Noodles & Company’s recovery strategy under CEO Drew Madsen ran into difficulties in the third quarter; same-store sales fell 3.3 percent and traffic fell 5.8 percent; There were sharper declines compared to the previous quarter.

Madsen, who moved from interim CEO to permanent CEO earlier this year, attributed the results to industry-wide volatility, increased competitive discounting and a challenging consumer environment.

He also noted two specific factors affecting Noodles: increased discount levels last year and a recent decline in third-party delivery sales.

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Noodles implemented aggressive discounts to break consumer resistance to price increases in 2023, and this rate rose to 13 percent last spring. This year it normalized its discounting level and invested savings in targeted loyalty program support, broader digital messaging and increased third-party market spend. This strategy was effective in helping to improve month over month the significant difference in sales and traffic compared to the fast casual industry benchmark in January. But concentrated competitor discounts, combined with Noodles’ steep discounts from the previous year, proved challenging for same-store sales in August and September.

In response, Noodles began ramping up promotions, adding a kids meal free offer in September and a buy one get one free deal on three new menu items in October. Madsen noted a “significant improvement” in Q4 sales so far, even after the BOGO bidding ended.

On the third-party delivery front, Madsen said the company saw a “sudden and significant” drop in sales with its largest partner starting in late July, despite continued investment in sponsored listings, special meals and lucrative promotions.

“We have not changed our strategy, investment or approach to engaging with third-party channels,” he said. “We believe it is our current menu markup that is causing the problem and we are evaluating alternative menu markup to make ourselves more attractive to the algorithm on this platform.”

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He added that Noodles is about a month into testing different menu markups and is seeing promising early results. It plans to complete testing and introduce a new optimal pricing strategy next month.

Coupled with declines in PC sales and traffic, Noodles’ AUV fell to $1.27 million in Q3 from $1.32 million in the previous quarter. Margin at the restaurant level was 12.8 percent, compared to 16.4 percent in the same period a year ago. Still, Madsen remains confident in Noodles’ strategic plan, which is structured around five key priorities he identified this spring: operational excellence, menu transformation, digital advancement, food-and-beverage growth and financial resilience.

“Establishing a foundation of operational excellence remains our top priority,” he said. “Building this foundation requires us to excel at the fundamentals of staffing, training and consistently applying standards that will make us a better competitive alternative.”

He added that on the personnel front, turnover continues to improve at both hourly and management levels. On the training front, Noodles has held bi-weekly sessions across the system to review the appropriate implementation of a new food practice standard, a new service standard and a new integrity standard. The primary focus of the training is to improve the dimensions of our guest experience most directly related to traffic growth (overall satisfaction, taste of food, and accuracy). In practice, better-trained team members combined with managers more consistently present at restaurants during peak periods to provide immediate guidance led to increased guest satisfaction scores in each month of the quarter across all three of these priority measures.

“For perspective, a one percentage point improvement in our guest satisfaction surveys is statistically significant, and our overall satisfaction has improved by 10 percentage points over the last six months,” Madsen said. “As a result, our gap between fast casual industry averages in overall guest satisfaction has already been reduced by more than half; all of these improvements came before our new menu transformation.”

The chain’s second priority focuses on its menu overhaul, which is being carried out through a partnership with consulting firm The Culinary Edge. The first phase of this process involved concept testing to identify the most interesting ideas for both new and improved dishes. In the second phase, Noodles centrally taste-tested new and improved dishes with customers to ensure they exceeded the guest satisfaction average on the current menu. The first two stages have both been completed.

The third phase began this summer, with the company placing the best new and improved dishes in test locations to evaluate real-world guest satisfaction, operational feasibility and associated financial implications, including menu mix changes.

“Our goal is to impact approximately two-thirds of our menu next year with new or improved offerings,” Madsen said. “Given the magnitude of change at stake for both guests and operations, we are taking a very thoughtful and strategic approach to testing and are gradually planning a national rollout of the entire updated menu over several months.”

National promotion began last month with the release of three dishes. There’s the new Crispy Chicken Bacon Alfredo, which Madsen says is a “more contemporary” version of the existing Alfredo Montamore that it replaces. In just a few weeks, it became the most viewed item on the chain’s digital menu and the second best-selling dish overall; average daily unit sales were more than double that of the original alfredo meal.

The second nationally featured dish, Lemon Garlic Shrimp Scampi, meets the need for lighter, fresher menu items. A third course, Chipotle Chicken Cavatappi, was added to meet the need for a Latin-inspired flavor profile on the menu. Both have guest satisfaction equal to or better than the current menu average and meet sales expectations based on previous test market results.

The launch of these three dishes was supported by a new commercial shoot at a Noodles restaurant called “Taste the Beginning of Something Great”, highlighting a commitment to what Madsen calls “bold, exciting culinary innovations”. To encourage trial, the company also introduced a buy-one-get-one-free special to reward members.

Customers are starting to notice. Traffic has increased from a negative run rate of approximately 6 percent before these changes were implemented to a negative run rate of just 0.8 percent in Q4 to date. Even in a challenging environment, Madsen said it’s not yet where it wants to be, but it’s encouraging to see that the menu innovation effort has the ability to positively impact traffic trends. To help maintain this momentum, advertising in November and December will continue to focus on these three new dishes, supported by an increased level of media investment compared to last year.

For more menu innovation, this month will see Noodles roll out three new signature Mac & Cheese dishes to test restaurants. Offerings like Garlic Bacon Mac Crunch, Pulled Pork Barbecue Mac, and Buffalo Chicken Ranch Mac have been the strongest performers in the central location taste test so far. Combined with an improved version of the existing Wisconsin Mac & Cheese, they are expected to form the chain’s largest sales mix category. Assuming the success of these new dishes in test markets, they will be introduced nationally in early 2025.

Noodles’ third strategic focus is to drive profitable traffic growth by leveraging its strong digital ecosystem, which currently accounts for 55 percent of the company’s total sales. Loyalty members play a key role, contributing 26 percent of sales and spending twice as much annually as non-members. This includes working with a third-party delivery partner to address the recent sales decline, but the company is also focused on fine-tuning its own digital channels.

Last year, Noodles invested in a customer data platform that brings all information about its known customers into one place. This allows it to attract these customers by using “smart, relevant and personalized” offers with fewer discounts, Madsen said. It focused specifically on reactivating former loyalty members, as the frequency of active members was more than 50 percent and had 2.5 more visits per year than the loyalty program average.

The chain will launch a revamped app with a new home screen and rewards store experience for Android and iOS in Q4. The update aims to strengthen the conversion rate when guests start placing an order with easy-to-use actions like reorder, favorite order, and order a saved order, while also allowing loyalty members to add the most relevant active loyalty rewards.

On the catering side, Noodles is focused on maintaining double-digit growth while laying the foundation for even stronger gains in the future. Catering sales have increased steadily from 1 percent of sales in 2022 to 1.7 percent year-to-date in 2024, and Q3 systemwide catering sales are up 27 percent compared to last year. Madsen believes catering could ultimately represent 4-5 percent of total sales as the company continues to develop and expand the channel.

The program saw notable successes in the third quarter, including a new back-to-school event in August that delivered the third-highest food and beverage sales week of the year. Noodles uses custom messages about menu innovation to encourage repeat purchases and attract new users to the channel. Another win was the addition of fractional catering managers who worked to develop relationships with schools and local sports teams in key markets.

As part of operational improvements, the company recently integrated ezCater into its system, eliminating the need to rekey orders from the third-party platform. Noodles is also exploring outsourced delivery options for online catering orders and a technology solution that allows orders to be transferred between restaurants.

Noodles’ final priority is to strengthen the financial foundation with greater emphasis on proactive cash management and operational efficiency across the business. This includes a $21 million to $23 million reduction in capital expenditures compared to 2023. Noodles also conducted a detailed portfolio review, which identified approximately 20 restaurants that could potentially close before their leases expire. Reflecting this assessment, the company closed five corporate locations and one franchise unit in the third quarter; Four corporate and three franchise locations followed in October.

Noodles opened three new company-owned restaurants and one new franchise restaurant in the third quarter. It completed the period with a total of 471 units, 377 of which were company-owned and 94 of which were franchises.