Operator: Good afternoon and welcome to today’s Noodles & Company Third Quarter 2021 Earnings Conference Call. All participants are now in a listen-only mode. After the presenters’ remarks, there will be a question-and-session. As a reminder, this call is being recorded. I would now like to introduce Noodles & Company’s Chief Financial Officer, Carl Lukach.

Your line is now open. Please go ahead.

Carl Lukach: Thank you and good afternoon, everyone. Welcome to our third quarter 2021 earnings call. Here with me this afternoon is Dave Boennighausen, our Chief Executive Officer.

I’d like to start by going over a few regulatory matters. 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 details relating to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. 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 news release and the cautionary statement in the company’s Annual Report on Form 10-K for its 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risk 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 2020 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. During the call we will discuss non-GAAP measures, which we believe can be useful in evaluating the company’s operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our third quarter 2021 earnings release and our supplemental information.

Now, I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Dave Boennighausen: Thanks, Carl, and good afternoon, everyone. I'm excited to share with you today our strong third quarter results and our progress toward achieving the accelerated growth objectives that we laid out earlier this year. Our third quarter results were highlighted by 16.3% comparable restaurant sales system-wide, allowing us to achieve another company record for average unit volumes at $1.3 million. In addition to strong sales performance, our restaurant level margin third quarter expanded 270 basis points versus the prior year to 18.1%, despite the impact of the current inflationary environment.

Both our average unit volume growth and our margin expansion have been aided by the success of our new restaurants, with our restaurants open from 2019 to 2021, continuing to perform above company averages for both sales and restaurant level margin. Our success in the third quarter as a result of the three primary strategies that we've been asking to capitalize on the opportunity ahead of us. The first is the continued differentiation of our concept to appeal to a broad range of lifestyles, convenience and dietary needs. Second, further activating our brand, particularly through our digital assets marketing strategy. And third, accelerating our unit growth to take advantage of an operating model that we feel is ideally suited for a post-COVID world.

As we think about the differentiation of our brand, I'd like to start with a discussion of our ongoing success in executing a disciplined strategy of culinary innovation is on trend, resonates with cash and builds brand royalty. Last quarter, we highlighted the June launch of our Tortelloni offering. Noting that for years stuffed pasta has been our guests most requested dish. Now, almost past its launch, Tortelloni continues to exceed our last year expectations, and we're particularly pleased with the conversion that we are seeing from trials of loyalty and frequency for those who have tried it. Well, our focus for the balance of the year from a menu perspective will be fully capitalizing on the addition of Tortelloni.

Our teams have also maintained a robust pipeline is innovation for 2022 and beyond. Next year, we anticipate a combination of enhancements to our already strong lineup of healthy alternatives, as well as new twist some familiar favorites. As we continue to differentiate the menu for today's environment, I’d now like to discuss our second strategy, focusing on further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. We have made significant progress with our digital capabilities and their impact on driving new gas, new usage occasions and increased frequency amongst a broad group of consumers. Digital continue to account for 52% of our sales in the third quarter, even as in restaurant ordering returned to 70% pre-COVID levels.

Of course, one of the biggest tools for driving digital growth is our rewards program, which is rapidly approaching 4 million members. The insights that we've garnered from our program, combined with increased capabilities to develop more personalized, relevant communication, has allowed us to attract new guests to Noodles & Company, as well as increased frequency of our existing guest. As we said, we believe that we're still in the early innings of more effectively utilizing our digital assets and data to better engage with our guests and we expect the strategy to be a meaningful driver of sales growth for years to come. Now, I'd like to talk about our third strategy surrounding accelerating unit growth, as I mentioned earlier, the restaurants open in the last three years continue to our third strategy surrounding accelerating unit growth. As I mentioned earlier, the restaurants open in the last three years continue to perform better than any group of new restaurants in our history without year volumes and restaurant level margins above company averages.

We are particularly seeing strength in our new restaurants that contain our order-ahead, drive-thru windows, which we estimate on average increased sales approximately 10% to 20% relative to traditional restaurants. We continue to expect at least 70% of new restaurants to incorporate the order-ahead, drive-thru windows as they improve convenience for our guests and are easy to execute for our operations teams. While we are excited about our pipeline through restaurants, from a development perspective, we have experienced the same short-term challenges that have been present throughout the industry. We and our franchisees have seen delays in construction, landlord building delivery and equipment availability over the last several months. As a result, we have pushed three company openings and two franchise openings originally slated for 2021 into early 2022.

These openings will be incremental to our prior outlook on unit growth for 2022 and we now anticipate at least 8% systemwide unit growth next year. At the present, we would expect our 2022 openings to be somewhat back loaded given the delays which exist in today's environment. However, our overall pipeline remains robust as we execute our strategy to achieve at least 1,500 units nationwide. A significant contributor to our aircraft will be our franchise community, and we were excited to announce during third quarter the signing of a new franchise deal to introduce the brand in the El Paso, Texas and Las Cruces, New Mexico markets. We're also pleased with the quality and trajectory of our conversations with additional prospective franchisees for both new territories, as well as potential refranchising of select company markets.

While we do anticipate further franchising progress the balance of this year, we also recognize that our prospective franchise partners most of whom are established restaurant operators currently running additional brands are also laser focused on navigating the last topic. I'd like to discuss today, the restaurant staffing environment. As we said before, for each of our three strategies, continued differentiation of our unique brand strengths, activating the brand for our digital marketing channels and accelerating unit growth, the importance of our team cannot be overstated. Our team has done a simply amazing job rising to the challenges of the last 18 months. Even with the strength of our team and better than industry turnover metrics, we have not been immune to the well-documented staffing difficulties seen throughout the country.

During the last half of Q3, these challenges combined with the impact of the Delta COVID variant, became more pronounced, resulting in reduced store hours across a number of restaurants in our system. Normalizing for staffing challenges our sales growth thus far in the fourth quarter remains on par with our record setting Q3 and we're taking a number of actions to address the current labor environment. We've implemented meaningful increases on our restaurant management compensation as well as instituted thank you and retention bonuses throughout our restaurant organization. Additionally, we've eliminated many time consuming tasks are execute in our restaurants, some on a temporary basis and others that we will believe make our restaurants more efficient both in the short and the long term. From recruiting to retention to development, we have piloted or implemented a wide variety of new approaches to aid and combat in the current staffing environment.

From sharing best practices amongst our operators to offering sign on retention bonuses for areas were particularly tough labor markets. While we believe shopping will remain a significant challenge in the near term, including in the fourth quarter based on trends from the last few weeks, we feel that the worst is behind us and I'm optimistic that our efforts will allow us to mitigate the impact as well as make us even stronger in the long term. Our efforts will allow us to mitigate the impact as well as make us even stronger in the long-term. I also am optimistic given the overall strength and commitment of our teams throughout the country. This commitment, evidenced by the tangible progress we've made across all aspects of the business has allowed me as a company to successfully navigate an unprecedented environment during the past 18 months and it gives me great confidence that we will successfully navigate the current environment as well and build off of the record setting sales results that we saw during the third quarter.

I'll turn it over to Carl to discuss in more depth our financial results.

Carl Lukach: Thank you, Dave, and good afternoon, everyone. In terms of the financial highlights. Total revenue for the third quarter increased 18.1% to $125.1 compared to last year. Comparable restaurant sales increased 16.3% system-wide comprised of a 15.3% increase at company owned locations and a 21% increase at franchised restaurants.

Average unit volumes for the third quarter were $1.38 million, representing a 16% growth rate compared to 2020 and a 15.9% growth rate compared to 2019. As a reminder, average unit volume is adjusted for restaurants that have been temporarily closed but is not adjusted for temporarily reduced hours within the restaurant. As Dave mentioned, total revenue during the third quarter was partially offset by both temporarily closed restaurants and reduced restaurant hours, driven predominantly by industry-wide labor shortages. These temporary closed days and reduced hours were more pronounced in the back half of the third quarter. We difficult to measure the exact 15.5% of AVU growth relative to 2019.

As Dave noted based on trends of the past two weeks, we estimate this impact has peaked and are encouraged by the opportunity Past two weeks, we believe this impact has peaked and are encouraged by the opportunities we've outlined from a talent acquisition and retention perspective. On a restaurant contribution basis, restaurant level margins were 18.1% in the third quarter, compared to 15.4% last year. Relative to the third quarter of 2019, which we believe to be a more relevant comparison, contribution margin increased 100 basis points from 17.1%, driven by sales leverage on higher average unit volumes and labor efficiencies. These that – these benefits also fully outweigh the incremental cost associated with third party delivery, which remains a key driver and investment for our business and it's held steady at 25% of total sales during the third quarter. We’re giving margin drivers in a bit more detail.

For the third quarter cost of goods sold was 25.1% of sales, an increase of 30 basis points from last year and 20 basis points better than the third quarter of 2019. On our last call, we indicated that cost of goods sold for the third quarter would be unfavorably impacted by commodity inflation and we are pleased to report that our results were better than anticipated. Our ability to offset the current inflationary environment was driven by temporarily securing shorter term inventory at more favorable rates than the spot market, driving efficiencies in our discounts and the 3% pricing we took on our core menu during the third quarter. Speaking of pricing, our third quarter pricing was for the third quarter was approximately 5.5%. As we look forward into the fourth quarter, we are still operating with industry wide inflationary challenges and anticipate continued incremental costs associated with securing supply for our restaurants, particularly within our protein mix.

In light of these headwinds, we are taking an additional 2% price increase on our core menu, which will be affected by the tail end of the fourth quarter. This increase will coincide with the lapping of price actions taken last year in fourth quarter and we expect a full fourth quarter pricing to be approximately 7.5%. Given the expected timing of our price actions, we anticipate that commodity inflation will still have an unfavorable impact on our cost of goods sold by approximately 50 to 60 basis points in the fourth quarter relative to the third quarter. A majority of this increase will be based on the need to temporarily purchase chicken at rates higher than historical levels. Labor costs for the third quarter were 30.0% of sales, which is essentially flat to last year and a 250 basis point improvement from 2019.

From a margin perspective, we saw a benefit in the quarter as a result of the temporary decreases in labor hours due to staffing challenges and reduced hours. As Dave mentioned, this margin benefit was offset by strategic investments in the third quarter and the retention of our team members primarily through a onetime appreciation bonus. We have also seen an increase in our average hourly rate driven predominantly by new hires onboarding at a higher rate in addition to overtime payouts. We continue to track the benefits of our kitchen of the future initiatives, in particular the rollout of our steamer equipment is meeting our expectations to reduce approximately two additional labor hours per restaurant per day. We have completed over 75% of our steamer rollout thus far in 2021, and we expect up to 90% of steamers to be rolled out by the end of this year.

We remain encouraged by the positive results demonstrated by the improved cook times, reduced labor hours and better taste to food scores. As we look ahead to the fourth quarter, we anticipate the similar labor cost percentage relative to the third quarter. Other operating costs for the quarter were 17.5% of sales compared to 18.6% last year due primarily to sales levers. Operating costs were 280 basis points higher than 2019 due to an increase in third party delivery fees and as the channel remains a critical avenue to drive brand awareness and new guests. Delivery fees were 5.3% of sales in the third quarter, compared to 5.5% in the third quarter last year.

We expect third party delivery to remain an important driver of the business going forward. And as such, we expect our operating cost percentage in the fourth quarter to be at similar levels to the third quarter. G&A for the quarter was $12.2 million compared to $10.8 million last year due to increases in both stock based compensation and temporary pay reductions implemented during 2020. As a percentage of total revenue, G&A decreased 50 basis points compared to last year. G&A included non-cash stock based compensation of $1.2 million during the third quarter, compared to $700,000 last year.

We anticipate that stock based compensation will be approximately $1 million next quarter and we anticipate that G&A dollars in the fourth quarter will be similar to our spend in the third quarter. GAAP net income for the third quarter was $4.7 million or $0.10 per diluted share, compared to a net loss of $0.1 million last year or $0.00 per diluted share. We also reported net income on an adjusted basis, which adjusts for the impact of impairments, divestitures and closures. On an adjusted basis net income with $5.3 million or $0.12 per diluted share compared to net income of $0.7 million or $0.01 per diluted share last year. It is important to note that our methodology for calculating adjusted net income no longer includes a tax adjustment related to the valuation allowance impact on our effective tax rate.

Accordingly, the adjusted net income reconciliation table in our third quarter earnings press release uses the same methodology for prior periods. We expect our effective tax rate to remain low for at least the remainder of the year. We do not expect to be a cash tax payer for the foreseeable future, given our sizeable NOL. Switching to our outlook for the rest of the year. So far through October, we have seen continued strength in our average unit volume growth compared to 2019 and expect volumes to remain strong throughout the fourth quarter.

That said, we also anticipate continued uncertainty related to the extent and duration of the current staffing disruption and the potential impact on our operating hours. As a result for the fourth quarter, we anticipate total revenues to range between $119 million and a $124 million. From a unit development perspective, we remain encouraged by our robust real estate pipeline as we head into next year. For 2021, we now anticipate seven to nine new restaurant system-wide compared to our previous guidance of $10 to $15. As Dave noted, the change in guidance is due to equipment availability and landlord delivery timing, which has pushed a handful of company and franchise locations into the early part of 2022.

These locations are simply a shift in timing and are considered incremental to our prior guidance of at least 7% unit growth on a system-wide basis in 2022. As such, we now anticipate at least 8% system-wide unit growth next year. From a capital perspective, in anticipation of several locations shifting into 2022, we expect full year capital expenditure of approximately $20 million to $22 million compared to our original guidance of $20 million to $24 million. Turning to the balance sheet at quarter end, we had cash and cash equivalents, $3.1 million and a total debt balance of approximately $23.7 million. During the quarter we made a full repayment on our revolver and anticipate maintaining a low cash balance going forward to optimize our cost of borrowings.

We anticipate that we will produce positive free cash flow through the remainder of 2021. Our ability to maintain strong liquidity will provide ample room to meet our growth objectives. With that, I would like to turn the call back over to Dave for final remarks.

Dave Boennighausen: Thanks, Carl. Tomorrow, Noodles & Company will release our first Social Impact Report, highlighting our progress and benchmarks across food, people, planet and community.

Our team has much to be proud of in creating a culture of servant leaders committed to fostering a better world. This commitment has allowed our team to navigate uncertainty from COVID to the economy to staffing challenges. While we can't ignore the impacts of the current staffing environment on our short-term operations, I'm confident that our team will rise to the challenge and come out even stronger than before. Noodles & Company’s off-premise digital and people strengths executed with a differentiated on trend menu perfectly suited for today's environment as the company positioned for significant growth over the years to come. Our performance thus far in 2021, including record setting AUVs from second quarter and then again in the third quarter, coupled with the strengthening operating and economic model, also bolsters my confidence in the significant expansion opportunity ahead of us for both growth company and franchise development.

I'm proud of what our team has accomplished and look forward to taking the next steps with Noodles journey together. With that Sharin please open the lines for Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from James Rutherford with Stephens Inc. Your line is open.

James Rutherford: Hey, Dave. Hey, Carl. Hope you're both doing well. Want to start on the unit growth side. I appreciate the color on the near-term growth challenges I mean clearly you are not the only ones experiencing the delays there, but just as we think about 2022, you mentioned that growth would be a little bit more back half loaded.

Just wanted to hear your thoughts on what visibility you have into that growth. Are you in a place where leases are pretty much signed and it's simply a matter of getting the construction done, the equipment installed? I mean just help us think about what level of visibility you have into that 8% growth for 2022.

Dave Boennighausen: Yes. So, again, we feel very comfortable with what we're seeing from a visibility perspective. First off, those restaurants that did get push from 2021 to 2022, those are all ready to go.

And there's the critical piece of equipment that wasn't going to be able to make it in time for us to get the construction timeline done, such that it would be late once 2021 and said those would be an early 2022. So now you're just looking at the balance of the pipeline of what we had already said is kind of our target rate, and we're actually ahead of where we expected to be from an overall LOI perspective. They’re in different processes in terms of construction, recently lease signing and LOIs. But we're actually above where we had expected to be. So while we still do expect that there could be some delays in terms of when the buildings are actually delivered to us and we have all the equipment available, we feel pretty strong with the both the quality and the quantity of the pipeline and the work of what we see for twenty two.

And that includes from a franchise perspective.

James Rutherford: Okay. Perfect. And then on the staffing dynamic, I appreciate the comment that it was about a 1.5% AUV impact in the third quarter. If I heard it correctly and it sounds like that, the suggestion is those challenges maybe peaked and it's still uncertain, but maybe we're on the downward side of that.

And just thinking about the outlook that you provided, Carol, in terms of 119, 124 million of sales. Can you just kind of level set us on what that sort of assumes for an AUV growth perspective of sales can you just kind of level set us on what that sort of assumes for a AUV growth perspective versus 2019 and is that I mean are you assuming a pretty significant step down into your growth, because I'm just trying to figure out what the implied impact there as at staffing if you if you could help there. Thank you.

Dave Boennighausen: Sure, happy to. So our sales guidance reflects a similar trend in AUV growth relative to 2019 that we reported in the third quarter.

So continued strength there, really when you look at the range on the high end of the range we reflect an improvement in staffing and the resulting temporary closure days and the low end of the range we reflect a continuation of current levels through a good portion of the fourth quarter. So really that's the volatile piece that defined the range.

James Rutherford: That's super helpful. Perfect. Thank you.

If I could put this one more in and then I'll turn it over. From the menu price dynamic, we've heard consistently from all the restaurants that we cover when you push on price, you're not seeing much resistance from the consumer. I'm just curious what you see on any traffic impacts from the price you've taken so far and kind of what gives you comfort on the next action, the 2% price you're taking in the fourth quarter?

Dave Boennighausen: Yeah. This is Dave speaking, I think we feel very strong James, with the overall value proposition of Nielsen Company, so over the years, we've been pretty recent [ph] and pretty soft in terms of the amount of pricing we've taken. And as we continue to evolve and improve the concept from a quality of food perspective, convenience, speed, et cetera, we feel it right proposition remains very strong.

As a reminder, most of the pricing does tend to fall on third-party, so third party delivery, which we have seen continues to be an occasion that's not as price sensitive. That's where we've been most heavily into from a pricing perspective. So the result both historically not being very aggressive on pricing as well as not being able – not being really touching the core menu very much, we still feel like we're in a very good place and we've not seen resistance to your point over the last several months on a pricing action we’ve taken.

Carl Lukach: Jim, the only thing I'll add to that is the 3% pricing increase took in August. We took those three strategically inelastic areas of the core menu.

So, we were able to measure that specifically when we look at that at from a phoenix basis and from a unit and dish velocity basis. And so we were able to that sort of gives our confidence that there hasn't been any impact of the price increase.

James Rutherford: Perfect. Thanks very much.

Operator: Thank you, our next question comes from Jack Corrigan with Truist Securities.

Your line is open.

Jack Corrigan: Hey, guys, thanks for taking the question and congrats on your continued momentum in your business here. It's impressive to see, now year-to-year, same store sales trends accelerating despite all the staffing issues. But I want to ask more specifically about the trends you're seeing in same store sales throughout the quarter. And if you guys are just if you could give October specifically or quarter date specifically, I think that'll be really helpful.

Dave Boennighausen: Yeah, I think from overall cases, it's actually start with Q3. So what we had seen Jack was momentum, the growth across the system really through July in that first part of August.

Carl Lukach: As you bifurcate restaurants and markets that have not had as much staffing challenges. We've been able to maintain that same level of trajectory, that same growth momentum as we've gone into October. The only difference you're seeing really is applying the restaurants that have had some staff challenge.

So the fundamental strength in the business remains extremely strong. We don’t want to necessarily suppose pure October numbers because there was some volatilities, we think of how COVID impacted, impacted us across the quarter, but we learned the fundamental two year growth that still remains very consistent with what we had seen during the third quarter.

Jack Corrigan: Okay, great. That’s really helpful. And then I mean if you think about the drivers in the quarter you know looking at digital marketing or your food news with the tortellini and then the reopening of the dining rooms, I guess how would rank order those or any others you can think of?

Dave Boennighausen: Certainly tortellini has been a great hit, and we still feel there's a long runway ahead of us from tortellini.

And I think what's exciting is not just has it hit core guest but one metric we're seeing just across tortellini, but even across the entire system is, as people get introduced to the brand, they enter that rewards program, we’re seeing that the duration of time before their next visit continue to shrink. So we're continuing to convert people who are trying to brand into more frequent loyal consumers. At the same time, our core group continues to strengthen as they have more reasons to come to Noodles & Company. So the combination of tortellini and how we're able to leverage that from a data and digital perspective is extremely encouraging. As you go to a little bit more couple of things that I point out that gives us continued confidence that digital retention still being north of 50% even as we're getting in restaurant sales come back.

That seems to continue to be a very sticky retention and feel very strong about that and also seeing much turn back positive from the same-store sales perspective. That's been the day part most impacted for us as well as most of the industry and that had positive same store sales during the third quarter for the first time in quite a while. So fundamental aspects of the business, because everything seems to be moving in the right direction, we certainly got some noise here from a staffing perspective, but the fundamentals very strong strengthened during Q3 and we've been able to maintain that through Q4 and be able to maintain that through Q4.

Jack Corrigan: Great. That’s great.

That’s very helpful. And then just one quick one on development, can you break out what you expect for a company versus franchise openings in 2022 as some have shifted and it's a little different outlook.

Dave Boennighausen: We haven't disclosed the exact number and there are some franchise potential candidates we're looking at that would potentially be doing it refranchising as well. So until we get a little closer in that comes to past, we have said historically that we expect that the growth is going to be predominantly company during 2022. We would expect that still to hold.

And as we go through 2023 and 2024, especially, that's when we look be looking for about half of the year growth to come from franchise and half from the company.

Jack Corrigan: All right. Great. I'll pass it along.

Operator: Thank you.

Our next question comes from the Nicole Miller with Piper Sandler. Your line is open.

Nicole Miller: Thank you. Good afternoon. I want to ask first on the top line in the AUVs if we could look past the noise here at the 1.38 million AUV, if you could look past seasonality, some one-time items and fully get the price that you're looking for to absorb inflation, what would be the start of a margin? I'm thinking if the long-term is 1.35 million AUV in a 20%, I believe store level margin, this 1.38 million has to get you quite close to that?

Dave Boennighausen: Yeah.

We think that is pretty darn accurate, Nicole, as a reminder for folks that, just level set earlier this year, we now accelerate growth objectives to get to a 1.450 in AUV and 20% restaurant level margin by 2024. Clearly, the momentum in the business since we initially disclosed these numbers give us pretty strong confidence that we'll be able to meet that objective and potentially surpass it. The 1.38 million does have some one-time noise from an inflationary perspective, as well as some of the compensation actions we took. With that 18.1 or 18.5 or 19, potentially more normalized environment, but I can't say clearly as we look at the overall long-term path of a 1.450 million and 20% margin, we feel it the results Wall Street in line with what we'd expect.

Nicole Miller: Okay.

Great. And then the second and last question also trying to look through the noise the pipeline in these ships are clearly very unforeseen issues. Typically in any pipeline, you would have some cushion and I'm just thinking it's not an LOI or sign lease issue at all, right? I mean, you had all your ducks in a row and then here's the new glitch. So if you think of the next year and the 8% development, is the pipeline like 9% to 10% deep. So we could have another unforeseen glitch because they seem to be appearing now more than we like or you kind of right at 8% on the nose in terms of the pipeline?

Dave Boennighausen: Now we're building a pipeline to call assuming that there are still volatility.

Whenever you build the pipeline you assume some level of fallout for whatever particular reason. So we built that type of cushion into our overall projections. It does - to your point, the LOI is still very good in terms of the lease negotiations and so forth. We have seen some delays just over the last year, as you've seen landlords, as they're going through their base building delivery dates and what they expect. There are some of the same challenges that they're looking at.

How we’ve approach it as we target 8%, we certainly build a pipeline that's beyond that, recognizing that there could be continued things out of our control.

Nicole Miller: All right. Thanks for the update. Have a great night, thank you.

Dave Boennighausen: Thank you.

Operator: Thank you. Our next question comes from Andrew Strelzik with BMO. Your line is open.

Andrew Strelzik: Hey, good afternoon, thanks for taking the questions. I guess first, I just wanted to clarify the gap between the company comps and the franchise comps, are we supposed to understand that that's basically a function of the staffing challenges, I’ve seen – I know kind of the laps and things like that the numbers can be wonky.

Is there more in there that's driving the divergence or is that really the biggest piece of that?

Dave Boennighausen: Yeah, I just struck it as a reminder, everybody we have about 15% of our restaurants are about 77 units that are franchised. They tend to be a bit more in college locations, Andrew. And one thing we've seen both the company as well as franchise really strong, same store sales growth as college campuses now versus what they were a year ago. You see some outsized growth. Additionally, from a franchise perspective, they kind of some of the staffing challenges in their particular markets bit earlier than we did on the company side.

So they tend to be in markets that are quite having as much disruption from a staffing side. So as we look at the fundamental strength of the business and one thing that gives us as great confidence as we do is looking at best franchise partners have kind of gone past some of these temporary disruptions, how well they've been able to maintain momentum over that timeframe.

Andrew Strelzik: Got it. Okay, so that makes sense, and that's helpful. Secondarily, I wanted to dig in a little bit more on the turnover commentary, and I know, the brand has had periods where turnover has been a challenge and more recently, it's been running in a much better place, but in an environment now where every brand in the restaurant space and even outside is kind of fighting for talent and taking actions to try to get as much time as they can.

What do you attribute continuing to drive, lower turnover so it’s really impressive for the brand and I'm just curious for your insights about what you think are the biggest drivers contributing to that?

Dave Boennighausen: I would say that in that sense you have two years you have been with Noodles and Company in the 20 years in the industry. The most common threat I've seen in any and now, Andrew, is the success of a restaurant is driven more than anything by the tenure of general manager. We have done very laser focused approach from a culture compensation incentive rewards just how we've approached that particular group. So the one thing that gives me so much confidence as we look forward is our tenure of managers is actually higher, even as we've gone through this process. So we've been able to maintain that core culture of strong future leaders.

And as you maintain that core leadership group, it just permeates through the whole organization. I would attribute more than anything. I mean, I think our teams we have great leadership across the board from our operations side. But how we've built that and strength and just the overall consistency from store level manager perspective has been the most important part. As we said, we're not immune, but I think we feel very good, not just with how we're weathering this compared to others, but also how it looks from a foundation perspective as we start building out significantly more restaurants.

Andrew Strelzik: And then the last piece here, I just wanted to and I apologize if I missed this or didn't understand fully, but the comment that the worst is behind the company in terms of the staffing challenges or the margin pressures. What is it exactly that you mean by that? Are you actually seeing the percentages get better exactly that you mean by that or are you actually seeing the percentages get better or are you seeing the hours improve a little bit? I know there's uncertainty, but I just want to understand exactly what you mean by the worst is behind the company? Yeah. Thank you.

Dave Boennighausen: Yeah. I approach it two different ways.

So the first part is every single day, our restaurants teams and our team throughout the organization is looking at the number of restaurants that have been impacting with how to reduce hours and we're seeing that number just continue to go down over the last couple of weeks. So it really started to get higher at the tail end of Q3 and then into the first part of Q4. And then the last couple of weeks, you're starting to see some really significant progress. And then the underlying cause in terms of just the pure number of employees you have and how staffed you are at the restaurant level, we are seeing significant progress in terms of the number of applications that are now turning into hires and employees within the organization that has meaningfully improved really over the last three to four weeks. So that's kind of the leading indicator that we started seeing a few weeks ago, three or four weeks ago that are now manifesting itself in fewer restaurants that are getting impacted by the disruption.

Andrew Strelzik: Got it. Okay. Thank you very much. I’ll pass it on.

Operator: Thank you.

[Operator Instructions] Our next question comes from Todd Brooks with C.L. King and Associates. Your line is open.

Todd Brooks: Hey, thanks. Good afternoon, guys.

Couple of questions for you. One Carl, can we talk about the one-time bonuses paid in the third quarter? Maybe what kind of basis point impact that had and I guess how effective they were? Do you think it's something that needs to be repeated in future quarters or truly one time?

Dave Boennighausen: Sure. So you're right. During the third quarter, we implemented a thank you bonus. Really, this was largely offset by some of the staffing levels that we saw in the restaurant due to the reduction in hours.

So we would characterize this as one-time in nature and something that we would not anticipate repeating. Having said that in the fourth quarter Dave did also mention that we are planning some retention bonus and signing bonus so that we're also anticipating being offset by the lower staffing levels.

Todd Brooks: Okay, so is there a way we can characterize it from a – without the bonus activity that gets us towards that 18.5%, 19% restaurant level operating margin that Dave was talking about in response to Nicole's question at these unit volumes?

Dave Boennighausen: Yeah. I would say that – when we talk about in the past, Todd, is that we like our prime costs to be at kind of 55% at this level. So roughly 25% of our COGS, 30% on labor, there a lot of noise in Q3 itself.

So as we look fundamentally at the business and how we then you know lever from those starting points. I feel very good that we're continuing on that path. As you look at the labor environment from a long-term perspective. Obviously retention and having just being an employer of choice will remain extraordinarily critical. So retaining -- hiring the right folks, retaining them and then developing future leaders, that will be a critical component as we look at wage inflation and maintaining that kind of 30% level and then library off a bit.

At the same time, we also recognize that with wage inflation we do continue to look for what's the next kitchen of the future? What are the next operational changes we can make, equipment changes we can make that will allow us to be more efficient and effective at the restaurant level. So while we're not able to necessarily say hey, 18.1, would have been 18.5 or 19 in Q3, excluding some of those one-time events, that's just because there were so many gives and takes throughout the given quarter. You think of COVID incentives, you name it. Probably vaccine incentives. We think that as we get to that increase in volume and we're able to maintain that over a sustained time and then continue to build off of that, that we're well on our way to that 20% target.

Todd Brooks: Okay. Great.

Carl Lukach: And Todd, just to add some context…

Todd Brooks: Yeah. Go ahead.

Dave Boennighausen: Todd, just to add some context what Dave mentioned about pulling forward some of the compensation increases or the wage inflation.

In the third quarter, we saw wage inflation just under 6% And as we look forward to the fourth quarter, we're anticipating mid to high single digits.

Todd Brooks: Okay. Great. Thanks, Carl, and then my final question, I'll pass it along. Two parts, one just on the on the franchising side.

Dave, you pointed to the fact that, listen, a lot of these guys are not a multi-unit multi-brand and they're working on operating through the same challenges that the rest of the spaces. But can you talk qualitatively about how the pipelines building giving how much the results are improving over the course of the year? And then you've kind of touched on not wanting to talk about the unit breakdown for growth for fiscal 2022 because there could be some refranchising opportunities with potential new partners. Can you talk about those efforts, what it takes to decide to refranchise corporate stores that have inflected in the return profile continues to improve and what you would look for in return for making that decision. Thanks.

Dave Boennighausen: Yeah.

Let's start on the second one in terms of refranchising. What we typically look at is a market where if you can find a strong operator confined a strong operator that has infrastructure has a pipeline of talent from the concepts that they operate. If they can likely grow that market faster than we could and they were able to capitalize on that experience. Clearly there's an asset light aspect of the just bouncing off the portfolio. But from an overall perspective, we look at that growth opportunity and who do we think is best situated to grow that concept or to grow our concept as quickly as we think is appropriate.

Quantitatively just how we're looking at pipeline itself, I'm very pleased with what we're seeing, in particular to as you referred to Todd the Q2 results, now as you look at Q3 results, I think everything that we're seeing with a franchisee, they're very attractive to the cash and cash return, the momentum in the business, how we're positioned the effectiveness of our new unit prototype. So as we continue to get more and more – more strength underneath us, a fundamental business success in the operating model, we just continue to build more from a flywheel perspective, if you will. So, yes, as we said, folks we're talking to, they're working through some of the same supply chain disruptions, staffing disruption issues that we're dealing with from the company side and as the whole industry is dealing with. I feel like as you can expect some good things in the next three to six months in terms of momentum on the franchise side.

Todd Brooks: Okay, great.

Thanks, Dave.

Operator: Thank you. And I’m currently showing no further questions at this time. Now I turn the call back over to Dave for any closing remarks.

Dave Boennighausen: Now, just want to say appreciate everybody's time this afternoon.

Again thank you to our team, time and time again over the past 18 months, they've risen to unprecedented challenges and we're already seeing ourselves kind of starting to get on the right side of this current challenge. And as we look into the balance 2021 and beyond, it couldn't be more excited and proud of where the team is and where we're going from this point forward. So thank you again for your time. Have a wonderful evening.

Operator: This concludes today's conference call.

Thank you for participating. You may now disconnect.