Noodles & Co CFO Carl Lukach talks digital sales, delivery, and ghost kitchens

Noodles & Co (NASDAQ: NDLS) reported on August 3 second-quarter results that came in better than expected. Earnings per share of 12 cents beat estimates by one cent per share while revenue of $125.6 million came in better than the $123.32 million analysts were looking for.

Some of the more notable highlights from the report include a 51.5% year-over-year increase in Average Unit Volumes at $1.35 million, a 15% increase in digital sales, and the highest level of restaurant contribution margins since 2014 at 18.9%.

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Following the report, Invezz had the opportunity to catch up with Noodles & Co CFO Carl Lukach and ask a few questions.

Digital sales momentum

Amid the ongoing COVID-19 pandemic, the ability to provide guests with a safer method of ordering has become a focal point for all restaurant stock investors.

Noodles reported that digital sales accounted for 56% of total sales in the second quarter. This represents a higher mix compared to rivals like Chipotle Mexican Grill, Inc. (NYSE: CMG) that said digital sales accounted for 48.5% of total sales in its second quarter.

Lukach told Invezz the company’s momentum is in part due to its investments in digital that started “well ahead” of the pandemic. During the early days of the pandemic, the existing infrastructure allowed the company to quickly shift towards a nearly entire off-premise model.

Now that COVID-19 restrictions have been eased, or in many states fully lifted, Noodles is seeing strong retention in digital sales. In fact, more than 90% of digital sales have been retained during the second quarter, the CFO told Invezz.

Digital momentum can also be attributed to strength in the Noodles Reward Program that now boasts 3.8 million members. The company’s recent Tortelloni launch was made exclusive to loyalty members and it is experiencing the best new product launch in Noodles’ history. The CFO said:

We are also continuing to use data analytics to better understand guest behavior and drive engagement and frequency, which will be a key focus going forward

Delivery update

Nearly coinciding with the earnings release, Noodles announced free delivery on all Monday orders through the end of September. Delivery represents a strong channel for the company because the type of food it offers customers travels very well in transit.

Lukach told Invezz the company has offset the added delivery costs through efficiencies in the labor model and cost of goods sold. In fact, Noodles’ restaurant contribution margins during the second quarter were 180 basis points higher compared to the same quarter in 2019 when delivery accounted for a much smaller mix.

Ghost kitchens

Noodles reiterated its longer-term guidance of operating at least 1,500 restaurants in the US. To achieve this, management expects a 7% system-wide unit growth in 2022 and an acceleration of growth to 10% soon thereafter.

During the second quarter, Noodles opened three new restaurants, including its first-ever ghost kitchen. A second ghost kitchen in San Jose will open later this year.

Ghost kitchens aren’t expected to act as a meaningful driver of growth — at least not yet. Lukach told Invezz that ghost kitchens are much cheaper to build at around $100,000 a unit and will serve as a testing ground on how to optimize operations. Successful results can be duplicated at its core restaurants given a high digital mix.

Finally, the San Jose location will also serve as a testing ground for a West Coast market where the company doesn’t have an established presence.