's always potential for seeing some franchise restaurants closing. But at the same time, the difference -- so we see success in Phoenix and Orlando, partially because we've executed the brand at a very high level and have been able to really have the operations teams focused well.

We're also seeing that with the franchise community, that they tend to be more focused on their restaurants, are in there day in and day out. It's not the distraction that it ultimately is for the Company side, or has been for the Company side. As a reminder, we've opened five or six new markets over the past three years, so the amount of distraction that's occurred is at a different level of magnitude versus if you are the owner/operator in a specific market. So, they've had more success than we have in the last couple of years, in terms of executing that aspect of the brand.

Okay. And then lastly, you've always had lower food cost than your typical fast casual concepts, which would have higher food costs, lower labor. And you made comments about investing in food quality within some of the menu changes. Is that something we should expect where COGS start to move up more meaningfully, as you work on the quality and maybe give consumers a little bit more than you have in the past?

Yes, that is one reason why we're certainly being very disciplined with how we approach the rollout of menu initiatives. I think you can expect that there will be some investment in the food cost side. We do believe that our supply chain team can identify opportunities to help us offset much of that investment. So, I would not expect that our cost of goods sold starts moving into the 30% range or anything like that. I think it would be much less meaningful than that. But I do believe that you can expect, over time, to see us shave labor, and have a little bit more on the COGS line.

And have you gone ahead and removed the naturally raised beef?

We did ultimately remove naturally raised steak. It was ultimately the supply chain was not necessarily able to keep up at it with a cost that we felt was appropriate to continue to move forward. We still believe that's something we are going to be pursuing over time. But given the supply chain constraints at the moment, we did ultimately remove naturally raised steak.

Thank you.

Thank you. That concludes our question-and-answer session for today. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.