Noodles & Co (NDLS) 2018 Q3 法說會逐字稿

Good afternoon, and welcome to today's Noodles & Company Third Quarter 2018 Earnings Conference Call. (Operator Instructions).

As a reminder, this conference call is being recorded. I will now introduce Noodles & Company's General Counsel, Melissa Heidman.

Thank you, and good afternoon, everyone. Welcome to our third quarter 2018 earnings call. Here with me this afternoon are Paul Murphy, our Executive Chairman; and Dave Boennighausen, our 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 2018 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 this afternoon's 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 2017 fiscal year 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.

Now I would like to turn it over to Paul Murphy, our Executive Chairman.

Thank you, Mel. We're extremely pleased and excited with our ongoing momentum in the third quarter as we continue to implement our strategic road map. After posting our strongest same-store sales in 6 years during Q2, we improved upon that mark during Q3, finishing the quarter of comparable sales growth of 5.5% systemwide. The company has made tremendous strides in 2018, executing a thoughtful strategy that capitalizes on the many strengths of the brand. This strategy has been comprehensive as we address culinary opportunities through the national introduction of zucchini noodles, off-premise opportunities through the buildout of quick pick up units and our rewards program and operational opportunities through initiatives that allow our friendly talented team members to better engage with our guests.

We are pleased that we were able to back up our second quarter results with another strong performance in Q3, and we know there is tremendous opportunity ahead. Earlier this month, we announced the further strengthening of our leadership team to help implement our strategy. We formally announced the promotion of Melissa Heidman as our Executive Vice President and General Counsel as well as the recent hiring of Ken Kuick as our Chief Financial Officer. I'm excited to continue to work with Mel, and look forward to working with Ken as he gets on the ground here in Denver in a few weeks. With the full leadership team rounded out and in place, we look forward to executing on our plan for noodles to consistently perform at the top of the restaurant industry for years to come. Just as we have executed thus far in 2018, we will continue to focus on a comprehensive strategy that will drive a superior, differentiated dining experience for our guests as well as create value for our shareholders.

I'll now turn it over to Dave to discuss our Q3 results and current strategy in more detail.

Thank you, Paul. As Paul mentioned, the company was able to build on our strong comparable sales growth performance in Q2 and achieved an even stronger result in Q3, with systemwide comparable sales growth of 5.5%, comprised of a 5.2% increase at company-owned restaurants, and a 7.6% increase at franchise locations. At company-owned restaurants, comparable sales included 2% traffic growth, 2.5% of price, and a 0.7% benefit from menu mix shift. Our positive menu mix shift is our first in several quarters and is attributable to the success of our zucchini noodle introduction.

We are particularly proud of our comparable sales momentum in Q3 given the negative impact on comparable sales of recent holiday shifts. As you may recall, in the second quarter, comparable sales benefited approximately 100 basis points from the shift at the Easter and 4th of July holidays in our fiscal calendar. Meanwhile, Q3 faced a headwind of approximately 50 basis points from the 4th of July shift, resulting in a total negative combined impact of 150 basis points from the holiday shifts between the second and third quarters. The fact that we were able to increase our comparable sales growth by 20 basis points despite this 150 basis points headwind is a testament to the momentum from our recent initiatives.

Of our 2% traffic increase in Q3, we believe that the benefit has resulted almost equally from our culinary, off-premise and operational initiatives.

I'll begin with our culinary initiatives, which, of course, have been led by the successful launch of our zucchini noodle this May. For years, the company struggled with the perception that noodles and pasta are unhealthy for you due to the relatively high amount of carbohydrates in our core dishes. The zucchini noodle has allowed us to address this concern with a platform that tastes great, affirms our authority on noodles and honors the heritage of the brand. We continue to view the zucchini noodle as the first step on our path of creating a platform of better for you flavorful dishes, and also believe there remains significant opportunity to build awareness and trial of the zucchini noodle itself.

Earlier this month, we reinforced the zucchini noodle through the introduction of our Zucchini Indonesian Peanut Sauté, and are currently in test with other better-for-you items, including additional health noodle forms that will enhance this platform.

In regards to off-premise, we continue to believe that Noodles & Company is uniquely positioned to win in this rapidly growing demand for convenience amongst restaurant consumers. Aside from having the speed and value necessary to complete for the off-premise occasion, we benefit from the ability of our food to travel well, the variety inherent in our menu, and our particular strength amongst time-starved families.

During the last period of Q3, off-premise sales represented nearly 53% of sales, an increase of over 350 basis points from the prior year. We have seen particular growth in our online sales, which has been bolstered by further development of our rewards program as well as the introduction earlier this year of quick pick-up shelving units in our locations.

During the last period of Q3, online ordering represented over 15% of sales, an increase of almost 600 basis points from the prior year. During the third quarter, we expanded third-party delivery throughout much of our system, primarily through the rollout of DoorDash into several of our markets. We now offer delivery in 80% of our company locations. Although delivery still represents only a small percentage of our total sales, we anticipate it will continue to grow and be a meaningful driver of sales growth for the balance of 2018 and through 2019.

Our approach to delivery has been disciplined, ensuring that the systems integrate seamlessly with our operations. This has been critical as we believe that operational improvements have been a meaningful driver of our recent strong performance. We continue to invest in our teams and in operational improvements through further best practice classes, select enhancements to our benefits programs, as well as consistent improvement in our new hire training and development programs.

Now shifting to our financial results. Total revenue for the third quarter was $116.7 million, a 2.2% increase over the prior year. This increase reflects the benefit of comparable sales growth, offset by the closures of 14 restaurants since Q3 of 2017, including closures -- including 3 closures during Q3 of this year. We anticipate an additional 4 to 6 closures during the balance of 2018, primarily from restaurants that have approached their lease-end date, and whose trade area has shifted since we originally opened them.

As we look forward, we anticipate our closures to normalize to a much lower rate. Average unit volumes on a trailing 12-month basis in the third quarter were $1.1 million, an increase of $41,000 from the prior year. Moreover, average weekly sales for the third quarter alone were over $22,000, equating to average unit volumes of approximately $1,150,000.

Adjusted EBITDA for the third quarter was $10.4 million, a 9.5% increase over the prior year. Adjusted EPS for the quarter was $0.04 compared with $0.02 in Q3 of 2017.

GAAP net income in the third quarter was $1.1 million. Restaurant level margin in the third quarter was 16.4%, an 80 basis point improvement versus the third quarter of 2017. The improvement was primarily seen in occupancy costs as a percentage of sales, which decreased from 11.2% to 10.4% as we leveraged our comparable sales growth. Cost of goods sold in the third quarter were 26.5%, in line with Q3 of 2017 and a 20 basis point improvement from the second quarter of this year. We anticipate COGS will continue to be in the mid to high 26s during Q4 of this year as the impact of our lower margin zucchini sales are offset by savings through various supply chain initiatives.

Labor during the third quarter was 32.7% of sales, a 10 basis points increase from last year. As leveraged from our comparable sales growth, offset wage inflation, as well as increased incentive compensation expense at the restaurant level. We anticipate labor expense to be modestly better as a percentage of sales than prior year during the fourth quarter.

Operating expenses in the third quarter were 14% of sales, which was in line with the prior year as leverage from increased comparable sales offset modest investment in our marketing, culinary and off-premise initiatives. We anticipate operating expense as a percentage of sales to be in the low-14% range during the fourth quarter compared with 13.4% in Q4 of 2017. This expected increase is a result of additional anticipated marketing expenses as well as increased costs related to our third-party delivery and call center programs.

Exclusive of noncash stock compensation expense of $0.6 million, general and administrative expenses were $9.8 million in Q3 or 8.4% of revenue. As a percentage of revenue, G&A expenses, exclusive of noncash stock comp, were in line with prior year.

We anticipate G&A expense, exclusive of noncash stock comp, to be between $43 million and $44 million for the full year 2018 with an additional $2.8 million of noncash stock compensation expense.

As a reminder, full year G&A includes approximately $3.7 million in nonrecurring cost related to data breach assessments and legal settlements that were expensed during the second quarter. Debt at the end of the Q3 was $47.8 million, net of unamortized debt issuance cost of $1.8 million. This debt figure reflects borrowing for the $11 million that was paid during Q3 related to data breach assessment and legal settlement mentioned earlier, offset by repayments made as a result of the proceeds from an equity offering completed in July. As we mentioned last quarter, with these 2 events behind us, we do not have and do not anticipate any large outstanding liabilities related to the data breach nor litigation activities in the near future.

From a new restaurant perspective, the class of 2017 continues to perform better than any class in several years, giving us continued confidence in the overall unit potential of the brand. While we will give more concrete guidance on future calls, we are now working to develop a disciplined approach to more meaningful unit growth, anticipate between 4 and 8 company openings for 2019, primarily in the back half of the year.

During the third quarter, we did not open any company nor franchise locations. Our franchise community continues to perform strongly as seen in their comparable sales performance, which was at 7.6% during the third quarter. As a reminder, during the first 3 quarters of 2018, we offered 1% of franchise sales and marketing allowances for our franchise restaurants in order to allow them to invest in local marketing in support of our recent launches. This suppressed franchise revenue by approximately $150,000 during each of the past 3 quarters. That rolls off in Q4, and we anticipate full year franchise revenue of approximately $4 million.

Now I'd like to discuss our overall guidance for 2018, which has been updated reflecting the momentum and strong performance in the third quarter. We are raising our total revenue guidance from between $450 million and $455 million, and now expect revenue between $457 million and $460 million for the fiscal year. Our revenue guidance now includes systemwide comparable sales growth of 3.5% to 4% for the full year, up from our previous guidance of 2.5% to 3.5%. Total revenue guidance also incorporates the impact of restaurants that have been closed or may close due to approaching lease expirations.

I'm happy to report that the underlying comp momentum has remained steady during the initial weeks of Q4. Please note though that our full year comparable sales guidance reflects the fact that 2017 Q4's comparable sales were 290 basis points better than Q3, as the company benefited from the launch of our macaroni and cheese platform as well as mild weather during the month of December.

We have increased the lower end of the range for our restaurant level margin guidance, and now anticipate full-year restaurant level margin of 14.8% to 15.5%. This reflects upside from our sales momentum, offset by continued wage inflation and increased investment in our third-party delivery program as well as a modest increase in marketing spend.

We have also adjusted the low end of our adjusted EBITDA range, and now expect adjusted EBITDA between $32.8 million and $34 million.

Finally, we now anticipate adjusted EPS between $0.01 and $0.04, up from prior guidance of between flat and $0.03. We continue to feel that there is significant opportunity to expand our average unit volumes and restaurant level margins over the next several quarters.

From an AUV perspective, we continue to take a holistic approach to improve the guest experience and are currently in tests with culinary, menu pricing, operational and off-premise initiatives that we believe will build upon our current momentum. Similarly, we are taking a comprehensive look at our margin opportunity. Aside from leverage on sales growth and pricing, we are working diligently across the organization on several opportunities to improve our expense profile. These include revisiting many of our existing contracts throughout our supply chain, the 2019 launch of new back of the house labor and food management systems, and continued initiatives to leverage technology to become more efficient throughout the organization. While we expect the benefits of these initiatives will be realized over time, we see significant opportunity in upcoming quarters to expand margins. We have also begun work on the development of a new smaller square footage prototype that we anticipate rolling out in 2019, as well as modest refreshes that we expect to execute through the organization during 2019 to better communicate the brand inside our restaurants while facilitating convenience for our guests.

Before I hand it over to Paul, I would again like to express my thanks to our talented team on the continued improvement in the brand's performance.

I am proud and pleased with how far the brand has progressed in the past several quarters, but even more excited for what lies ahead.

Now I will turn it back to Paul for final remarks.

Thanks, Dave. I'd like to echo Dave's gratitude towards our team for their accomplishments thus far in 2018. The team continues to execute the hard work necessary to strengthen our foundation and deliver on initiatives that position the brand for future success. Our intent is to build upon our momentum to drive sustained, predictable growth for years to come. We continue to believe that we are in the early innings of our strategy, and I'm excited for the balance of 2018 and for the years to come.

Brian, please open the lines for Q&A.

(Operator Instructions) And our first question will come from the line of Michael Gallo with CL King.

Yes. So just to kind of delve in a little bit on some of the pricing work you're doing. I was wondering if you can update us on where that stands? How we should we should think about that opportunity? Whether you have anything baked into the fourth quarter from any of the potential pricing optimization tests? And kind of how we should expect that will phase in as you hit 2019?

Sure. So Mike, we don't expect that it's going to be hitting nationally until probably the middle of 2019, potentially Q2. What we're doing is, we're doing 4 different test sales looking at a few different things. Looking at the structure of the menu, the layout, how do we better communicate our platforms, also looking at individual line pricing, testing bundles. There's a handful of things that are being involved in the test. I'm very excited with how the test is going thus far. We look to expand upon that during Q1 of next year for then a launch later on in the year. In terms of Q4 of this year, really would have a de minimis impact on the overall results.

And our next question will come from the line of Jake Bartlett with SunTrust.

Dave, could you help us out. You gave us a little bit, and I'm hoping you can be a little more specific with how you exited the quarter on same-store sales? What you're saying about the early part of the fourth quarter? I kind of -- excluding the calendar shift in July, it looks like your run rate was about 6% for the remainder of the quarters. So I'm just wondering whether that's the number we should think about with your momentum? And then I also had a question about just helping us, for last year as we think about how difficult the compares get in the back half of the fourth quarter, if you could give us any more detail about how the -- what the cadence of the same-store sales was on a monthly basis last quarter or last fourth quarter?

Yes. Sure, Jake. So I'll answer kind of the second part first. So as a reminder for everybody from the company perspective, we're negative 3.8% in same-store sales during Q3 of last year. That improved to a negative 0.9% during Q4 of last year. So we started seeing some of the momentum. And as we see how the brands progressed over this year, we exited Q3 very strongly. Very pleased with what we're seeing thus far during Q4. But the reality is we are going to start facing some tougher comparisons, and particularly had a very mild December from a weather perspective. And as many of you know, our geographical penetration is heavily dominated by the Upper Midwest, the Mid-Atlantic and the Rocky Mountain West. So I want to be pragmatic in recognizing that we started seeing some of the initiatives take hold in Q4 of last year. And also seeing -- we'll also go against much more difficult comparisons in December. December itself was in the positive low-single digits last year.

Got it. And then, are you baking in any lift from the delivery of rollout now that 80% of the system is on DoorDash, is that baked into the fourth quarter guidance here?

Very modestly, because what we've seen with delivery in the initial restaurants that had it also with our franchise community is that really is build over time. I mean what we have seen thus far is since we launched, still very encouraging. We're very pleased with where it sits. At the same time, we have seen it typically build over time. So not much incorporated into Q4.

Okay. And then on the margins, you raised your same-store sales guidance. And you're closing some stores, which I presume are less efficient. But you didn't raise the higher end of your margin guidance and some of your profitability. So just what is the main driver to what's kind of less -- what's pressuring the margins that you hadn't expected before?

Well, part of that actually is, even though we haven't baked a lot into the same-store sales perspective for delivery. We do have more delivery that's expected for Q4 of this year than what we had originally anticipated. And as many of you know, that's not the highest margin sales growth that you can have. You typically get much more leverage off of other initiatives. That is one component. And also as we look at the marketing spend. Last year it was relatively low marketing spend, about 0.6% of sales. Expect to have a modestly -- modest increase in marketing expense versus what we had originally contemplated as we continue to pursue awareness and trial of the zucchini noodle.

Okay. And then lastly, you commented before about your -- the initiatives you have planned for really kind of the May time frame of '19. And at the time before we knew how noodles was going to do, you talked about how you're more excited potentially about what was happening in '19 than what you had going on in '18. Is that still true? And how much visibility do you have on what is to come on '19 in terms of how far the tests have progressed?

Yes, sure. So we're very excited for what 2019 has to bring. We're in the kind of the midst of finalizing that overall calendar and plan for 2019. I think as you look at the initiatives we have around off-premise, some of the refresh work we're doing with the brand. I think from the zucchini noodle perspective that better-for-you platform will continue to have great dividends for us. So still very excited with what we're going to see in 2019. And similar to this year, it's going to be holistic. You are going to see us not just address one aspect and opportunity of the business, but we'll be touching on off-premise operational and culinary initiatives. So a bit too early to say what we think '19 as compared to '18, but I know I'm pretty excited with what we have in test right now.

And our next question will come from the line of Greg Badishkanian with Citi.

It's actually Fred Wightman on for Greg. I was just hoping you could give us a bit more information about what you're seeing in terms of adoption for Zoodles specifically? I mean if we look at some of that these trial markets, how has adoption trended as we sort of move along that maturity curve?

Sure. So from a trial market perspective what kind of -- I'd like to call back a little bit to how we approach the test. That was primarily operational and we didn't do much marketing and PR until we actually went national with it in May. I'm very pleased with what we're seeing from the zucchini noodle. It has not seen a diminishment or diminishing in terms of its incidence, bolstered again as we introduced the zucchini Indonesian Peanut Sauté. Also introduced Zucchini Truffle Mac earlier this month. So from a decay curve perspective, what you would typically see with a new item, we have not seen that with zucchini, which is one reason why we didn't pivot away from it. We continue to reinforce it during Q4 of this year, and still think there is a lot of legs left in that.

Okay. Great. And then if we look at some of the expanded delivery partnerships you guys talked a few times in the prepared remarks about the sales contribution. But if we think about that from a profitability perspective, can you just give us a little bit more info as far as what you're seeing in terms of check size, frequency, how much of that you think is cannibalizing what would otherwise be in store orders would be really helpful.

Yes, I mean, certainly with my background coming up through the finance ranks, delivery is something that I approach with healthy amount of cynicism in terms of what's truly incremental versus cannibalized. And encouragingly we're still seeing that vast majority of it is incremental business, and is overall accretive to our overall EBITDA and certainly to sales as well. From a margin perspective and pure percentage, as we said earlier, it's not as high a leverage as you would see from other initiatives, but still very pleased with what we're seeing. A bit too early to understand what changes in frequency, how that impacts the overall frequency of the business. And from a check perspective, I think no secret that delivery orders tend to have a higher check average than other order modes. But I also believe that delivery tends to be something that lends itself to higher group orders as well anyway.

And our next question will come from the line of Nicole Miller with Piper Jaffray.

I have few quick questions. So if you -- when you talk about the return to growth, the opportunity for a smaller footprint. Is this something that fuels both company and franchise development? Or do you favor one ownership model and development going forward?

Yes, I'd certainly let Paul to take a quick approach to that question, and certainly we're pretty excited about in terms of just the overall opportunity for the brand, both from a company and franchise perspective.

Oh, yes, Nicole, this is Paul. I think that it is going to give us the ability to influence growth really in both pathways, both company and franchise. Given that we are already over 50% off-premise. So the work that we're doing with the smaller footprint both in the front of the house and in the back of house is how can we meet where we think the puck is going in terms of the consumer, from a convenience standpoint. And what we're seeing is, not necessarily have the need for as much seating in the front of the house, you still need it. So with ability to do that and ability to over time have a lower investment cost is not only attractive to us, but it's attractive to franchisees, both our current and we believe as our performance continues to improve and our model improves that it'll give us the potential to have conversations with new franchisees in the future.

And then as you contemplate that return to a more accelerated pace of development, how do you just think about capital deployment in general? What's the right amount of debt, I know the net debt to EBITDA is fairly benign, I think the leverage is about 1.5x right now. But maybe just walk us through that process?

So we are certainly taking a disciplined approach, Nicole. If you look back to a few years ago when the company was building 50 to 60 restaurants a year, that's not something that I would see in our near future. So we'll be pretty disciplined with our approach. Don't think you'll see us have substantial increase in debt. Actually I think we'll be free cash flow positive in 2019. One reason I'm extremely excited about how we're approaching development this time is where we got kind of 2 paths from the prototype front. The first path is, as Paul mentioned, we don't need as much square footage in our restaurants. Today, we're much more off-premise. So we'll be able to save costs and have a better economic model just with the current operating systems as they sit today, we'll have pickup windows in many of our restaurants, which we're excited about. And then the second kind of approach that we are taking is also bringing some third-parties to help us from an industrial engineering perspective to really look at that back of the house kitchen. And Nicole, that's where I think there is a tremendous unlock for us in terms of making a much more efficient model for our teams to just execute better and just do a fabulous job. And I think that's going to have great legs, maybe not so much in 2019, but I think it can really help drive 2020 and beyond. And certainly, as you continue to execute on either one of those paths, you're going to see more and more franchise excitement for the brand.

And our next question will come from the line of Andrew Strelzik with BMO Capital Markets.

So my first question is, just a couple for me. My first question is, in the press release you mentioned a number of different cohorts where you're seeing strength driving the comp momentum. But as you're collecting customer data, is there really any one cohort that stands out that's really driving things more so than the others?

Really they're pretty equal, Andrew. I think that the zucchini one has been the most powerful to me because what it allowed us to do is really bring back a lot of lapsed users that really enjoy the brand, but they felt like they haven't been able to use us for a while. So that's the one that I think is ultimately the most powerful in redefining the brand. But I don't want to shortchange the impact that off-premise and operational improvements have had on the business. As a reminder, this performance we've had and the momentum we have gained, it's really started in Q4 of last year. And we are already pretty healthy on a positive side even before the zucchini launch. So I think the zucchini launch, what's fabulous about it is, when we did finally launch it we were in a much stronger position to execute. So short answer, I do think the zucchini is most powerful one in the long term. But collectively, I think it's the been the power of all those initiatives together.

And on -- I thought the -- in terms of the pricing tests that you're talking about potentially rolling out for next year, bundles was one that really stuck out to me as something that you're testing. And so I recognize that check growth from this quarter was kind of discrete related to Zoodles. But I'm just wondering how comfortable are you with the check growth that you're seeing, is bundles a way that you're thinking about maybe managing the check? And do you think that a bundled offer would attract a different customer or is that kind of just something incremental for an existing customer?

Actually -- this is Paul, by the way. I think the answer is both. We, in the pricing test, we are doing work against bundles and so far as Dave mentioned earlier, certainly I like what we're seeing. But I think it -- what it does is it gives people the opportunity to use us in a different way. So I think people who want to use us that way, that don't -- can't use the brand now. I think it gives them that opportunity. And then I think with some of the existing customers, they would, I think, skew a little bit more in that direction if we give them the opportunity to do that. So -- and frankly, I think it also helps us as we look down the road from a value perception. And we're pretty excited about. Because I think like you just mentioned, we see that it really helps the brand in two or three areas in terms of choice of how to use us, and also from a value perspective. And so far, I mean, the test is early. We'll be bringing so many things to bear on the market in 2019, but we're happy with what we're seeing.

Okay. Great. And then the last one for me. There's been a number of things going on in terms of the asset footprint between closures and slowing the growth and all of these things. As you look to start to reaccelerate that, can you just give us kind of early thoughts about how you're developing that plan? Is that going to be more of kind of backflow markets or are you starting look at new markets? Or just any kind of thought process about how that's going to unfold going forward relative to kind of a couple of years ago?

Sure. Sure. I think, certainly you'll see much more infill of existing markets. I love where our footprints sits today in terms of we have established markets, but still have some room to grow. And then we also have several markets that we're really not that much penetration in. So I think as we build those as well. I think there's great opportunity. So you'll see mainly in the backfill side.

(Operator Instructions) And our next question will come from the line of Andy Barish with Jefferies.

Just a follow up on the delivery. It seem like the target was more like 50% and you're at 80%. Am I missing something there? Or were you able to kind of get a few more DoorDash markets up and running a little bit earlier than expected?

Yes, part of it, it's actually all the same. We saw some great results. And from DoorDash itself -- saw the ability to have an expanded footprint. The results that we had, had us accelerated just a touch. It was very late in the quarter in Q3. So not very much impact there. But ultimately, what we like, what we're seeing, and like the footprint and operational execution from the DoorDash perspective. We did have a little bit more of a modest assumption earlier on just because you are relying on third-party, you are relying on integration, just wanted to be safe with how we -- what our expectations were.

Great. And then on the restaurant level margin opportunity for next year, you're sounding a little bit more optimistic. Any sort of one or 2 key drivers obviously beyond continuation of solid comps?

Yes. It's a pretty holistic approach. And so I see we pointed out a few in the call earlier. Yes, I think the pricing test is a big one in terms of the structure, not just the pricing element itself, but the structure driving people towards more profitable dishes. From a supply chain perspective, very happy with the progress that we're seeing in terms of just revisiting all of our approaches, our discipline, our platform. So I think there's great opportunity there. Back of the house, we're in the midst of testing right now, our new back of the house system that will touch labor and then will ultimately touch food. We see opportunities from a technology perspective that continue to look for efficiencies. It's a pretty holistic approach. I think it'll be layered in over time. I don't think you're going to see it -- impact turning in the calendar on January 1. But we certainly see a lot of different levers that can be pulled.

And our next question will come from the line of David Palmer with RBC Capital Markets.

Dave, you've mentioned operations. And in operations improvement that you made as being a reason why the comps were improving, even before you had the zucchini noodles. And within that time frame, you had some closed stores. And so there might have been some coexistence of reasons why the comps were already improving, in fact, it felt like fast-casual in general was getting better over that time. But other things that you can really point to that make you feel like your operations are improving in a way that you can sustain at least a better level of comps then you had in the past even without these sales layers, like delivery and the menu innovation that you're doing, anything that could help us get our heads around the operations recovery will be helpful.

Yes. Certainly, I think, the thing I would point to just all of our people metrics. I have seen in our business that the path that you always see to sales growth is that it starts with your people metrics improving. Then you see operational metrics improved and guest scores and then sales. We still see the fundamental foundation of that being people, continue to improve our management turnover, is lower than it's been in many, many years. So continued improvement just in the foundation of the people side, particularly from that turnover 10-year perspective, I feel very good about the foundation we've got. Maybe Paul, kind of, add to that as well.

Yes, David, this is Paul. I think a couple of things, and quite honestly is that it does start with people. It starts with retaining your people and training your people. And I think we have done a far better job over kind of the last 12 to 16 months of addressing the people needs. We've rolled out a new, basically training and development program that we're seeing is having a real impact on -- and frankly the training -- not only train and develop, but the accountability at the store level for the operational execution of the brand. And so not only are we -- we're seeing it in our scores, we're seeing it in our -- if we kind of look online in the social media. And frankly, we're seeing it in our store visits, not only when Dave's out in the store or Brad West or the regionals and RDOs. We're seeing a real uptick in the level of execution at the store level. And we think that's kind of where everything begins. And we can make brand promises about Zoodles and quick pickup and other things. But it comes down to are we executing against that to deliver and make sure the brand promise is happening. We still have certainly room for growth at, but I've seen real growth on the company on that and basically a real change in the accountability for executing at the store level.

Yes. I'll even add to that comment an unorthodox metric, Dave. And that is No Kid Hungry program. So we've partnered with No Kid Hungry. Our team members at the restaurant level are asking our guests if they'd like to donate as they take an order. We have always punched above our weight in terms of the amount of donations that we get for our size. And last year we set a pretty high mark at about $1,000 per restaurant. We beat that by about 20% or 30% this year. And when you see the teams engage at that type of a level to where they are all in, in terms of where we are trying to take his brand from a culture perspective and involvement in the community and just having an extremely positive experience for our guests. That's an unorthodox metric to be looking at through, but I think it's a really good signal for how strong our team is today in the operations side and their level of engagement. They do have great pride in...

No, that's helpful. I just want to ask one more about development. As you're contemplating reaccelerating unit growth. You mentioned perhaps value engineering the box a little bit, maybe getting down towards 2,000 square feet versus where you were before at 2,500-plus and being more off-premise in your focus in general might make that better return for you. But are you -- is that beyond that format and the size of it? How else are you thinking about growing differently than you did in the past? I think you mentioned infill, is that because you're thinking about getting better density and therefore get better delivery concentration or getting closer to neighborhoods? Like how you're thinking about it at this time differently?

Well, first, tremendous discipline on every site selection that we have. There's no compromising, there's no talking ourselves into the access or the parking or whatever it could be. So I think that's first and foremost. The critical piece we're doing is quality over quantity. From a market perspective, we have so much opportunity with infill. Several markets of ours that we are only at 1 restaurant per 300,000 to 400,000 population, and in our more established markets, we're probably 1 per 80, 1 per 90. So we know there's tremendous opportunity there. And to your point, it leverages your opportunity delivery, it leverages your supply chain, leverages your people, has so much benefit across the board and the brand awareness will just continue to grow in those markets. So we don't feel it's a need for us to go into far flung new markets. Certainly, there's a time and place where we'll be entering that, but we see a lot of runway just in the markets we're in today.

And I'm showing no further questions in the queue at this time. So now it's my pleasure to hand the conference over to Mr. Dave Boennighausen for any closing comments or remarks.

Thanks, Brian. We appreciate everybody's time today. Really excited with where the brand is going. And I think the momentum that the team has been able to accomplish is something we're very proud of. Again, appreciate your time today. Look forward to the balance of 2018 and talking to you again early next year.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude our program and we may all disconnect. Everyone, have a wonderful day.