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

Carl Lukach: Thank you and good afternoon, everyone. Welcome to our fourth 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 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 material – could differ materially from those projections during a number of risks and uncertainties. The Safe Harbor statement in this afternoon’s 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 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 identified important factors that could – that cause actual results to material differently 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 fourth 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.

2021 was an important year for Noodles & Company as we made significant progress against our growth objectives. Validating the resonance of the brand for today’s consumer, as well as setting the stage for accelerated unit growth, which is now underway. For the fiscal year, revenue increased 20.7% compared to 2020 to over $475 million. Comparable restaurant sales increased 22.1% system-wide and digital sales increased 20%, accounting for 57% in total sales. Restaurant in the margin for fiscal 2021 increased 400 basis points to 15.9%, culminating in 233% increase in adjusted EBITDA to $38.1 million for the year.

As we look back at 2021, one important aspect is the underlying AUV momentum that we’ve seen throughout the system. Evidenced by the record AUVs of $1.3 million that we achieved in Q3 prior to the staffing and Delta variant challenges of the fourth quarter. Even with the impact of Delta and staffing challenges, for the full year average unit volumes reached an all-time high of $1.3 million, representing approximately 22% growth over 2020 an increase of over 11% versus pre-pandemic 2019. We saw strength throughout the country with particular momentum in less penetrated markets where we – where we were able to accelerate brand awareness to target digital efforts. As AUV grew in 2021, we’re also proud of the efficiencies gained throughout our labor model, particularly with the implementation of steamers that will be completed nationally this quarter.

The gains from these efficiency initiatives will manifest themselves throughout 2022, both to reduce labor hours as well as improvements and throughput in tough times, which are critical as we face increased demand, both in existing and new locations. Finally, during 2021, our newest vintages of restaurants performed at our highest level in company history, validating our strategy to accelerate growth with a proven model that yields 30% plus cash and cash returns. Turning toward recent results. During the fourth quarter, while the underlying business remained strong, the company was significantly impacted by both staffing – the staffing challenges, as well as the surge of the Delta COVID variant, which was concentrated in our most penetrated markets of the Rocky Mountain West and the upper Midwest. This resulted in a meaningful amount of temporary closures or reduction in operating hours, which we estimate impacted revenue by approximately $8 million for the fourth quarter.

The Delta variants impact on the full quarters’ financials were additionally compounded by one-time cost nation-wide related to investments and staffing and continued volatility within our supply chain. It’s important to note that his impact was particularly profound during late October and through the month of November. Notably, the staffing improved and the Delta variants subsided, the business quickly regained momentum, as evidenced by our strengthening comparable restaurants sales throughout the quarter. From the fiscal period perspective, system-wide comparable sales grew 6.8% in October, increased to 11.9% in November, and then again to 14.7% during the month of December. As the calendar trend to 2022, trailing the surge in Omicron cases has impacted the beginning of the year.

But again, we’re pleased with how performance has improved as cases has subside – subsided. During our January fiscal period, comparable sales increased 2.7% at company-owned locations and 4% system-wide. Results have accelerated in the recent weeks, with comparable sales in our February period increasing 7.5% at company-owned locations and 8.7% system-wide as of yesterday, February 22nd. These results give us confidence that the brand will again prove its resilience and accelerate both sales and margin expansion quickly as Omicron pressure subside. This belief is also bolstered by the brand’s strong value proposition, with the majority of our dishes having entry points of approximately $7.

We feel this pricing power gives us the ability to enact additional pricing during the second quarter and potentially beyond to medicate anticipated margin pressures. As we look to the year ahead, we continue to believe that our three primary strategies will have a profound impact on our ability to become a premier growth story of the restaurants face. These strategies remained first, the continued differentiation of our concepts to appeal to a broad range of lifestyles to be into dietary needs, which will be best exemplified by a particularly exciting new culinary launch in the second quarter. Second, further activating our brand, particularly to our digital assets and marketing strategy, which ultimately will result in the launch of a new brand or new platform that we’ll roll out in the coming months. And third, accelerating our unit growth, to take advantage of an operating model, we feel is ideally suited for today’s environment, driven by our target of 8% unit growth in 2022 and accelerate to 10% next year.

Let me provide a brief update on each of these. Starting with our culinary strategy and continued differentiation of the brand. Noodles & Company remains the only national fast-casual restaurant bringing fresh takes on world flavors with the noodles and pasta-based menu. Our fresh, flavorful and ready to order approach sets the brand apart. And our variety and the fact our food travels so well makes perfectly suited for meeting the consumer needs around convenience.

Offering our guests real cooking, so they don’t have to, whenever and wherever they want. In 2021, we showcased the strength of our menus through continued innovation, particularly with the introduction of Tortelloni in June, which continues to be the best performing new menu item in our history. We still feel there’s a lot of runway that Tortelloni offering and are particularly pleased with the increase in frequency that we’re seeing from those who have tried the dish. Our ability to optimize our menu innovation between healthy offerings and new spins on familiar favorites has been a hallmark of our brand, and that will continue in 2022. Just last week, we launched two new salads, refreshing the category in advance of upcoming warmer months, while simplifying our operational execution.

And throughout the year, we will additionally be completely testing on new menu items for 2023 and beyond. However, the culinary innovation, where we are currently most excited about is LEANguini which we’ll launch in a few months. LEANguini has the taste and the texture of a traditional linguini noodle and gets its name from having over 50% less net carbs and over 40% more protein than a traditional linguini noodle. The culinary formula for linguini is proprietary, first of its kind offering that is a result of almost a year in innovation. We feel that linguini going to have a similar impact what zucchini noodles had on the brand a few years ago, expanding our market reach meaningfully by redefining the traditional expectations including pasta.

As our culinary innovation accelerates in upcoming months, so to our second strategy which is further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. During 2021, our digital sales reached 20% over the prior year, and both for the full year and Q4 accounted for over 50% – 57% of total sales. We continue to be impressed by the strength of this channel, which is bolstered again by how well our food travels throughout premise occasions. The strength of our rewards program in our residence with younger more digital savvy consumers. We continue to enhance the targeting of our marketing, as well as the capabilities of our digital assets.

Introducing a higher level of personalization to our guests engagement that’s enhancing the overall guest experience. Of course, one of the biggest source for driving digital growth is our rewards program, which has now crossed 4 million members. During 2021, we saw significant increases, both in our ability to attract new overlaps guests, as well as convert rewards members to more frequent guest. For example, 65% of the new members who sign up for our rewards program returned for a second visit within 60 days, which is faster than revisit rates you’ve seen in the prior years. We believe this points to not only the power of the program itself, but also its ability to inform more effective targeted marketing communications.

Given the disruptions that industry has seen in recent months, our marketing priorities at Q4 of ‘21 and in Q1 of ‘22 have focused on accelerating a brand building platform that we’ll roll out in the coming months. This increase in marketing activity will capitalize on the strength of our initiatives and increase the insights we have gathered from our rewards program. This provides added confidence and the ability for us to accelerate momentum during 2022 with efficient targeted activation of the brand. Well, we look forward to culinary innovation and brand activation throughout 2022, perhaps the most impactful strategy is the acceleration of our unit growth profile, which is now underway. As we discussed before the results, the restaurants open in the last three years continue to perform better than any group of the restaurants in our history.

The average unit volumes in restaurant level margin is about company average. This momentum has continued thus far in 2022, which is particularly exciting, given the openings thus far, we put our first franchise location into the market of South Carolina, as well as the test of a smaller square footage order had dragged through location outside of Madison, Wisconsin, that is also an entirely off-premise location. We just say approximately 35 openings system-wide for 2022, including 7 during this first quarter. While the balance of our 2022 openings will be somewhat backward given the current development environment, we remain very confident in the opportunity to accelerate the unit growth to 10% beginning in 2023 with the proving 30% plus cash on cash return model, again perfectly suited for today’s environment. This model which incorporates our order has dragged through windows and an operating model that reflects the progress made over the last few years in terms of labor efficiencies, continue to gain positive retentions from the franchise community as well.

As we closed earlier this quarter, in January, we closed a transaction with an established 150 plus unit, multi-concept franchisee to be our exclusive partner for California. This transaction included the sale of 15 existing company-owned restaurants, as well as the early development agreement that provides for the opening of 40 new locations over the next several years. This agreement, the recent strong opening of our newest franchisee in South Carolina, and the previously announced franchised deals expanded to West Texas and Southern New Mexico validates the Noodles & Company opportunity and we’re pleased with the current quality and trajectory of our conversations with additional prospective franchisees. As we enter this phase of accelerated growth, the importance of our team cannot be overstated. While we’ve not been immune to the staffing challenges we see throughout the industry in recent months, we’re highly encouraged with both the improvement at our overall staffing levels, and our ability to retain the key talent that is critical to the execution of our new unit acceleration.

Our management tenure remains extraordinarily strong, and we’re on track to open nearly a 100% of new units with experienced, proven general managers prepared to introduce the brand to new traders throughout the country. As always, my thanks to our team for their incredible dedication towards delivering tremendous execution to our guest during an unprecedented time. And I look forward to joining you on the journey as we accelerate all aspects of Noodles & Company growth story. I’ll now turn it over to Carl to discuss in more depth our financial results and expectations within 2022.

Carl Lukach: Thank you, Dave and good afternoon, everyone.

We are very proud of our full year financial results, which represents strong upward momentum towards our accelerated growth objectives even with a challenging market backdrop. For the full year, total revenue in 2021 was $475 million and nearly 21% increase compared to last year. Underlying our revenue growth, our average unit volumes were $1.3 million for the year, a 22% increase from last year and in a 11.3% increase versus 2019. More specifically on the fourth quarter, total revenue was $114.8 million, an increase of 7.1% compared to prior year. Comparable restaurant sales increased to 11.2% system-wide, comprised of a 9.5% increase at company-owned locations and a 20.8% increase at franchise restaurants.

Average unit volumes for the fourth quarter were $1.31 million, representing 14.9% growth compared to 2020 and a 10.8% growth rate compared to 2019. And the reminder average unit volumes is adjusted for restaurants that have been temporary – temporarily closed for a full day, but is not adjusted for temporarily reduced hours. As Dave noted, while the business regained significant momentum during the latter stages of the fourth quarter, October and November were particularly challenged first by staffing issues, and then the prominence of the COVID-19 and Delta variant in our most penetrated markets. This led to an increase in both temporary closures as well as reduced operating hours, which we estimate negatively impacted the fourth quarter by approximately $8 million in revenue. This increase in temporary closures combined with one-time staffing incentives also impacted our restaurant level margins during the fourth quarter.

Restaurant contribution margin for the fourth quarter was 12.4% compared to a 13.6% margin during the fourth quarter of 2020. For the full year, contribution margin increased 400 basis points versus prior year to 15.9%. Cost of gods sold was 25.9% of sales in the fourth quarter, an increase of 70 basis points from last year. The increase during the fourth quarter was predominantly driven by ongoing market challenges in supply chain and a volatile commodities environment. Our cost of goods sold inflation was approximately 8% during the quarter, largely driven by our protein basket, specifically, the price of chicken breast.

Our full year cost of goods sold was 25.2% and roughly flat versus 2020. Labor costs for the quarter was 33.2% of sales, which is a 110 basis points above last year. Fourth quarter labor costs include approximately $1.1 million of one-time expenses related to retention, hiring and COVID related expenses, such as vaccination and sick pay. In total, our core wage inflation for the fourth quarter was approximately 9%. For the full year, labor costs declined a 130 basis points as a percentage of sales to 31.2%.

Other operating costs for the quarter were 18.4% of sales, which was essentially flat to last year, given a similar mix in our delivery business, and was 17.9% of sales for the full year. Delivery fees were 5.9% of sales in the fourth quarter, compared to 5.7% in the fourth quarter of last year. G&A for the quarter was a 11.4% – sorry $11.4 million, which was essentially flat to last year. G&A includes non-cash, stock-based compensation of $700,000 during the fourth quarter, compared to $600,000 last year. GAAP net loss for the fourth quarter was $4.7 million or $0.10 per diluted share, compared to a net loss of $3.8 million last year or $0.09 per diluted share.

We also reported net income on an adjusted basis, which adjust for the impact of impairment, divestitures and closures. Excluding these adjustments, our fourth quarter net loss was $2.5 million or $0.05 per diluted share, compared to a net loss of $2.3 million or $0.05 per diluted share of last year. As a reminder, our methodology for calculating adjusted net income no longer includes a tax adjustment related to the valuation allowance and the impact on our effective tax rate. We expect our effective tax rate to remain low at least through 2022 and we do not expect to be a cash tax payer for the foreseeable future, given our sizable NOL and other – tax credit in total of over $150 million. Now, I’d like to take a moment to talk about the first quarter of 2022 with a bridge to our expectations for the full year.

As you have no doubt heard, external disruptions have had an impact on many of our peers in the first quarter to-date, and we are no different. In addition, it’s worth noting that our first quarter is seasonally our lowest due to our geographic concentration in cold weather locations, even without the added impact of Omicron, staffing challenges and elevated levels of inflation. Despite the near-term challenges, we are extremely optimistic about our opportunities ahead of us this year. We are proud of our successes in 2021, particularly the strength we’ve demonstrated in our unit economic model, which sets the scene for our strategic focus areas in 2022, including our accelerated unit growth. Now, let’s start first with our expectations from a revenue perspective.

For the first quarter, we anticipate total revenues to range between $110 million and $113 million, inclusive of mid-single-digit comparable restaurant sales growth. As Dave indicated, the onset of Omicron variant during the beginning of 2022 had a material impact on our business in January and to a lesser extent in February. However, just as we saw on the fourth quarter with the Delta variant, comparable restaurant sales have rebounded as Omicron has subsided. Comp restaurant sales increased 2.7% at company-owned locations in fiscal January and have increased 7.5% thus far in February. It’s also worth noting that with the successful close of our franchise transaction with Warner Foods, our prior California locations are no longer included in restaurant revenue as of mid-January, and instead that we’ve recorded in franchise royalties.

We estimate that the net impact in the first quarter from a total revenue perspective is $4 million. The impact to EBITDA will be negligible in 2022 and accretive as the territory is built out thereafter. Now let’s look at our cost expectations. Today, we reiterated our target of 20% restaurant level margins by 2024, driven by acceleration of our average unit volume, continued labor efficiencies and a return to a more normalized level of food inflation. There is no question that the first quarter will be impacted by Omicron and inflationary pressures compounded by our historic seasonality.

And we anticipate Q1 of 2022 restaurant level contribution margins of 7% to 9%. However, we expect meaningful acceleration of margin as the year goes on, culminating in restaurant level margins in the high-teens during the back half of the year. For the components of restaurant level expense, we’ll start with cost of goods sold. Our cost of goods sold margin is expected to be unusually high in the first quarter of 2022, given a reset in some of our annual food contracts, and industry-wide record levels of inflation, particularly in protein. We expect COGS of 28% to 29% this quarter, with a linear progression back to our – long-term goal of 25% by the second half of the year.

Our COGS in the short-term is particularly impacted by inflation we’re seeing in protein, which accounts for approximately a quarter of our cost of goods sold. More specifically, we are seeing outside inflation in boneless chicken breasts, which makes up about half of our protein expense. Despite these challenges, we continue to be encouraged by our strong vendor partnerships and ability to opportunistically secure shorter-term inventory at more favorable rates in the spot market. Like COGS, we expect labor to be unusually high during the first quarter, between 33% and 34% of sales, driven by sales deleverage during our seasonally low first quarter, and staffing inefficiencies at COVID related temporarily closed restaurants. We are forecasting low double-digit wage inflation for the first quarter and remaining at elevated levels throughout the year with modest sequential improvement.

Even with the anticipated wage inflation, we are forecasting a return to our target labor cost of 30% of sales by the second quarter this year, driven by sales leverage, as well as efficiencies gained from our steamer initiative, which is will now be complete in its national rollout during Q1. Underlying our margin forecast is the anticipation of an additional price increase to our core menu during the second quarter. We firmly believe the company has meaningful pricing power, particularly as the majority of our pricing actions during the past few years have been defined to the premium paid by our third-party delivery guests. As you can imagine that gives and takes as pricing increases roll on and others roll off. But we expect effective pricing to be around 7.5% in the first quarter, increasing to about 9% to 10% during the second quarter, and leveling off between 6% to 8% during the balance of the year.

We anticipate general and administrative expense of approximately $12 million in the first quarter, inclusive of stock-based compensation. We expect stock-based compensation to be around $1.2 million. Switching to development. We continue to see excellent performance from our new restaurants, and anticipate 7 openings during the first quarter, primarily company-owned restaurants. For the full year, we expect approximately 35 system-wide openings with roughly 70% of openings being company-operated.

We do expect the pipeline – pipeline to be somewhat back loaded, with roughly a third of our 2022 openings occurring in the fourth quarter. From a restaurant closure perspective, while we are confident that we are now at the end of the closures related to real estate that is not well suited for today’s current environment. In the first quarter, we anticipate two closures, one, which confided with the California transaction and one mall-based location in the DC Metro area. We continue to believe that our best use of capital is investing in new unit development, particularly given the strong performance of our recent practice, which are on track to support our target of 30% cash on cash return at new restaurants. For 2022, we anticipate $30 million to $34 million in capital spent, of which, roughly two-thirds were support new unit development.

Despite the inflation we are seeing in construction and raw materials for development, we expect average net investment for new locations to be at or just above $800,000 per location. We expect the remainder of our capital to be allocated to ongoing restaurant maintenance and continued investment in technology to enhance both our digital business and our guests’ engagement. Our accelerated unit growth is supported by a strong balance sheet. As the end of fiscal 2021, we had cash and cash equivalents of $2.3 million and in total debt balance of approximately $22.3 million. We anticipate that our 2022 restaurant – development needs will be funded through our operating cash flow.

However, during our seasonally low Q1, we expect to utilize a portion of our revolver capacity to fund working capital and development needs. With that, I would like to turn the call back over to Dave for final remarks.

Dave Boennighausen: 2021 was an extremely successful year for Noodles & Company, despite the well documented industry challenges related to COVID, staffing challenges and increases in inflation. Well, there are means and ways as we enter 2022, the fundamental business has never been stronger, with significant improvements in our culinary innovation, digital and marketing capabilities, not renovated model efficiencies, all bolstered by our value proposition that allows us to mitigate the current inflationary environment. Most importantly, the brand is now embarking on accelerated unit growth with a model perfectly suited for today’s environment.

But despite the strength of recent classes, the expected opening of 7 system – 7 locations system-wide this first quarter, and increased momentum [technical difficulty]. Noodles & Company is well positioned to be one of the premier growth stories in the restaurant industry. Now look forward to sharing our success with you in 2022 and beyond. With that, Alexander, please open the lines for the Q&A.

Operator: Thank you.

[Operator Instructions] We have your first question from Jack Corrigan with Truist Securities. Your line is open.

Jack Corrigan: Hey, guys. Thanks for – for taking the question. And my first one is just on what’s implied by your same-store sales guidance with mid-single digits in the first quarter? You know, if I’m doing the math, right with 2.7% in January and 7.5% in February, you’re sort of already at mid-single digits.

So does that imply just mid-single digits in March? And I guess why wouldn’t we see an acceleration from here?

Dave Boennighausen: Yeah, Jack, we certainly think that there’s opportunity for acceleration from here, the only aspect that we – that we like to keep in mind is – is the weather. I mean, we saw that the Upper Midwest competitors or restaurants in the Rocky Mountains, they have an impact on the business. And just knowing the volatility and weathers want to respect that has the potential to impact March as well.

Jack Corrigan: Great, thanks. That’s helpful.

And then I guess, the second question is on your staffing levels. And is there any way you can quantify where your staffing levels are currently versus – you know maybe versus ‘19 or versus what do you think full staffing would be at this point for these volumes? Like how much is that limiting your sales – sales still currently?

Dave Boennighausen: Yeah, we think that limiting on sales is very minimal. So it’s a very small percentage of our restaurants that are now currently short staffed, not out of the woods yet by any stretch, but at the same time, the momentum has been extraordinary and the retention of the team has been great. I think one thing, Jack that we point to, that we’re particularly proud of, and as you look at that recovery from a staffing side, our cook times actually thus far at 2022 are the best they’ve been in the history of the company. So we not only have got staffing to a much higher level, but we’re executing at a very high level.

Part of that has to do with the steamer initiative, for sure. But a big part of the staffing coming not quite to where we’re at 100%, we’re getting much closer.

Jack Corrigan: Great, thanks. That’s – that’s really helpful. And then just last one on development.

Yeah you had elevated store closures in ‘21. And you said you expect too in the first quarter? Is that the only closures you expect for all of ‘22 –

Dave Boennighausen: Yeah we are – sorry, go ahead, Jack.

Jack Corrigan: No, you go ahead, sir.

Dave Boennighausen: Yeah, we’re finally at the malls. So there were some signs that from a finance perspective, it made sense for us to wait until the lease was over, before we ultimately close it.

We’re now at the end of that. So as there’s highest potential for one and two where either the developer has something happen or we see it or we see a different opportunity to consider a relocation or something like down the road like that. That’s always possible. We’re finally now at the end of all those closures that were related to really just the review of the portfolio and how trade area dynamics and the consumer need to change. And as we noted, one of those locations as example was the mall location that we expect to close here in Q1.

Jack Corrigan: Great, thanks for the questions.

Operator: We have your next question from Andrew Strelzik with BMO Capital Markets. Your line is open.

Andrew Strelzik: Hey, good afternoon. My first question you mentioned some of the inefficiencies as well as some one-time expenses in the quarter.

Can you quantify how much the one-time stuff was in the quarter? And then is there any assumption for 1Q and the guidance you gave as well were kind of not from the costs?

Carl Lukach: Sure. For the quarter, the one-time impact that we had, which particularly showed up in our labor margins was $1.1 million, that was related to one-time staffing, such as the retention bonus, sign on bonuses, but also related to the COVID related sick pay or vaccine pay. From a go-forward basis in our Q1 guidance, there is no expectation for any of those to continue, no more one-time charges. We don’t anticipate that to be throughout the duration in next year – sorry, this year.

Andrew Strelzik: Yeah, got it.

Okay so that’s helpful. And then obviously understand the – the kind of regional pressures in some of your key areas in the Upper Midwest and the Rockies. I guess I’m just curious you know what are the trends look like in maybe the rest of the country? I mean, did you see just as we’re kind of thinking about understanding how to you know, temporarily this isn’t those types of things, just kind of maybe more durability in some of the other regions? Could you speak to some of those trends, please?

Dave Boennighausen: Yeah, absolutely. So as you look at the Mid Atlantic, you look at sort of the Southwest, those markets that were not impacted by Delta, one you know it was encouraging that they carry over the momentum manager from what we’ve seen in Q3, pretty much throughout all of Q4. And so they didn’t actually start seeing the impact of their business until here I mean that directly push to our 2022 with Omicron, which gives us that added confidence in terms of the overall trajectory of the business that are drawing momentum.

Andrew Strelzik: Got it, okay. And then my last question is just on the menu. So, recently here just announced some of the new salads going on the menu. You talked about linguini. Recently, we’ve seen Truff Mac, and it just feels like the menu news.

Pace is kind of accelerated here. Is that right? Is that intentional you know maybe some holdover from the last 24 months or maybe that you know, the environment wasn’t as conducive? I’m just kind of curious how you’re thinking about further opportunities across the menu as well kind of rolling forward here? Thanks.

Dave Boennighausen: Yeah, I mean, let’s just start with just the overall power of [technical difficulty] and we think that one has just great potential similarly [technical difficulty] and for the brand in terms of expanding the overall reach into so many different – different types of occasion in guest profile. That’s what has been in touch for a long time. Salad was something that we’ve been tested for a while as well.

This is ultimately a pre-deliberate discipline process where we have lots of – lots of different items in tests. And you can expect to continue to see that type of innovation really for the foreseeable future and in terms of every three or four months that plus having some good menu news as we do it, we take things off the menu as well, to ensure that we don’t sacrifice I mean that operational complexity. But I will say they will – they will be pulp like celery, fresh category we’re excited about that certainly is the one that as we look at 2022, it will be the great driver and another reason we have such great confidence that will gain momentum throughout this year.

Andrew Strelzik: Got it, thank you very much. I’ll go ahead and pass it on.

Operator: We have your next question from Andy Barish with Jefferies. Your lines open.

Andy Barish: Hey, guys. Wanted to just get a sense – excuse me, on the marketing side. To clarify, did you say with – with the COVID surge that you actually kind of pulled back on what you would have expected from a marketing side? And then, I think it’s the – the messaging and the creative supposed to evolve a little bit in ‘22? Can you kind of let us know how that you know kicks off in the – in the 2Q beyond just you know product news?

Dave Boennighausen: Yeah, if you’ll see – you’ll see things shift from being more transactional, which is what we saw during the first part of COVID.

And then and you’re correct, it wasn’t that we pulled back significantly from a marketing perspective. But there was a little bit of a muted nature to it, given all the staffing challenges that you saw you know throughout the industry, as well as – as well as the impact of Delta, a little bit of Omicron. What you will see as we look into 2022 as, us, harness that full power of all the data insights we’ve had, the – these improvements we’ve made to the digital assets, which you’ll see those continuing to evolve and improve as well. In general, just making the brand more visible, pointing out to all those great aspects from our cooking methodology to how we approach people, to service, to the value proposition, to the variety of food. This brand has so many great attributes and elements to it, that we still feel we’re just scratching the surface in terms of consumers really truly knowing that and what’s great about the data that we’ve got and the improvements we’ve made throughout our – our guests engagement as well as our orders platform is we’re so confident that the activation is going to be as effective and efficient as well.

Andy Barish: Got it, thanks. And then Carl, on the – on the G&A side of things, I guess, is that $12 million you talked about in the 1Q a pretty good run rate. And – and do you get any – any noticeable savings from you know California now being – being franchised you know with that market kind of probably needing some regional support out here, given it was you know it was not contiguous to some other areas?

Carl Lukach: Yeah, that’s right. So – so first from a runway perspective, I would assume that it’s – it’s a somewhat lower quarter than the full year if you think about analyzing the quarters, just given some of the cadence of our historical spend. So I would anticipate that Q1 and beyond we see a little bit elevated G&A expense.

In terms of California, there is a death benefit there certainly. So I would expect that, that is baked into our number. It does help us streamline some of the operations.

Andy Barish: Okay. Thanks, guys.

Operator: We – we have your next question from James – Rutherford with Stephens Inc. Your line is open.

James Rutherford: Thanks for taking the questions. Hey, Dave and Carl. I wanted to dig – dig in a little bit on the margin guidance for the 1Q and most importantly, the ramp through into the back half of the year.

Starting on the COGS side of it, I think I heard you say that you’re expecting 28% to 20% COGS margin in the first quarter, then back to 25% in the back half of the year. We know your menu price assumptions for each quarter. What are you assuming on the commodity inflation front to get you back to that 25% COGS margin by the back half of the year?

Carl Lukach: Sure. James, let me walk you through a little bit. So, first of all, we are continuing to see this inflation pressure on our cost of food.

It’s really driven by the commodity price volatility, staffing pressures, and as I mentioned, particularly protein. In the first quarter, we do see elevated levels of inflation. What we’re estimating right now is around 18%. These challenges we’re seeing ongoing, and we’re still seeing some elevated pricing even at – at where we are today, particularly in protein. In terms of the go-forward, there’s really two elements here.

First, it’s the pricing action that we’re anticipating to take, we’re looking to take about 2 – sorry about 3% to 4% pricing action in the second quarter. So that’s going to be a key offset. But in terms of what getting back to normal looks like in the second half, you can imply about mid-to-high single digit levels of inflation just in the second half. That’ll get us back to normal levels.

James Rutherford: Okay, thanks for that.

Flipping over to the wage piece of it. If I have my notes correct, I think wage inflation was around mid-single digits last quarter. I think you said high-single digit 9-ish percent this quarter and then guided low-double for the first quarter, correct me if I’m wrong on those numbers. But, where do you think we find the top end of that? It sounds like most of your restaurants are fully staffed based on what Dave was saying earlier. What are you predicting for wage inflation? How that progresses through the year?

Carl Lukach: So first of all, you’re correct on those assumptions.

That’s what we’ve seen so far. And that’s what we’re anticipating in the first quarter. We are anticipating that wage inflation for the most part continues, there will be some relief as you go throughout the year. But we’re anticipating that that remains at elevated levels. A lot of that is due to rehire rates, in addition to increasing our wage band as we remain competitive in each of these markets.

And then thinking about what’s going to get us back to that 30% target by the second half of the year, it’s really three things. First, it’s ongoing efficiencies that we’re now anniversarying and having in full run rate, particularly our steamers, which are going to complete in this quarter. The second is, there were some one-time associated costs with our labor force in 2021 that we are no longer going to be anticipating this year. And then finally at our sales leverage, as we look at you know the continuing growth in traffic and pricing, we’re anticipating sales helping to drive that 30% target cost for labor.

James Rutherford: Very helpful, thank you.

If I could slip in one more. Dave, on the – the unit growth expectation for next year, which I think is still 10%. You know conceptually what kind of mix do you think and you know it’s probably like numbers, but between kind of company-owned and franchise and what sort of visibility do you have into – into that growth acceleration?

Dave Boennighausen: Yeah, visibility continues to strengthen. We’re really encouraged by the sheer number of quality that we’re seeing through the pipeline, making obviously, the development environments a little bit volatile, but we’re very pleased with what we’re seeing there. The overall mix but it’s still going to be a little bit dependent upon you know how we see that the franchise community changed their solid rate of growth as we’re seeing momentum there.

We would expect the majority of openings in 2023 to be company-owned and then shifting in 2024 and beyond to be closer

to 50:50 mix in terms of company-owned and franchise of the mix.

James Rutherford: Excellent. Thank you guys, really appreciate the help.

Dave Boennighausen: Thank you.

Operator: We have – we have your next question from Nicole Miller with Piper Sandler.

Your line is open.

Nicole Miller: Thank you, good afternoon. Just super quick on 4Q. Was the $1.1 million labor investment you’re talking about was that all in 4Q?

Dave Boennighausen: That’s correct.

Nicole Miller: Okay.

And so the question is then on the $8 million of sales impact from Omicron. Is the only store level margin impact at $1.1 million or did that hit other areas of the store level margin?

Carl Lukach: So first, the $8 million was actually related to Delta. So Omicron has more of an impact that we saw in the first quarter, particularly January into February, but Delta was the impact in the fourth quarter. So, to your question, it was – it was both the $8 million and then the associated flow through in addition to labor inefficiencies for restaurants that were operating at partial hours, plus the $1.1 million, so there was certainly a compounding margin impact.

Nicole Miller: So the $1.1 million translates to a 100 basis points.

So if you didn’t have these COVID variants, you know store level margin would have been 13.4% instead of 12.4%. Just to put a finer point on it, you’re saying there’s – there’s other things to take into consideration and would have been even better than 13.4%?

Carl Lukach: That’s right, Nicole. So for that $8 million of revenue impact that were related to partial closures, both full day closures and partial day closures. There’s – there’s labor inefficiencies associated when you’re – when you’re operating just a day part or having to close intermittently. So, I agree there is – there were other factors impacting labor as a result of those temporary closures.

Nicole Miller: Okay. I mean, I’m sure it’s difficult to tease out. But if there’s a number to throw out you know let us know. And what was the percent marketing in 4Q?

Dave Boennighausen: That for our fourth quarter marketing is just around 1% which is consistent with what we saw - in what was seen in prior quarters as well, a little bit lower in terms of absolute dollar strength versus what we’ve seen partially you know as we saw the impact on the revenue side of Delta.

Nicole Miller: And I asked that then in the context of coming forward to 1Q with all the conversation and guidance you’ve already – addressed at this point, and assuming the marketing isn’t changing too much in the operating line, then, the store level margin in total for 1Q is barely going to be double-digit.

I just want to make sure we’re all on the same page before we hang up here. Is that – is that the indication? Because you didn’t really address occupancy and other operating costs.

Carl Lukach: Yeah, Nicole, that’s about right.

Dave Boennighausen: Yeah, that’s correct. So we – we actually guided 7% to 9% in terms of Q1 margin.

Do you want us to give the –

Nicole Miller: All right, thanks –

Dave Boennighausen: Do you want [technical difficulty] everybody in the historical seasonality we have in our brand –

Nicole Miller: Okay.

Dave Boennighausen: In terms of this you know 100 basis points lower for margin perspective then what you could see through the balance of the year. So as we talked about on the call, that Q1 margin guides, it incorporates not just a pretty meaningful seasonal impact that we have – that we’ve always had, but also kind of that elevated element that we’ve seen inflation perspective and the impact of Omicron. But you know as we said, we expect this is going to materially improve throughout the course of 2022. We expect that will be approaching 20% restaurant level margins present back half of the year here.

Nicole Miller: Just one more last question on the subject. And I realize it’s a very challenging question. But you know if we couldn’t absorb all the detail and just back up high level and say, gosh you know you’re making a little bit less here than in any other period you know if you want to pick the same quarter or different quarters, but for the same or different reasons, right, it’s a little bit of a question mark. Is the Delta between like Omicron market or let’s say COVID market conditions? I think the Delta then is just the – the commodity inflation. Can you slice and dice it that way and say, okay, that 7% to 9% store level margin should be this if demand had been normalized if like you know and it should be this, if commodities, if you could keep pace with price action?

Dave Boennighausen: Yeah.

When I think how we articulated that is that COGS we expected in the normal environment is around 25%, and due to inflation we expect that to be 20% to 29%. So significant inflation here during the first part during Q1. Now when we alleviated that, not just through, we expect some improvement in the inflation over the course of the year, but also through the price action that we’re taking from a labor perspective, again, our expectation is between 33% to 34% always have been higher if you want, again, from the seasonality perspective. So, this one is more related to just some of the inefficiencies through Omicron, we would expect that labor line to have some meaningful opportunity to actually have leverage over the course of the balance of just ‘22.

Nicole Miller: And just – very last question.

It could be a little challenging for franchisees with the sales being inconsistent and commodities being up like this. What kind of conversations are you having with the current potential franchisees and how are you lending support?

Dave Boennighausen: Yeah, very positive actually. They understand the impact that also has had on the business as well as own product inflation. These are just tiny multi-ended operators that they’re encountering all of this on their – on in their business as well. And they’re attracted to us because they see that pricing power and the value proposition.

Most importantly, they see the track record of 30% plus cash on cash returns from our most recent classes, that’s even before we’re able to implement some potential cost savings. So, they’re encountering the same challenges in their markets that we’re seeing throughout the industry. And you know when you look back at 2021 as a whole, extremely strong year for us after a margin expansion as well as the expansion perspective. And we see the cadence bridged us ‘22 being remarkable as well and there remains tremendous confidence from that side.

Nicole Miller: Thank you.

Operator: [Operator Instructions] We have your next question from Todd Brooks with The Benchmark Company. Your line is open.

Todd Brooks: Hey. Good afternoon, guys. Thanks for the questions.

Dave Boennighausen: Hey, Todd.

Todd Brooks: A couple of – couple of questions here. One, you’ve bumped the AUV goal for fiscal ‘24 by another $50,000 here. So $1. - $1.5 million.

Can you talk about what percent of the current base is above that hurdle already? And what the restaurant level operating margin profile of those stores look like that are above $1.5 million?

Carl Lukach: So Todd, the – we have of our existing restaurant base, I would say anywhere from 30% to 35% that’s already above that level. And they’re operating certainly above the 20% contribution margin. When we were looking at this at $1.4 million or $1.5 million on prior targets, you know over 40% of our current locations were at that current level also. And again, operating at 20% contribution margin or above.

Todd Brooks: So with the increase in the AUV goal, does the 20% goal continuing for contribution margin just reflect inflationary realities or because that it sounds like the base that’s already north of the $1.5 million is above the 20% target?

Dave Boennighausen: I don’t know if we could say realities versus uncertainties in terms of we feel that this concept has the ability to expand margins meaningfully not just even through this year, but beyond.

But just want to reflect there is uncertainty in terms of what the overall inflation environment looks – looks like in 2023 and beyond. So really reflects that in terms of the overall cost as well, that the brand can lever beyond 20% its size ever.

Todd Brooks: Okay, great. And then can you share with us the proceeds to the company from the sale of the 15 units to Warner Foods?

Dave Boennighausen: Now something that we have – that we will be disclosing, as Carl mentioned in terms of the overall impact on the business from either perspective, relatively not negligible for 2022 Well we’re excited about in terms of this transaction is such a great established partner, and as they build up that territory, will be meaningfully accretive. I’m kind of across the Board for our P&L, the proceeds very solid deal but at the same time, not material enough to having to move the needle significantly in terms of the overall balance sheet.

Todd Brooks: Okay, great. And then finally on the franchising pipeline. Just you talked about maybe a little bit more of a corporate store next to the 23 openings before getting

to 50:50 now and ’24. Is that just reflective of some lost momentum with discussions due to Omicron? Or how would you – how would you talk through that pipeline and the momentum that you would have around initial additional announcements here in the near-term?

Dave Boennighausen: Yeah. Actually that was always our expectation, just given the realities of as we sign on these new transactions that are over and maybe 1 in 2022, 2 or 3 in 2023 as you build more and more momentum, there’s a waterfall effect that ultimately that gets to you know

roughly 50:50 split, which is the math behind it, it doesn’t really happen until 2024.

So that was actually always the expectation was that we were not going to be able to kind of

get 50:50 split for the new growth perspective until 2024.

Todd Brooks: Okay. And do you feel like Omicron slowed down the ability for us to see more announcements in the – in the near-term? Or is it just pushing out kind of closing deals for reality that everybody had to operate through?

Dave Boennighausen: We don’t think so. I – we certainly you know recognize that during the staffing crisis, we talked about and I think we saw more of it then. Because during the staffing crisis, Todd, our operating partners and we were talking about they were talking with this prospective franchisees, they would typically have their own concepts during – during that staffing crisis, they want to make sure that they had under control.

Omicron is a little bit different in terms of it’s been relatively short in terms of its impact. We saw a significant spike clearly throughout the industry in January, and that come down materially and almost completely subsided here in February. So that impact has been very minimized. People would pass that frequently. So momentum we feel actually has been pretty strong.

Todd Brooks: Okay, great. Thanks for the questions.

Operator: I am showing no further questions at this time. I would now like to turn the conference back to Dave for any closing remarks.

Dave Boennighausen: Now, Thanks, Alexander and appreciate everyone’s time today and hope that you have a great evening.

Thank you very much.

Operator: Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.