Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Noodles & Company (NASDAQ:NDLS)

Q2 2014 Results Earnings Conference Call

August 13, 2014, 04:30 PM ET

Executives

Kevin Reddy - CEO and Chairman

Dave Boennighausen - CFO

Keith Kinsey - President and COO

Analysts

John Glass - Morgan Stanley

Joe Buckley - Bank of America Merrill Lynch

David Tarantino - Robert W. Baird

Jeffrey Bernstein - Barclays

Nicole Miller Regan - Piper Jaffray

Operator

Good afternoon, and welcome to today's Noodles & Company Second Quarter 2014 Earnings Conference Call. All participants are now in a listen-only mode. After the 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, Dave Boennighausen.

Dave Boennighausen

Thank you, Candace. Good afternoon, everyone, and welcome to our second quarter 2014 earnings call. Here with me this afternoon are Kevin Reddy, Chairman and Chief Executive Officer; and Keith Kinsey, our President and Chief Operating Officer.

Let me start by going over a few regulatory matters. I'd like to note that 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 targeted results for 2014 and details related to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties.

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 2013 fiscal year. This document contains and identifies important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Now I'd like to turn the call over to Kevin.

Kevin Reddy

Thanks, Dave, and good afternoon. As most of you have seen from our press release second quarter results fell shorter than our expectation, including a comparable restaurants sales decline of 0.07% system wide in Q2. Following the atypical weather impacts of approximately 400 basis points in Q1 we had expected to see our sales return to more typical pattern in Q2. While we saw some normalization at the beginning of the quarter that was followed by softness in may before gaining momentum in June.

Consequently, although sales have improved compared with the beginning of year it has been slower to materialize then we anticipated. We know the core business is well positioned and resonating with consumers. However there are two particular areas that we are seeing more softness then we have historically. First, 20% of our company restaurants are located in the Mid-Atlantic, particular the D.C. Metro Area. Our channel checks continue to show challenges industry-wide in the D.C. market. And while the market continues to be a solid performer for us overall with some of our highest volumes restaurants its comparable sales performance has lagged the balance of the country.

Second, one of the strengths of the brand is how we connect with middle-income families, offering favorites from kids to adults in a warm and welcoming environment. While there has been nominal job growth in recent months we still believe the data points to softness in the middle income consumer particularly the families. Typically we see similar growth across all days and day parts but in the second quarter we saw less improvement sequentially from the first quarter for the family dining occasion.

While these two areas indicate that we are not immune to market or consumer headwinds we still believe we will overcome these influences. Continued focus on improving the guest experience within our restaurants execution of our initiatives around catering and the dinner day part, as well as more investment in effective marketing are all essential to improve on the results from the first part of the year all of which are already are under way.

That said there are several reasons to be pleased about progress that was made in the second quarter. Comparable sales were positive for the second quarter after adjusting for the Easter Holiday shift and our momentum has been steadily building back for the back half of Q2 and into Q3 which is running up 1.3% quarter-to-date through August 12th.

We have made significant progress in our catering initiatives and the roll out plans are on track to be completed this month. We also continue to see strong traction with restaurant development. Our newest markets of the Bay area, Orlando and Boston continue to perform strong which bodes well as we build out these metro areas for years to come. These positive developments are encouraging and should contribute to trends returning to the levels we had anticipated. We firmly believe that the investments we have made during the recent months are already beginning to bear positive results. We continue our conviction in our business plant which calls for 2.5% to 3% annual comparable sales growth over the long-term. However given our results at this point in the year we feel it is judicious to temper our full year comp sales and EPS expectations which Dave will discuss further on.

A few more points about Q2; in April we launched our Spring LTO which includes an Asparagus di Parma, the return of our Backyard Barbecue Salad as well as a Margherita Flatbread. As our limited time offers have been a staple of our menu strategy over the years, reinforcing to our guests the commitments to fresh, local and constantly prepared ingredients throughout the day. While we have not disclosed the offering for the fall LTO we plan its launch in October.

During the quarter we expanded our catering initiative and we have it available, we’ll have it available in all of our company restaurants by the end of this month. We continue to be pleased with guest feedback and the ease with which our operations teams can execute the orders. There is a clearly demand for this occasion and we believe our offering is compelling in the marketplace.

Our operations and marketing teams are now focusing on creating awareness and introducing our catering platform to potential users. Sales have steadily increased in our original test restaurants and we continue to believe the program can contribute 1% to 1.5% to the top line during the fourth quarter. We also continue roll-out our dinner day part initiative which is now approximately 25% of our company restaurants and is included in all new restaurant openings. We believe that dinner day part positioning allows us to further differentiate ourselves in the competitive eating and drinking out space, while contributing to traffic and average check growth over the long-term. Our plan still calls for a full disciplined roll-out of our dinner initiatives to extend through 2015.

In addition to these newer initiatives we are also making it easier for our guests to engage with the brand during their busy life styles; examples range from our steps to increase throughput to our robust online and mobile platform which allow guest to skip the line. Online ordering has continue to grow rapidly and is currently 4% of sales, more than double what it was just six months ago. While the team is making the appropriate investments to drive sales we also continue to invest capital wisely in the development of new restaurants. We still believe that 12% to 13% is an appropriate long-term target for Noodles & Company but during the past two years and into 2014 we have had the opportunity to bring additional restaurants into the pipeline.

To put this into perspective the 410 restaurants we operated system-wide at the end of the second quarter 2014 represents a nearly 60% increase from the end of the second quarter of 2011, so pretty strong growth. While these additional restaurants add a bit of short-term pressure on the P&L from margin dilution to increased investments in pre-opening and G&A support they are sites we believe are excellent long term investments to build brand awareness and economies of scale in their respective markets.

Noodles & Company has enjoyed a long track record of predictable sales and earnings growth over the past nine years. While the first half of 2014 has been softer than anticipated we firmly believe the first two quarters are temporary interruption of that success. The team has the right focus, is objective about our results, continues to problem solve and innovate while taking the necessary actions to build an enduring brand with sustainable growth towards 2,500 restaurants nationwide.

Now I would like to turn it over to Keith Kinsey, our President and Chief Operating Officer to discuss the strengths and significant success we are having in the development area which is so critical to achieving our growth expectations.

Keith Kinsey

Thanks Kevin. I am happy to report that our path to 2,500 units nationwide, the pipeline for new restaurant development continues to be incredibly strong. We now believe that we'll be on the high end of our previously stated range for company development and expect to open between 45 and 50 restaurants during 2014. Through the second quarter we are already over halfway to that goal, opening 12 additional units during the quarter and now 25 year-to-date.

We are also nearly half way to our target goal for the franchise openings, which continues to be between 10 to 15 for 2014 of which five have already opened through the first two quarters of the year. During the second quarter on the company side we built our second restaurants in both the Bay Area and Orlando while our franchise partner in Boston also opened up initially three restaurants in the metropolitan area. The brand has already shown its ability to be successful in the coast but it’s exciting to see the guest reaction and early performance from these very dense and highly populist areas.

Our entry in to Boston has just been one of the exciting developments for our franchise community, as weather-normalized franchise comparable restaurant sales came back in line with company sales during the back half of the second quarter and in to the third quarter. Moreover the strength of recent openings has resulted in the improved overall average volumes and their AUV gap versus the company of 2.5% is the narrowest it’s been in several years.

One other note on the franchise front was the closing of the company’s acquisition of 16 franchise restaurants in the Greater Indianapolis market place, which occurred early in Q3 and is consequently not reflected in our Q2 results. The deal which was funded through our existing credit facility added over 300 staff members to our team and net of lost royalties contribute approximately $15 million to net revenues on an annualized basis. Moreover we are pleased with the real estate opportunity the acquisition affords and believe the transaction will be modestly accretive to earnings next year and beyond.

As we mentioned when the transaction was announced our partner in Indianapolis had already signed a development agreement for [Lilo] Kentucky area which we expect to have an initial opening later this summer. On the company side as Kevin mentioned, we have seen some softness in the mid-Atlantic region where a large percentage of our 2012 and 2013 openings are located. However we are very comfortable with the real estate and the long term position of these locations.

Collectively our restaurants that are not in the comparable restaurant base achieved sales of approximately 85% of company average in Q2, within our historical range. Excluding the restaurants in mid-Atlantic our new restaurants are surpassing our interim maturity expectations and we are particularly encouraged with our openings thus far in 2014 which we have had considerably more geographic disparity that our previous classes and have outperformed our opening model. We remain disciplined in our real estate selection process and are intensely focused on introducing and building the brand thoughtfully in a sustained manner. Now I would like to turn it over Dave to discuss at more length our financial performance during the second quarter.

Dave Boennighausen

Thank Keith. For the second quarter of 2014 we reported adjusted net income of $3.7 million or $0.12 earnings per share, a slight decrease from prior year. Revenue in the second quarter increased 12% to $99.5 million, due primarily to an increase in the number of restaurants offset by a modest decline of 0.6% in company-owned restaurants and 0.7% system wide. Of note excluding the holiday shift which negatively impacted the quarter by approximately 90 basis point comparable restaurant sales were slightly positive system wide for the second quarter.

In the first two quarters of 2014, comparable restaurant sales decreased 1% for company owned restaurants, 2.2% for franchise and 1.1% system wide. As Kevin mentioned, we’ve seen increased momentum thus far in Q3, with comparable restaurant sales at positive 1.3% through yesterday, August 12. And we now project that we will complete the year with roughly flat comparable restaurant sales for the full year.

In terms of menu price we ran 1.7% price in the second quarter 2014 and anticipate the same level of price in the third quarter. In October we will overlap our most recent price increase and anticipate introducing an increase of approximately 2% with our fall LTO launch.

On the earnings front, our earnings per share of $0.12 was below our internal expectation driven primarily by sales deleverage and our accelerated investment in our catering initiative in new restaurant openings. As Kevin mentioned, we have opened 25 restaurants this year with many more under construction. The acceleration in new restaurant openings compared with the prior year resulted in approximately $500,000 of additional expense in the second quarter year-over-year, both in preopening as well as in general and administrative support expenses.

Given this increased investment in new restaurants and reduced comparable restaurant sales guidance that Kevin discussed earlier we are also tempering our EPS projection for the year to roughly flat growth versus last year's adjusted EPS of $0.40. Our adjustment in EPS guidance compared to our prior call is almost entirely related due to our -- is entirely due to our reduction in comparable restaurant sales expectations. Given our typical flow through each percentage point change in comparable sales impacts EPS by approximately $0.03 to $0.04 resulting in the vast majority of our adjustment in EPS guidance.

Additionally due to pre-opening and support expenses in the short-term our accelerated new unit investment will be modestly detrimental to 2014 earnings. Specific through the second quarter our restaurant level margins declined 200 basis points to 20.4%. De-leveraging our comparable restaurant sales attributed approximately two-thirds of that decline with the balance coming from a combination of the lost operating day with the Easter Shift, the softness in our new Mid-Atlantic restaurants as Keith mentioned and increased cost of goods sold.

COGS of 26.8% was 70 basis points higher than Q2 of 2013 as a result of increased promotional activity as well as modest increases in both dairy and shrimp ingredient costs. We anticipate COGS to remain slightly elevated in the third quarter before falling to the low to mid 26% during the fourth quarter. Labor costs increased modestly 10 basis points to 29.9% in the quarter as lower incentive compensation and health insurance claims offset the de-leverage from lower average unit volumes.

Operating costs were 12.5% in the second quarter, 50 basis points above the prior year due to de-leverage as well increased maintenance cost. Within operating costs marketing spend of approximately 0.6% of sales in Q2 was consistent with the prior year and while year-to-date marketing spend also stands at 0.6% through quarter two we do anticipate an increase in spend to roughly 1% to 1.5% of sales during the back half of 2014 netting to approximately 1% for the year.

Occupancy costs increased from 9.7% of sales to 10.4% in the second quarter due again to dilution from our immature restaurants as well as the loss of one operating day relative to the second quarter of 2013. General and administrative expenses decreased 700 basis points to 8.3% of sales in Q2 although last year's G&A expenses were significantly influenced by non-recurring expenses related to our Q2, 2013 initial public offering.

As a percentage of sales general and administrative expenses stand at 8.1% year-to-date and we continue to believe that we'll complete the year at approximately 8% of sales, a 50 basis point improvement over last year once you adjust for non-recurring 2013 expenses. This projection for general administrative expenses does incorporate roughly $300,000 to $400,000 in net incremental expense that we will incur later this month due to our all manager summit that occurs once every two years.

With the opening of 12 company locations and several more under construction pre-opening expense increased to $1 million during Q2. As of the end of Q2 the company had $9.6 million in debt outstanding on our credit facility a number which will rise in Q3 as our acquisition in the Indianapolis market was funded primarily through this facility. Our effective tax rate was 40.3% in the second quarter and we anticipate our full year 2014 tax rate to be approximately 40% to 41%.

Now I would like to turn over to Kevin for some closing remarks.

Kevin Reddy

Before moving to Q&A I would like to have a few additional thoughts. We've seen a noticeable increase in promotional activities throughout the industry as well as marketing spend from competition in our markets. As such we'll be incrementally increasing our spend in the second half of the year compared to the first half, as Dave mentioned. Historically, when we deploy promotional and social media tactics we consistently see a positive response from our programs and our guests. As we stepped up our local relationship marketing efforts we've also witnessed real excitement and pride from our team members and enthusiasm from our guests about our food and friendly service.

Being a part of the community and giving back is a big component of our business philosophy. It builds guest royalty, creates [trial] and will be an important aspect in growing our catering business. In addition to the exceptional organic growth our guest feedback in our new restaurants reflects a connection and understanding of our Your World Kitchen positioning and mechanizing. This is a positive and important validation of the strengths of our differentiation.

Final comment about our people; As I work and observe both our operating and central support teams I am impressed with the level of objectivity, competitiveness, commitment and problem solving they are bringing to the table. They are the right aspirations and behaviors needed to create success in this environment. So thank you for your time and let's open up the lines for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of John Glass of Morgan Stanley. Your line is now open.

John Glass - Morgan Stanley

Thanks. Can you talk a little bit more about how you -- you talked a little more promotional spend in the back half of the year? Is that just spending on advertising or you are doing more price point advertising, so how specifically tactically do you plan to address some of the sales weakness you have seen?

Kevin Reddy

John we have -- this is Kevin. We have some initiatives and tactics in terms of our short term traffic driving and then longer-term brand building, customer loyalty building. The short-term traffic drivers tend to be promotional. We use our digital platform, our email platform to really get some offers out there. We are also focusing on our fall and winter LTO which tends to be shorter-term in terms of increasing spend merchandising within the restaurants. And we have few, I think interesting messaging, because this allows us to target different markets with different messages, targeted to some mom’s, families as well as some of the markets that we think will react positively from our menu nutritional stories.

And then on the longer-term basis we are clear we are going to be putting some money into the catering background as well as our core menu reinforcing just the variety of flavors and the choice that our guests have. So those tend to be where we are currently planning to invest?

John Glass - Morgan Stanley

And are those messages happening, is that responsible for the uptick in comps, or is this something that’s still to come later in the third quarter?

Kevin Reddy

We actually started testing a few of those tactics in June, you know just a couple of different messages in different markets and it did have a positive reaction.

John Glass - Morgan Stanley

Then just one final question, how do you think about so in circumstances like this, the question becomes what about our long-term growth rate, is that still impacting your view, particularly for 2015? Particularly how do you think unit growth is it pressuring the P&L maybe or maybe it hasn’t cannibalized sales, maybe like you view on -- maybe that’s one of the reasons you have seen the comp weakness. So how do you frame up early days, 2015 at least from a unit growth standpoint and maybe talk a little bit more about how do you think about the long-term growth rate now?

Kevin Reddy

That’s an important question, John and one that we clearly study. I think our long-term growth rate is appropriate and I think the ability to grow at a higher rate makes sense provided we are getting quality real estate. Our pipeline is strong, we have a lot of sites that we look at, so that we can pare them down be rigorous and stick our site criteria. So I feel good about that rate. It does, as we have said and you have acknowledged, puts some short-term pressure on the P&L. But those are clearly the right decisions for the business long term.

I think the other area that we watch closely is we promote from within quite frequently and a lot of time we are transferring new folks into those restaurants. So the other area that it puts a little bit of pressure is the teams are doing a nice job focusing inside the four walls and meeting our operating metrics, which is the most important thing. But when you have a lot new folks in restaurants it delays a little bit of the getting outside the four walls.

So we have also been supporting local marketing a little bit differently then we have in the past. But I will tell you grew real estate is great real estate and somebody is going to take it. And if we have the opportunity to grow wisely at a faster rate when it’s available I think it’s the right positioning. I don’t think you will see us, even if we have the opportunity go much higher though than where we are targeting.

Dave Boennighausen

Yeah, and John this is Dave. Specific to the question on cannibalization we talked about those two aspects that we are really in particular seeing softness in the Mid-Atlantic a little bit with families as well. The markets that we are the most established in, Denver and Minnesota as we continue to build-out those market or not seeing any material cannibalization. So from perspective and our overall country unit account 2500 and we still feel very comfortable with that number.

John Glass - Morgan Stanley

Thank you.

Operator

Thank you. And our next question comes from the line of Joe Buckley of Bank of America Merrill Lynch. Your line is now open.

Joe Buckley - Bank of America Merrill Lynch

Thank you. Appreciate the thoughts on the Mid-Atlantic market. And I think to refer to a lot of openings being in that market in 2012, 2013, could you talk about the 2012, 2013 stores more broadly, are they -- is that where you are seeing the weakness across the class of opening and may be in addition to the region?

Dave Boennighausen

Yeah I'll actually start out Joe, by talking when you look at the class of 2012, and '13 excluding the Mid-Atlantic we're actually surpassing our expectations. Together now the DC metro area and the rest of the Mid Atlantic comprises about 30% to 40% of the openings during those classes. So they have a disproportionate influence. As a group we are a little bit behind the internal model but excluding those restaurants we're actually surpassing it. I'll turn over to Kevin and Keith maybe to talk about how it changed our development strategy.

Kevin Reddy

Yeah I think one other thing I'll add to that Joe and this is Kevin is that the majority of those deals that created the skew in those classes were signed in 2011 and 2012. And as we saw aggressive growth and penetration in that area we actually scaled back we have far fewer deals that have opened recently in that area and we may not even have any in that pipeline in the DC metro area or if we do it's one or two.

So the ability for it to influence the group really is much as smaller today which allows us to really focus on really the core business and helping those restaurants get to the areas that we believe they should.

Joe Buckley - Bank of America Merrill Lynch

And then a question on the middle income family comments, how does that manifest itself, how do you measure that, is that dinner business or is it may be the number of entrees per check or how -- could you fill out those comments out a little bit about how you know that the area of weakness?

Kevin Reddy

I think that's a great question, Joe and to put some perspective, we're not going to be able to disclose exactly where we feel it lands up. But there is really three components and you hit on them. One is how the different day parts are performing and the ones that are more heavily reliant on the family occasion. Second will be those trade areas that we know are little bit more residential based, little bit more suburban, and then the third thing is looking at menu mix and have that shifts. So what we were seeing some inconsistency in those performance metrics that typically we don't see.

Keith Kinsey

I would tell you that there are -- as we look at some of the other retail concepts, not just restaurants but they depend on that consumer group they tend to be under a little more stress than normal. And there has been some third-party data that still shows that whether you look at income growth, intended expenditures on different items, saving going up, call it paying more out of cash. I think there is still evidence that although that group may be stable it’s still not turned.

Joe Buckley - Bank of America Merrill Lynch

Okay, and one last quick one. You gave us the pricing factor for the quarter, is that what the check increase was as well. So as we try to break that comp down between traffic and check?

Dave Boennighausen

Mix was pretty much flat, Joe so the average check is pretty much equivalent with price.

Joe Buckley - Bank of America Merrill Lynch

Okay, thank you.

Operator

Thank you. And our next question comes from the line of David Tarantino of Robert W. Baird. Your line is now open.

David Tarantino - Robert W. Baird

Hi, good afternoon, I wanted to see if you could give us a little bit more detail on how much the Mid-Atlantic region is lying on the comps. So is there any way you could potentially talk about the basis point impact if you pull those out, what the comps might look like, anything you can offer there would be helpful.

Kevin Reddy

David I don't know what to say beyond our prepared remarks, that catering and family really we believe those two issues between Mid-Atlantic and family, the combined impact of those are roughly the gap between hitting our long-term guidance. And that influenced a little bit but I think that's the clarity. Don't want to be -- want to be (respective) give you as much as we can but don’t want to get into too much detail but those two items really represent the gap.

David Tarantino - Robert W. Baird

Got it and then I guess if you think about it one factor that I guess you didn't mention or couple of factors you didn’t are competition. I think you mentioned that as being sort of something you are responding to now but do you think that there is a competitive threat or competitive situation that might be weighing on the trend line? And then I guess secondly, as you review your internal operating metrics or brand scores or the metrics that you track internally, have seen any noticeable change relative to the internal metrics?

Kevin Reddy

We really haven’t. I think the internal metric still look pretty strong. We are pleased with, particularly some of the operating metrics on the new restaurants, outside of softness we expect that we shared about mid-Atlantic. Actually some of the third party analysis there was a -- I think it was a [NRA or NRN] report that came out with loyalty within sectors and we won the category for noodles and pasta. So I am still very encouraged by what we see in here from guests. And I believe that, that really hasn’t changed our operating metrics. Really are just the learning curves that we typically have always seen and our team gained experience in their new restaurants.

Keith Kinsey

Yeah. I think from base operating piece inside we are definitely working on some things to help throughput and optimize how we do things within the restaurant. From a new -- to Kevin’s point with some of the transfers and some of the new people we are definitely focusing on training those and making sure when they open up those restaurants they can quickly get to those operating metrics that we want them to be at.

Kevin Reddy

And just going back and circling back on your question on competition. We view that as there is always competition and there is always challenges in the macro environment and we just have to address them. We really haven’t seen anything that I would say is significantly material other than marketing spend from some of the bigger players that can advertise pretty heavily in our market place. The amount of growth for good real estate and good markets is pretty competitive. I think we are doing a great job on winning the real estate battle of that. And you always get a little bit of trial and impact when restaurants open up near you.

So -- but I think that’s more of a temporary issue. From a competitive standpoint, I like how differentiated we are, still believe we are strong category of one.

David Tarantino - Robert W. Baird

Thank you.

Operator

Thank you. (Operator Instructions). And our next question comes from the line of Jeffrey Bernstein of Barclays. Your line is now open.

Jeffrey Bernstein - Barclays

Great. Thank you very much. Couple of questions. Just one following up on the comp discussion, just wondering A, whether or not you see other markets, may be like DC that you might there be inclined to avoid because of some common theme that DC might provide? Or maybe you can give some color just granularity in terms of weekday versus weekend or lunch versus dinner just as you think about kind of future growth. I’m wondering whether there is any kind of common theme that you might want to take away from this most recent quarter’s results.

Keith Kinsey

I mean from a standpoint, I’ll let Dave talk to the numbers side. But from the standpoint of real estate and looking at the different market, this is Keith, the ones that we are looking at, the ones that were in our pipeline earlier we felt very comfortable that those were the right market, still feel very comfortable that those are ones we want to go in to both from expanding what we already have there and then also new ones that will be going in to.

Dave Boennighausen

Yeah, and I think you are seeing it bear out in the Class of 2014 with the exception of not nearly as many restaurants in mid-Atlantic. The make-up looks pretty similar to what we saw in prior classes and this class of 2014 is definitely outperforming both prior classes as well as our internal model. From real estate perspective when you look at week days versus weekend the internal model that we use as well as our own boots on the ground with our own team we are looking for generators for homework and shop. We are looking a day part buildup of where we get to our projections.

The great thing about our concept is we continue and this hasn’t changed in Q2, we continue to be very strong in urban locations, we are strong in suburbs, we are strong in college towns. Yes, there is a little bit of weakness in family dynamic but it’s still pretty modest and in terms of the overall impact on our real estate I don’t think there is too much there.

Jeffrey Bernstein - Barclays

Got it. And then just a follow up on earlier question regarding as we look at 2015 it sounds like from a unit growth perspective and there is really no sense of change in terms of your pace of openings. Is there any reason to believe that may be ’15 wouldn’t get back to kind of the latest projection of more long-term earnings growth of 25%, are there any unique investments or does perhaps the competition leave you cautious around getting back to 2.5% to 3% comp next year or should we really assume that presumably ’14 is an anomaly and getting to kind of 25% of growth in ’15 as a reasonable assumption?

Kevin Reddy

Hey, this is Kevin. I believe it’s a reasonable assumption. I think we are focused on what we have to do to get back to that long-term guidance and several aspects of the business are our outperforming particularly the real estate in growth and we are focused on the two areas that we really talked, which is Mid-Atlantic dominated by D.C. which I do think is a unique environment from just overall restaurant growth not just fast casual but all classes and then just the mentality of that D.C. area, although with the debate with the government spendings really being capped but there is reality of its impact on the local business and spending in that neighborhood

I think that the other aspects of our business that we dig into that we discerned I feel very good about. And we have to turn and address some of those areas that we talked about but really getting back to a slightly higher level of comp should put us on track to meet those expectations.

Jeffrey Bernstein - Barclays

Then just last point on you mentioned the online and the catering, both comments sound similar to what you said in past quarters. Just wondering when you are not a national advertiser like what’s the approach to get someone to do that online. I mean are you happy with in -- branded catering, I guess but how do you actually incentivize consumers who aren’t familiar with it without national advertising and get them to really try it to really drive that, the catering will be online mix.

Kevin Reddy

Yeah, well part of it is around education, part of it is empowering the teams because word of mount is and personal recommendation remain very strong and so we have a lot of tactics inside the four wells to incent our team members to make personal recommendations that they are passionate about and believe in. We are also we have approaches to get out into the community building business to business using social and digital media. So the incentives sometimes are a discount, a lot of times they fall into the education and awareness component.

Dave Boennighausen

Yeah, and we think about marketing spend for the balance of the year there is basic some portion of it is going to be digital media and when you look at those digital media campaigns that create very much so -- leads the consumer to go towards our online ordering page and order directly from there and we are seeing increases from that. Still we are relatively early on but that’s a great opportunity for a concept like us that doesn’t have that war chest of marketing to be able to use digital to get something moving in our direction on online ordering.

Jeffrey Bernstein - Barclays

Understood, thank you very much.

Operator

Thank you. And our next question comes from the line of Nicole Miller Regan of Piper Jaffray. Your line is now open.

Nicole Miller Regan - Piper Jaffray

Thank you, good afternoon if I understand advertising budget this year it sounds half of percent in the first-half and 1.5 in the back half or 1% for the year how did that compare by quarter to the prior year? Was it…?

Kevin Reddy

Yeah, it actually wasn’t quite that smooth last year either on the call. The first quarter of last year I believe is 1.4% of sales and then the balance of the quarters were pretty evenly distributed around 0.6% to 0.7%.

Nicole Miller Regan - Piper Jaffray

Okay, thank you.

Keith Kinsey

Yeah, that understanding is correct on the call. Thanks

Nicole Miller Regan - Piper Jaffray

Okay.

Keith Kinsey

And hi, by the way.

Nicole Miller Regan - Piper Jaffray

And then in terms of the July comp thank you for sharing the current trend and actually I guess through the first few days of August as you look back on last year how did the months of July, September and August compare so that we can understand if the comparisons are going to get easier or more difficult as you exit the quarter?

Dave Boennighausen

Our comparisons are relatively even actually throughout Q3 in the quarter there is a little of the noise in there when we have the floods in the Colorado area that will benefit September by about -- it will end up benefitting the quarter by about 11 0to 20 basis points and that occurs in September but outside of that was actually pretty even growth throughout the periods last year.

Nicole Miller Regan - Piper Jaffray

Okay. And then a final question, back on the catering decision, it sounds like you were talking a bit about the investments I am just wondering the links and duration or excuse me same thing, the quantity -- can you qualify what does the investment is to some degree and how long and what I am trying to get at is does the average check offset what you will lose in margin right away or does it take a little bit of time?

Kevin Reddy

Yeah absolutely, actually catering overall is actually very accretive to our margins. What we saw in Q2 was potentially the marketing and merchandising materials, those are aspects that end up getting expense immediately, probably in that couple hundred thousand dollar range in that neighborhood including all aspects of the catering as well as the trading, trading was pretty -- we leveraged technology. We're able to get out and touch those larger markets but utilize web demos et cetera.

So there is a little bit of that as well. But really I mean about a couple of hundred thousand and that's really initial investment that doesn't recur.

Nicole Miller Regan - Piper Jaffray

Thank you.

Operator

Thank you and I am showing no further questions at this time. I would like to turn the call back to management for closing remarks.

Kevin Reddy

I think we have done those and just thank you for your time and perspective and we'll talk you later. Take care have a great afternoon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Have a great day everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Noodles & Company's (NDLS) CEO Kevin Reddy on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts