Consumers sent Noodles & Company a clear message in the second quarter: Menu pricing had gotten too high.
Systemwide same-store sales for the fast-casual chain dropped 5.5% for the July 4-ended second quarter, and traffic was down 9.1%—numbers that would have been a lot worse if the company hadn’t taken immediate measures to cut pricing and talk up value, said CEO Dave Boennighausen.
Following a 5% price hike in February, Noodles went into the second quarter with a peak of 13% in pricing year over year, which Boennighausen said led to a “sudden and significant” double-digit decline in traffic early on.
To stop the bleeding, Noodles decreased menu prices by 3% in the beginning of May and began promoting value with a $10 mac-and-cheese deal and seven menu items priced at $7.
“With this pivot, our traffic decline steadily improved from a negative 14% in April to a decline of 5.8% during July,” said Boennighausen, indicating that the too-high prices were the dominant factor.
Still, Boennighausen said Noodles needs to take a hard look at the bigger picture. He outlined several strategies designed to drive back sales and reverse second-quarter results that were fairly grim for the fast-casual brand.
Revenues declined 4.5% to $125.2 million for the quarter and the company swung to a net loss of $1.3 million, or $0.03 per share, compared with net income of $1.3 million, or $0.03 per share, a year ago.
Boennighausen said the chain is also slowing growth while the company works on righting the ship. The guidance for unit growth was revised to 5%, down from earlier projections of 7.5% growth, with most new openings being company owned.
The chain also implemented a corporate restructuring earlier this year that Boennighausen expects will yield $2 million in annualized savings. Though it wasn't discussed during the earnings call, a company spokesperson said Thursday that the central support office was analyzed and adjustments were made to a few departments.
"In some situations, we modified responsibilities, and we also eliminated a handful of positions," the spokesperson said. "These decisions were not made lightly; however the restructuring has positioned Noodles to be more efficient as we drive the business forward."
In May, Noodles’ former CFO Carl Lukach stepped down. He has been replaced with Michael Hynes, the former vice president of finance and accounting for Ruth’s Hospitality Group, who joined Boennighausen on the call for the first time.
While most restaurant chains raised prices to address the higher commodity and labor costs over the past two years, Boennighausen argued that Noodles went further than its peers.
And the result was a loss of lower-income consumers, though rewards program members and higher-income consumers remained strong.
“At its height, we were running 13% year-over-year pricing and nearly 20% two-year pricing,” he said. “We needed to—and we’re continuing to—work to win back some of those more price-sensitive guests.”
Among the other strategies to win back sales is a comprehensive menu refresh. Noodles has hired a consultant to take a broad look at the menu, from offerings to presentation and pricing.
The chain is in the process of rolling out digital menu boards, which are expected to be in 75% of the chain’s 465 locations by the end of the third quarter and in all stores before the end of the year.
The menu boards alone have helped boost sales. Boennighausen said the mac-and-cheese deal in May showed 24% higher sales in restaurants with menu boards compared with those without.
One new menu item coming in September is a Chicken Parmesan, which Boennighausen said is both a familiar Italian favorite but still unlike anything else in fast casual. It will be priced around $10.95 and Boennighausen predicted it could be as popular as the hit addition of tortelloni when it was first introduced in 2021 and became a best seller.
Noodles is also focusing on catering as a sales driver.
Catering represented about 1.4% of sales during the second quarter, a 40% increase over the second quarter of 2022. But Boennighausen said catering could represent sales in the mid-single-digits in time. Currently, among the chain’s top 10% of restaurants, catering is about 4% of sales, he said.
The company is also investing in technology to better collect analytics to engage on a more personal level with guests. And Noodles also enhanced its online ordering system with a new “product recommendation engine,” driven by machine learning, that in tests showed a 50% increase in sales of the recommended items.
Though the company ended the quarter with $3.1 million of cash on hand and outstanding debt of $64.7 million, the board authorized a repurchase of up to $5 million of common stock.
Despite the disappointing second-quarter results, Boennighausen said, “I want to reiterate my belief that the core of the Noodles brand is well positioned for success and there’s significant upside potential of our current results. You have heard today of our plans and strategies to address our current shortcomings, build upon our strengths and deliver sustainable shareholder value.”
UPDATE: This article was updated with more information from Noodles & Company.
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