Noodles & Company considers restaurant closures to advance comeback plan

Noodles & Company is considering closing some underperforming restaurants as part of its turnaround strategy.

The fast-casual business has identified about 20 locations with significant negative cash flows. Collectively, these units generate annual losses of about $2 million. The company is now working with a national broker and beginning discussions with landlords to explore closing these stores by the end of their leases or sooner.

“We believe that closing underperforming restaurants will allow us to increase our focus on our restaurants with the greatest growth potential and deliver increased corporate earnings and cash flow post-closure,” CEO Drew Madsen said last week during the company’s second-quarter earnings conference call.

The timing of potential closures is uncertain and will be decided on a case-by-case basis, added CFO Mike Hynes. He also said the company expects to close 10 to 15 restaurants in fiscal 2024, including “some of the underperforming restaurants.”

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Noodles opened five company-owned restaurants in the second quarter and one in July, bringing the total number of new openings for the year to eight. It also opened a new franchise location in July. The company expects to open a total of 10 new company-owned restaurants and three new franchise restaurants in fiscal 2024. It also sold six Portland-area restaurants to a new franchise group in the second quarter, bringing the total number of franchise locations to 95, or 20 percent of its 475 stores.

These changes come as part of an ongoing effort to restructure operations and revamp the menu after a year of declining sales that rebounded in the second quarter. Total sales increased 1.8 percent to $127.4 million. Systemwide comparables increased 2 percent, including a 4.7 percent increase at franchise restaurants and a 1.3 percent increase at company-owned restaurants. Company traffic decreased 1.1 percent in the second quarter, with pricing contributing 0.9 percent and mix contributing 1.5 percent.

Madsen said he was pleased with the improvement in comps “despite a challenging consumer environment,” noting that Noodles hit the fast-casual benchmark in same-store sales and traffic for the first time since 2022. The chain also improved its restaurant contribution margin by 70 basis points, “supported by strong cost management.”

Most importantly, he said, Noodles has made “significant progress” on its five strategic priorities for long-term profitable growth, including an improved foundation for better operations and encouraging initial test market results for the menu redesign.

“Although the current consumer environment may cause fluctuations in our near-term results, I am confident that we are on the right track,” said Madsen.

He stressed that the top priority is to achieve operational excellence and focus on key aspects of the guest experience, such as food quality, overall satisfaction and order accuracy – especially during meal times when there are fewer guests. To achieve this, Noodles has conducted bi-weekly training at all of its locations to establish new standards in food preparation. The training covers specific tasks such as cooking proteins and caramelizing noodles, as well as improving service elements such as table checks and drink accuracy.

In addition, the company is improving compliance with staff standards and ensuring that general managers and assistant general managers are present for dinner during peak shifts. These initiatives have resulted in a steady improvement in guest satisfaction during the day shift.

“In the short term, it’s difficult to tie the improvement in guest satisfaction to the increase in guest traffic, but we are clearly establishing the culture and behaviors among our team members needed to deliver a more consistent and satisfying guest experience,” Madsen said. “I’m confident this will lead to stronger guest loyalty and, in the long term, increased guest traffic.”

Noodles’ second priority is a comprehensive menu overhaul designed to capture guest interest. This initiative will go through several phases. Phase 1 identified compelling new and improved dishes through concept testing with The Culinary Edge. Phase 2 involved taste testing to ensure the new dishes developed by the food and beverage consulting firm exceeded guest satisfaction benchmarks.

With these phases almost complete, Phase 3 has begun, which will see the new offerings rolled out at test locations to assess real-world guest satisfaction, operational feasibility and financial impact. The goal is to refresh approximately two-thirds of the menu with new or improved offerings over the next year.

Recent additions to the test locations include Crispy Chicken Bacon Alfredo, which saw a 50 percent increase in sales and higher guest satisfaction compared to its predecessor; Lemon Garlic Shrimp Scampi, which meets demand for lighter options, and Chipotle Chicken Cavatappi, which offers a Latin-inspired flavor profile. These dishes are scheduled to launch nationwide in October. Less popular dishes, such as Zucchini with Roasted Garlic Cream Sauce, have since been removed. Five more dishes were recently introduced, with further launches planned after the holiday season through early 2025.

The company is using limited-time offerings as a stopgap measure while it completes testing of its core menu. Madsen said the most recent LTO, Baked Alfredo with grilled chicken, hasn’t done as well as its predecessor, Steak Stroganoff.

“Our hypothesis is that three of our last four LTOs, including Chicken Parmesan, Chicken Prosciutto Tortelloni and Baked Alfredo with Chicken, all fell into the category of classic Italian comfort food and felt too similar to generate particular visitation interest,” he said. “With that in mind, we plan to offer one dish from our existing menu starting in mid-August: Spicy Korean Steak Noodles.”

Although the dish is little known, it is very popular with guests and very popular with younger consumers, he added.

“We believe it has more headline value and better generates interest in special visits,” Madsen said. “With Spicy Korean Steak Noodles launching in August, as well as Crispy Chicken Bacon Alfredo, Lemon Garlic Shrimp Scampi and Chipotle Chicken Cavatappi rolling out nationwide in October, we will have plenty of exciting menu news to effectively bridge the gap until the full new menu launches in 2025.”

With 55 percent of revenue coming from digital channels and 26 percent from loyalty program members – who spend twice as much annually as non-members – the company’s third priority is to maximize its digital ecosystem. In 2023, it invested in a customer data platform that enables more personalized and relevant offers with fewer discounts. The strategy has reactivated former loyalty programs, resulting in a 5 percent increase in their traffic and a 32 percent decrease in loyalty discount spending through the second quarter.

Noodles also saw strong performance in third-party delivery, supported by investments in sponsored offers, exclusive dishes and profitable promotions, which drove double-digit traffic growth in Q2. The plan is to continue to focus on these areas while testing broader media channels such as connected TV, streaming audio, podcasts and direct mail to attract new customers and increase loyalty program sign-ups.

The fourth priority is to maintain double-digit growth in catering while improving the infrastructure needed for more aggressive future expansion. The channel, which accounted for 1 percent of sales in 2022 and 1.2 percent in 2023, has risen to 1.7 percent of sales in the current year of 2024, with systemwide sales up 42 percent in the second quarter.

“We remain convinced that the catering business can account for at least four to five percent of sales in the future. We believe that growth in the catering business will be gradual and contribute to higher overall margins,” said Madsen.

To fuel this growth, Noodles plans to expand its catering offerings by targeting events like Teacher Appreciation Day and introducing new menu options like boxed lunches and takeout. The company will also employ new strategies, including part-time catering managers to build relationships with local organizations and targeted LinkedIn ads to reach catering decision makers. In addition, the company will streamline its operations by integrating a new ordering solution to eliminate manual input from third-party platforms and exploring options to outsource delivery and transfer orders between locations.

The final priority is to strengthen financial stability through proactive cash management and increased operational efficiency. The company has reduced capital spending from $52 million in 2023 to an expected $28 million to $32 million this year, thanks to fewer new store openings and the completion of the rollout of digital menu boards.

In January, the company launched a comprehensive cost-cutting initiative that is expected to deliver savings of approximately $4 million in 2024. This initiative included targeted staff reductions in less critical areas, employee benefit adjustments and supply chain improvements. The company’s Smart Cost Savings team is actively pursuing further reductions in restaurant operating costs and general and administrative expenses, and now expects total savings of over $5 million for the year.