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Noodles & Co. (NASDAQ:NDLS)
Q4 2019 Earnings Call
Feb 26, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon and welcome to today's Noodles & Company fourth-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this call is being recorded. I will now introduce Noodles & Company's chief financial officer, Ken Kuick.

Ken Kuick -- Chief Financial Officer

Thank you and good afternoon, everyone. Welcome to our fourth-quarter 2019 earnings call. Here with me this afternoon is Dave Boennighausen, our chief executive officer. I'd like to start by going over a few regulatory matters.

During our opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items, including our guidance about our anticipated results in 2020 and details relating to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are only projections, and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The safe harbor statement in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for its 2018 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that is set forth, the risks and uncertainties related to the company's forward-looking statements.

I refer you to the documents that company files from time to time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K for its 2018 fiscal year and subsequent filings we have made. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

A reconciliation of these measures to the most directly comparable GAAP measures is available in our fourth-quarter 2019 earnings release and our supplemental information. Now I'd like to turn it over to Dave Boennighausen, our chief executive officer.

Dave Boennighausen -- Chief Executive Officer

Thanks, Ken, and good afternoon, everyone. 2019 was a strong year for Noodles & Company as we built off the success of 2018, improved the overall sustainability and effectiveness of our strategy, while positioning the brand to win in today's competitive restaurant environment. With seven consecutive quarters of really positive comparable sales growth, significant margin expansion and trends accelerating thus far in 2020, we have greater confidence than ever in the potential of Noodles & Company to become one of the premier growth concepts in the fast casual space. This includes a disciplined return to strong unit expansion, which I will discuss later, but I'd like to start with some perspective on the overall brand strategy and our recent results.

As we began to activate our new Noodles REWARDS program and enhancements to our app and digital ordering experience, we saw tangible improvements to our sales results during the last several weeks of 2019 and we ultimately completed the year with comparable sales growth of 2.8% systemwide and the two-year growth of 6.5%. Importantly, trends have strengthened even more in 2020 and reflects positive traffic growth, a significant focus of ours that we are very pleased about. Through yesterday, February 25, we have achieved company comparable sales growth of 5.8% year to date, meaningfully outperforming the industry thus far in 2020. As momentum has increased in the top line, we also continue to see strong expansion in our bottom line.

During the fourth quarter, restaurant-level contribution margin increased 200 basis points versus prior year to 17.2% while adjusted EBITDA increased over 30% to $10.9 million. This also allowed us to complete 2019 with a 15.2% increase in adjusted EBITDA and an increase in adjusted net income to $8.1 million versus $1 million during the year prior. We believe that our results for the full year and the great start to 2020 are a direct result of our strategies surrounding convenience, guest engagement, culinary innovation and operational excellence. Beginning with convenience in our approach to our guest engagement.

We are leaning into the company's unique ability to make it easy for our guests to engage with us in a highly personalized manner. How, when and where they want, the variety inherent in our menu, how well our food travels and our residents with younger generations are core strengths that positions the brand for strong continued growth in the off-premise occasion. To date, our initiatives have included enhancements to our digital ordering and quick pickup experiences as well as the introduction of drive-up pick-up windows in many of our new locations. During the fourth quarter, digital sales increased 34% over the prior year and accounted for 25% of our total sales.

This success helped lift overall off-premise 420 basis points to 58% of sales. While seasonality is a factor, this trend has also accelerated thus far in year 2020, with digital year-to-date, representing 28% of sales and total off-premise sales increasing to 60%. We are pleased with the progress that we have made around our off-premise initiatives. However, we believe we are only scratching the surface of our potential.

During 2020, we will continue to evolve our quick pick-up and digital ordering channel experiences. As those evolve, we are also focused on building our rewards program membership and developing the digital and data tools to optimize the guest engagement activities. Finally, as it pertains to guest engagement, earlier this year, we were fortunate to bring on Stacey Pool as our new Chief Marketing Officer. Stacey comes to us with significant experience activating brands and engaging guests from a digital perspective, most recently after several years with their resorts, where she held a variety of leadership roles, including leading the company's industry-leading season pass the efforts and the introduction of the first digital mountain assistant.

Stacey's influence on our strategy is already being felt, and I look forward to partnering with her on our transformational opportunity ahead of us in terms of guest engagement. Moving to culinary innovation. We continue to execute on our ability to provide choice for today's consumer, with favorites from kids to adults, from healthy to indulgent and from comfortable to adventurous. During the fourth quarter, we introduced the cauliflower-infused rigatoni, which has quickly reached our highest taste of food scores on the menu and offers a great complement to our successful zucchini noodle platform.

The company's introduction of plant-based alternatives during the past several quarters highlights our ability to meet the very dietary needs of today's consumer. Our culinary strategy continues to become more refined and very disciplined, and we anticipate approximately three menu launches annually. During the first quarter, we've already launched two items that reinforce strengths in our core menu. First, our grilled orange chicken on lo mein, closing a significant gap on the Asian side of our menu.

And second, we returned our zucchini shrimp scampi to the menu, which performed well as a limited-time offering last year and provides a great tasting, low-carb, low-calorie alternative for guests. During the final two menu rollouts of the year, we anticipate further innovation to be centered around our catering menu, which will be relaunched in May; our signature Mac & Cheese lineup; and also finally, continued evolution of our healthy noodle alternatives. While the company has made great strides through our convenience, guest engagement and culinary strategies, perhaps, we are most proud of how strong our operations and people development have become. Over the past few years, the company has invested in best-in-class training and development programs as well as industry-leading benefits.

Combined with the unique and the strong culture of friendly and engaging team members, we have seen significant improvements in our guest experience scores, turnover percentage and other significant people and operational metrics. Operational and people excellence will always be critical to any restaurant's success. But we are particularly excited about the strength of our operations foundation as we look to accelerate our unit growth, where our strong people benches paramount. Strong operations is one important reason we believe that the six restaurants opened systemwide in 2019 have performed so well, in fact, better than any noodle's class in over 15 years.

With seven consecutive quarters of comparable sales growth, strong recent restaurant performance, and significant improvements to our economic model, we have added confidence in the company's overall unit potential. We are currently targeting 5% unit growth systemwide beginning in 2021, with potential acceleration to at least 7% unit growth in the years beyond. We anticipate making progress toward these targets with 10 to 15 new restaurant openings in year 2020. Our approach to unit growth will be disciplined and achieved through a combination of both company and franchise unit growth.

Company growth will focus on the significant expansion potential in our existing markets as well as low-risk new markets contiguous to areas where we already have infrastructure and our strong brand awareness. We also expect that franchising will become a more meaningful part of our expansion. And in 2020, we anticipate more aggressively pursuing franchise sales, while continuing to support our existing franchise base. And so to that end, we recently announced the refranchising of our nine restaurants in the Charlotte and Orlando markets to an existing franchisee, River City Restaurant Group.

Additionally, as part of this agreement, RCRG is expected to open at least 22 additional Noodles & Company restaurants over the next several years. While we anticipate most of our franchise growth will come from expansion of markets by existing franchisees or by franchising new markets, we will be opportunistic toward refranchising when we see this kind of potential for a franchisee to grow one of our markets faster than we would from the company perspective. From both the company and franchise perspective, we continue to execute on a smaller square footage design, engineered to increase efficiency, reduce cost and deliver on the increased importance of our off-premise business. As noted in prior calls, we are targeting the majority of new units to include pick-up windows, which provided added convenience and I guess -- this speed to our guests.

New restaurants will also benefit from our strengthening economic model, which as noted earlier, has seen significant margin expansion over the past several quarters. On our most recent earnings call, we discussed our initiative to really optimize our kitchen equipment package and operating processes. Earlier this year, we implemented the first round of changes related to this initiative, improving operational procedures that we believe will result in meaningful savings in 2020 and beyond to offset ongoing labor pressures throughout the industry. We will also continue to be encouraged by initial results we are seeing from restaurants retrofitted with the new equipment package, and we will be expanding certain elements of test in upcoming months.

New restaurants in 2020 will already incorporate these changes as we also work toward implementing many of these changes nationwide. While the process of rolling out these initiatives will be disciplined, we believe strongly in its potential to improve, meaningfully, labor efficiency, while also improving speed, food quality and importantly, flexibility for future innovation in our menu. In closing, I believe our recent performance indicates the strong trajectory that our business is on as well as the sustainability of our strategy. And at the same time, I feel that the best is yet to come.

We still have significant opportunity to meaningfully improve our economic model, while expanding the brand to meet its tremendous white space potential. I am so proud of our 10,000 team members nationwide to continue to provide outstanding guest experiences day in and day out, and who have helped us deliver another strong quarter of financial performance and that great start to 2020. I'll now turn it over to Ken to provide more details on our 2019 results.

Ken Kuick -- Chief Financial Officer

Thank you, Dave. Our results in 2019 reflect the effectiveness of our strategy, as both average unit volumes and margin continue to expand, resulting in meaningful growth in the company's profitability. In 2019, total revenue increased 1% to $462.4 million from $457.8 million in 2018, led by systemwide comparable sales growth of 2.8%. Moreover, restaurant-level margins expanded 110 basis points to 16.1%.

Our continued comparable sales growth and robust margin expansion, adjusted EBITDA increased 15.2% to $38.4 million. As Dave noted earlier, our economic model strengthened throughout the year, and during the fourth quarter, we achieved an expansion in restaurant-level margins of 200 basis points and an increase in adjusted EBITDA of over 30%. Net income in 2019 was $1.6 million or $0.04 per diluted share compared to some loss of $8.4 million or $0.20 per diluted share in 2018. Adjusted net income for 2019 was $8.1 million or $0.18 per diluted share compared to adjusted net income of $1 million or $0.02 per diluted share in 2018.

Adjustments to net income included $4.3 million of noncash charges in the fourth quarter related to our strategic refranchising activity and noncash charges associated with the favorable amendment to our credit facility. 2019's comparable sales of 2.8% we comprised of 2.9% growth at company-owned restaurants and a 2.5% increase at franchise locations. Company-owned comparable sales growth reflected 3.6% growth in average check, offset by a modest 0.7% decline in traffic. As Dave noted, comparable sales growth has accelerated thus far in 2020 and reflects positive traffic growth, resulting in year-to-date comparable sales of 5.7% systemwide, 5.8% at our company locations and 5% at franchise locations.

Our restaurant margin expansion of 110 basis points during 2019 was driven primarily by leverage on higher average unit volume, supply chain initiatives and labor efficiencies. These benefits were partially offset by an increase in third-party delivery fees, labor inflation and higher costs associated with the launch of our new guest engagement program in the fourth quarter. Looking at our costs in more detail. Cost of goods sold as a percent of restaurant sales decreased of 100 basis points to 25% during the year as we continue to benefit from the successful implementation of certain supply chain and pricing initiatives.

Labor during the year remained flat at 33% as our labor efficiency initiatives and sales leverage and offset the continued wage inflation of between 4% and 5%. Other operating expense remained substantively flat in 2019 when compared to 2018. Our operating -- on other operating expenses were negatively impacted by 120 basis points in additional third-party delivery fees, which increased to 1.6% of sales. Delivery accounted for 7% of sales in 2019.

And as a reminder, we lapped the national rollout of delivery during the back half of the fourth quarter. And as we discussed on the last earnings call, we implemented a 10% delivery pricing premium systemwide in the fourth quarter and so, thus far, are confident that we have not seen a negative impact on the overall guest value perception of our delivery offering. Additionally, during the second quarter of this year, we expect to roll out direct delivery executed by third parties but ordered through our native digital channels to enhance delivery margins. Of note, delivery accounted for 8.8% of sales during the fourth quarter of 2019 and continues to increase modestly so far in year 2020.

General and administrative expenses in 2019 decreased 70 basis points to 9.4% of sales. G&A in 2018 included charges totaling $3.7 million related to data breach liabilities and the settlement of gift card litigation. Excluding these charges, G&A increased 10 basis points due primarily to marketing initiatives related to the launch of our new reward program in the fourth quarter of 2019. 2019 marked another year of balance sheet strengthening.

Our long-term debt at the end of 2019 was $42.6 million, a 4 million decrease from the end of our 2018. Cash on hand at the end of 2019 was $10.5 million, a nearly $6 million increase from the end of 2018. Additionally, during the fourth quarter of 2019, we amended our credit facility, increasing our borrowing capacity to $100 million, while expanding our capital expenditure flexibility to support our new restaurant development and our Kitchen of the Future initiative. So now I'd like to turn our attention to guidance based on current information for the full-year 2020, including some of our key financial metrics.

We currently expect 2020 of adjusted diluted earnings per share of between $0.21 and $0.26. Our full year guidance is based on the following assumptions: we expect total revenue between $470 million and $480 million, which incorporates the impact of the refranchising of nine company restaurants earlier this year. We expect comparable restaurant sales between 3% and 5%. Restaurant contribution is projected to be approximately 17%, and we are also modeling adjusted EBITDA growth between 10% and 20% to a range of between $42 million and $46 million.

We expect 10 to 15 new restaurant openings systemwide in 2020, including eight to 11 new company restaurants. And finally, for the full year, capital expenditures are expected to run between $20 million and $30 million as we expand our new restaurant openings and continue to test and roll out the kitchen initiative. And with that, I'd like to turn it back over to Dave for final remarks.

Dave Boennighausen -- Chief Executive Officer

Thanks, Ken. In closing, we'd like to thank all of our employees for the results being driven by their commitment and the dedication to delivering an outstanding guest experience at our restaurants. Our continued success in 2019 and also strength early in 2020 is a direct result of all their hard work, and we look forward to building on this success in 2020 and beyond, as Noodles reaches our tremendous growth potential. Victor, please open the lines for Q&A.

Questions & Answers:


Operator

Thank you. [Operator instructions] And our first question will come from the line of Jake Bartlett from SunTrust. You may begin.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for taking the questions. My first questions were about the same-store sales and understanding the cadence in the fourth quarter and then also quarter to date. You get -- it sounds like your sales momentum is strong currently, but was below the low end of the range for 2019.

So I just wanted to understand what happened as you kind of -- as you turned on to marketing again after the rewards program whether that was later than you expected? Any other kind of factors that might have caused the slight miss in the fourth quarter?

Dave Boennighausen -- Chief Executive Officer

Sure. No, thanks, Jake. It's a great question. And so with same-store sales, during the last earnings call, we had talked about how they were positive leading up to that earnings call thus far in Q4.

We anticipated that they would accelerate during the back half of the year. They absolutely did so and particularly strengthened. Kind of week in, week out, it got stronger and stronger as the quarter went on. And then the same thing has happened thus far in 2020.

I think one thing that gets us excited about the numbers that we've seen thus far in 2020 is that we just do continuously see momentum kind of grow on a very regular basis. As it relates to where we failed our guidance, just a touch shy of where we had expected to land in the quarter. Much of that just took a little bit longer for that momentum to really get triggered. But once it did, we've been very excited.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. And just understanding the quarter to date, I believe you were running fairly strong last January, and then things like the polar vortex and all the crazy weather you had in Denver hit. But just to let us -- just to help us understand what the year-ago comparisons for the kind of the quarter-to-date numbers, so we can kind of frame it correctly.

Dave Boennighausen -- Chief Executive Officer

Yes, absolutely. When you look at the overall comparisons for 2020, certainly, we are receiving some weather benefit as it relates to the first couple of months of this year. But I think what's exciting is that even when you normalize for that weather benefit, we are still seeing quarter-to-date performance at the top end of our guidance for the full year. So weather hasn't -- it's really just a small factor relative to some of the other factors, which a lot of that is around the digital engagement.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Got it. And then last questions are about the restaurant margin guidance. And it looks like there's about 90 basis points of expansion that you're expecting. Can you help us kind of understand what's baked into that? One question would be around the delivery.

How much of the kind of the 1.6% of delivery pressure from the fee there can you reclaim with the new pricing structure? And so that's one part of it.And then the other is how much of the kitchen equipment changes are baked in? I mean, is it just the process, I believe, around 60 basis points from the process change that's baked in or do you have an assumption of rolling out, say, the steamers earlier or anything else that we should think about?

Dave Boennighausen -- Chief Executive Officer

Yes. I'll touch on the labor side, and then if Ken can give some texture on delivery and the balance of our margin expectations. With labor, we did institute process changes in late January, that we expect will save about one to one and a half hours of labor per restaurant per day, which is a meaningful number and it allows us to combat a significant amount of labor inflation. There is a little bit incorporated to our guidance in terms of benefit that we would expect from further rollout.

But as we said in the prepared remarks, it's going to be pretty disciplined. So whether we're looking at the capital aspect or the labor savings aspect, we will ensure that we're setting the right program in place for us to have a strong ROI and really give us the flexibility for future innovation. In terms of delivery, maybe Ken can give some of those reference points?

Ken Kuick -- Chief Financial Officer

Yes. Hey, Jake, it's Ken. Good to hear from you and a great question. We did see a substantial increase in our off-premise occasion during 2019, and that was largely through delivery.

We'd expect delivery to stabilize somewhat near where it is right now. In terms of the margin side going forward, we talked about really four main drivers: one is negotiating the fees with the third-party providers; two is implementing premium delivery pricing, which we did in the fourth quarter. That's a 10% pricing premium. And then third, and I think probably most impactful is beginning to move guests from third-party delivery platforms to direct delivery.

That brings a substantially lower fee for us. And then in the longer term, as digital continues to grow, we'll look at modifying our labor model, particularly in the front of the house.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks very much.

Operator

Thank you. And our next question comes from the line of Andrew Strelzik from BMO Capital Markets. You may begin.

Unknown speaker

Hey, guys. This is actually David on for Andrew. Thanks for taking the questions. My first question is just on the pace of unit openings and I guess, how should we think about the cadence in 2020? Will it be relatively balanced throughout the year or weighted more heavily toward any particular quarter?

Ken Kuick -- Chief Financial Officer

Hey, David. It's Ken. Thanks for the question. We actually opened our first restaurant today, so we're super excited about that.

For 2019, the openings will be mostly back-end loaded -- I'm sorry, 2020 will be mostly back-end loaded.

Dave Boennighausen -- Chief Executive Officer

Yes. We're really happy with where the pipeline is setting up for both 2020 as well as 2021 and beyond. But at the same time, we do recognize that it's going to be much more loaded toward the fourth quarter, particularly in the first part of the fourth quarter and maybe the back half of the third quarter.

Unknown speaker

Great. That's helpful. And then just one follow-up. You've obviously had a lot of success leading into the healthy platform with Zoodles and Caulifloodles over the last couple of years, and it sounds like innovation within that platform will remain a focus moving forward.

I guess I'm just wondering if you're actively testing additional products right now? And I guess, more broadly, how large a part of the business that can grow from a product perspective over time without compromising operations or throughput? And then just piggybacking off that, is 20% to 25% of total sales mix level still kind of the right level to think about in terms of where the healthy side of the menu can grow to over time? And then just given how robust the growth has been to this point, is there an opportunity to growing beyond that?

Dave Boennighausen -- Chief Executive Officer

Yes, absolutely. We think there's a significant runway in the better fee platform, the different noodle alternatives, our salad offerings. We do still believe that it has the potential to reach the mix that you mentioned, the 20%, 25% of guests, which currently Mac & Cheese is our largest selling platform. Encouragingly, the mix continues to grow.

And while Caulifloodles, when we have introduced those, that's intended to meet a different objective. It's an accessible noodle, primarily for existing guests wanting to get more veggies in their diets. It was a great complement to our zucchini noodle. We are in the process of testing additional introductions and innovation around plant-based noodle alternatives.

I will say that we're a little bit early on, so I don't want -- and I think we'll talk more during upcoming earnings calls. I will answer the question, though, in terms of the impact on operations. We are maniacal about ensuring that as we increase innovation through the system that at the same time, we take away things and improve processes to ensure that we don't fall into actually think there was one of the challenges that we had a handful of it years ago is when the menu did get too complex. So it is something with which we are very, very laser-focused on, making sure that we balance innovation with our operational execution.

Unknown speaker

That's really helpful. Thanks for taking the questions, guys.

Operator

Thank you. [Operator instructions] Our next question come will from the line of Andy Barish from Jefferies. You may begin.

Andy Barish -- Jefferies -- Analyst

Yes, hi. It's just a quick housekeeping on the fourth quarter's same-store sales components.

Ken Kuick -- Chief Financial Officer

Yes. Hi, Andy. It's Ken. Fourth-quarter comp sales were 1.5% systemwide.

Company-owned sales growth reflected negative traffic of 2.3%, offset by 3.8% of price and mix shift. And then, as mentioned earlier on the -- in the prepared remarks, traffic improved over the course of the fourth quarter and turned positive, thus far, in 2020.

Andy Barish -- Jefferies -- Analyst

And are you still anticipating about three points of price for '20?

Dave Boennighausen -- Chief Executive Officer

Yes, we're really a touch higher than that right now, Andy, but we would expect for the full year that we'll have about 3% of price, and then expect modestly positive traffic as well as a little bit of benefit from mix shift as well.

Andy Barish -- Jefferies -- Analyst

And kind of closing that gap with Stacey coming on board in the marketing role between the off-premise and the digital engagement. What are a couple of signposts maybe we can look for as we move through the year to kind of convert some of those guests into the digital flywheel, if you will?

Dave Boennighausen -- Chief Executive Officer

Yes, absolutely. I think 2020, Andy, will be a year really around picking off some of the low-hanging fruit in terms of better engagement with our guests. But at the same time, just growing the overall program in terms of membership and getting the data set up to where we can really have the tools to become really much more personalized than we are today. You'll see us, as we get more refined with the program, talk a bit more around what the membership levels are looking like as well as conversion, but still a bit early there.

I think one of the signposts to look for those is just that overall digital ordering. And I think our brand, and we believe firmly that we're better positioned than most brands in terms of capturing this enormous growth opportunity. As we said on the earnings call, almost 30% of our sales thus far this year are being ordered digitally, 60% off-premise. This is a brand that resonates for the digital experience, whether it be how we do with younger generation, to how the food travels, etc.

So I'd say in the short term, continue to look at the progress around digital growth in total, and then we'll be providing more texture surrounding the program as a whole as we go through this year.

Andy Barish -- Jefferies -- Analyst

And can you just help us dimensionalize sort of, I guess, the near- to medium-term opportunity on labor. How many hours kind of before the equipment changes? And was the January process changes, was that related to prep changes in the kitchens?

Dave Boennighausen -- Chief Executive Officer

Yes, that is correct. So it's actually moving a little bit more prep throughout the day instead of earlier in the day. Those process changes were tested pretty rigorously. So we're happy with what we're seeing thus far is making the lives easier for the team members as well as giving us, again, about one hour to one and a half hours of savings.

I've said in the past that we expect ultimately, the goal would be to get 10 hours of labor out of the system per restaurant per day. That is our long-term goal. We're very happy with what we're seeing with the steamers, which is really meant to make our Sauté noodle line more efficient, hotter temperature of food, better quality of the food, better order accuracy. That one, we expect to roll out more over the course of this year.

Don't want to peg a labor number on it yet because we haven't tested it in isolation versus -- and also with the other aspect of our strategy, which is more around an oven and how we approach our proteins. That's the one area that we need to spend a bit more time refining, ensuring we have the absolute right package. So more to come. So, there's not a lot that's baked into the guidance, except for the one to one and a half hours that we already are capturing today.

Andy Barish -- Jefferies -- Analyst

Thank you.

Operator

[Operator instructions] We have a follow-up from Jake Bartlett from SunTrust. You may begin.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for the follow-ups. One, just kind of modeling bookkeeping question. Did you close three company-owned stores in the fourth quarter?

Dave Boennighausen -- Chief Executive Officer

Hold it while we -- Ken makes sure we got the absolute right number. What you can look forward, we're firmly past that period of closures that we had in 2017 and '18. As a reminder, a lot of the restaurants that have been closing since that have been those that were at the end of their lease life. We just didn't feel it was the right trade area to continue.

On an ongoing basis, closures are going to be much more normalized. So you can expect really about one every six months, somewhere in that ballpark as leases end. You are correct that three did close during the fourth quarter of 2019.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

OK. But so we had, I think, five closures in '19 in the company. And that's really the end of the kind of the closure program?

Dave Boennighausen -- Chief Executive Officer

Yes. It will be more just normal course of business just as leases end, and we want to relocate a restaurant or the trade areas moved.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Got it. And then just another question on the margin, the pieces of the drivers to that. You mentioned around 3% menu pricing. What do you expect for commodity inflation in 2020?

Ken Kuick -- Chief Financial Officer

Yes, Jake, this is Ken. Great question. In 2019, we saw inflation of around 1%, and we would expect that -- about the same in 2020. So we're right at 1%.

As a reminder, we contract about 75% of our spend and we're in good shape for 2020 in that regard. And an advantage that we continue to have is the variety in our menu and in our ingredients, and that helps limit our exposure to particular commodity fluctuations.

Dave Boennighausen -- Chief Executive Officer

Yes. I think one thing we've been proud of with the success in recent quarters, Jake, is we've been able to significantly improve our cost of goods sold but at the same time, in investing significantly in our menu. It started a couple of years ago as we completely relaunched and reengineered our Mac & Cheese sauce included with zucchini, which is a lower-margin item, includes the cauliflower. We've been able to invest quite a bit in the guest experience at the same time that we've been able to identify savings and our processes on how we contract.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Got it. And then last one. You mentioned in the script, the -- an evolution of the pick-up experience in 2020. Is this potentially a sales driver? Can you go into a little more detail on what that is?

Dave Boennighausen -- Chief Executive Officer

Yes. With 60% of our food off-premise and 30% right now coming through our pickup units, they're functional. They're effective in many ways, but we don't believe that they're personalized nor are they necessarily very obvious, and they don't necessarily remove as much friction from the experience as we would like. So what we're looking at is, in most of our restaurants, we have three cash registers.

As business has moved more digital, we really don't need that third cash register anymore. So really, we'll be rolling out, in many of our restaurants, removing that third register and instead incorporating a much more powerful, a bit more personalized pickup experience that's also easier for the guests. So when all is set and done, it's really about removing as much friction as possible from that experience.

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Great. I appreciate it.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Ken Kuick -- Chief Financial Officer

Dave Boennighausen -- Chief Executive Officer

Jake Bartlett -- SunTrust Robinson Humphrey -- Analyst

Unknown speaker

Andy Barish -- Jefferies -- Analyst

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