Noodles & Co. (NDLS) Q4 2021 Earnings Call Transcript

Noodles & Co. (NDLS -10.36%)
Q4 2021 Earnings Call
Feb 23, 2022, 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's fourth quarter 2021 earnings conference call. [Operator instructions] I would now like to introduce Noodles & Company's chief financial officer, Carl Lukach.

Carl Lukach -- Chief Financial Officer

Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2021 earnings call. Here with me this afternoon is Dave Boennighausen, our chief executive officer. I'd like to start by going over a few regulatory matters.

During our opening remarks 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 details related 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 during a number of risks and uncertainties. The safe harbor statement in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for its 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company's forward-looking statements.

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 2020 fiscal year and subsequent filings we have made. These documents contain and identify important factors that cause actual results to material differently from those contained in our projections or forward-looking statements. During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter 2021 earnings release and our supplemental information. Now I would like to turn it over to Dave Boennighausen, our chief executive officer.

Dave Boennighausen -- Chief Executive Officer

Thanks, Carl, and good afternoon, everyone. 2021 was an important year for Noodles & Company as we made significant progress against our growth objectives, validating the residents of the brand for today's consumer, as well as setting the stage for accelerating unit growth, which is now underway. For the fiscal year, revenue increased 40.7%, compared to 2020 to over $475 million. Comparable restaurant sales increased 2.1% systemwide and digital sales increased 20%, accounting for 57% of total sales.

Restaurant loan margin for fiscal 2021 increased 400 basis points to 15.9%, culminating 233% increase in adjusted EBITDA to $38.1 million for the year. As we look back at 2021, one important aspect is the underlying momentum that we have seen throughout the system. As evidenced by the record AUVs of $1.3 million that we achieved in Q3 prior to the staffing and Delta variant challenges of the fourth quarter. Even with the impact of Delta and staffing challenges for the full year, average unit volumes reached an all-time high of $1.3 million, representing approximately 22% growth over 2020 and an increase of over 11% versus pre-pandemic 2019.

We saw strength throughout the country with particular momentum in less penetrated markets where we were able to accelerate brand awareness through targeted digital efforts. As ATD grew in 2021, we're also proud of the efficiencies gained throughout our labor model, particularly with the implementation of steamers that will be completed nationally this quarter. The gains from these efficiency initiatives will manifest themselves throughout 2022, both to reduce labor hours, as well as improvements in throughput and cut times, which are critical as we face increased demand both in existing and new locations. Finally, during 2021, our newest vintages of restaurants performed at our highest level in company history.

Now in our strategy to accelerate growth with a proven model that yields 30%, plus cash-on-cash returns. Turning to our recent results. During the fourth quarter, while the underlying business remained strong, the company was significantly impacted by both stacking challenges, as well as the surge of the Delta COVID variant, which was concentrated in our most penetrated markets of the Rocky Mountain West and the Upper Midwest. This resulted in a meaningful amount of temporary closures of reduction in operating hours, which we estimate impacted revenue by approximately $8 million for the fourth quarter.

The Delta variant impact on the full quarter's financials were additionally compounded by one-time costs nationwide related to investments in staffing and continued volatility within our supply chain. It's important to note that this impact was particularly profound during late October and through the month of November. Notably, the staffing improves and the Delta variant the business quickly regained momentum as evidenced by strengthening comparable restaurant sales throughout the quarter. From a fiscal-period perspective, systemwide comparable sales grew 6.8% in October increased to 11.9% in November and then again to 14.7% during the month of December.

As the calendar turned to 2022, fairly these Omicron cases has impacted at the beginning of the year. But again, we're pleased with how performance has improved as cases has subsided. During our January fiscal period, hospital sales increased 2.7% at company locations and 4% systemwide. Results have accelerated in recent weeks with comparable sales in our February period, increasing 7.5% in company-owned locations and 8.7% systemwide as of yesterday, February 22.

These results give us confidence that the brand will again prove its resilience and accelerate both sales and margin expansion quickly as one Omicron subsides. This belief is also bolstered by the brand's strong value proposition with the majority of our dishes having entry points of approximately $7. We feel this pricing power gives us the ability to enact additional pricing during the second quarter and potentially beyond to medicate anticipated margin pressures. As we look to the year ahead, we continue to believe that our three primary strategies will have a profound impact on our ability to become a premier growth story in the restaurant space.

These strategies remain: first, the continued differentiation of our concept to appeal to a broad range of lifestyles, convenience and dietary needs which will be best exemplified by a particularly exciting new culinary launch in the second quarter. Second, further activating our brand, particularly through our digital assets and marketing strategy, which ultimately will result in the launch of the new brand building platform that will roll out in the coming months. And third, accelerating our unit growth to take advantage of an operating model, we feel is ideally suited for today's environment, driven by our targeted 8% unit growth in 2022 and accelerated to 10% next year. Let me provide a brief update on each of these, starting with our culinary strategy and continued differentiation of the brand.

Noodles & Company remains the only national casual restaurant bringing fresh taste on both flavors with the noodles and pasta-based menu. Our fresh, flavorful and ready-to-order approach sets the brand apart, and our variety of the fact our food travels so well makes perfectly suited for meeting consumer needs around convenience, offer our guests real comping so they don't have to whenever and wherever they want. In 2021, we showcased the strength of our menu through continued innovation, particularly with the introduction of Tortelloni in June, which continues to be the best-performing new menu items in our history. We still feel there's a lot of runway in the Tortelloni offering and are particularly pleased with the increase in frequency that we're seeing from those who have tried the dish.

Our ability to optimize our menu innovation between healthy offerings and new spends on familiar favorites has been a hallmark of our brand, and now will continue in 2022. Just last week, we launched two new salads, refreshing the category for upcoming warmer months while simplifying our operational execution. And throughout the year, we will additionally be completing testing on new menu items for 2023 and beyond. However, the color or innovation where we are currently most excited about is mainly, which will launch in a few months.

We has the taste and the texture of a traditional noodle and gets its name from having over 50% less net cars and over 40% more protein than a traditional noodle. The culinary formula is proprietary versus current offering that is a result of almost a year of innovation. We feel that we really can have a similar impact to what outings had in the brand a few years ago, expanding our market reach meaningfully by redefining the traditional expectations of the pasta. As our cold innovation accelerates in upcoming months, so our second strategy, which is further activating the version, particularly through our digital capabilities and improved marketing attractiveness.

During 2020, on our digital sales grew 20% over the prior year. We both for the full year and Q4 accounted for over 50%, 57% of total sales. We continue to be impressed by the strength in this channel, which is bolstered again by how well our food travels for all premise occasions, the strength of our rewards program and our residents with younger or digital consumers. We continue to enhance the targeting of our marketing, as well as the capabilities of our digital assets, introducing a higher level of personalization to our best engagement, thus enhancing the overall guest experience.

Of course, one of the biggest tools for driving digital growth is our rewards program, which has now across 4 million members. During 2021, we saw significant increases, both in our ability to attract or last guests, as well as convert rewards members to more frequent guests. For example, 65% of new members who sign up for our rewards program returned for a second visit within 60 days, which is faster than revisit rates we've seen in prior years. We believe this points to not only the power of the program itself but also has the ability to inform more effective targeted marketing communications.

Given the disruptions that the industry has seen in recent months, our marketing priorities in Q4 of '21 and Q1 of '22, have focused on accelerating our brand building platforms that will roll out in the coming months. This increase in marketing activity will capitalize on the strength of our initiatives and increased insights we gathered from our rewards program. This provides added confidence in the ability for us to accelerate momentum during 2022 with efficient targeted activation of the brand. While we look forward to culinary innovation and brand activation throughout 2022, perhaps the most impactful strategy is the acceleration of our unit growth profile, which is now underway.

As we've discussed before, the restaurants opened in the last three years continue to perform better than any group of new restaurants in our history, averaging bars and restaurant-level margins of both company at average. This momentum has continued thus far in 2022, which is particularly exciting, given the openings thus far, we cut our first franchise location in the new market of South Carolina, as well as the test of a smaller square footage, order had drive-through location outside of Wisconsin that is also an entirely off-premise location. We anticipate approximately 35 openings systemwide for 2022, including seven during the first quarter. While the balance of our 2022 opening will be somewhat backlogged given the current development environment, we remain very confident in the opportunity to accelerate unit growth to 10% beginning in 2023 with a proving 30%, plus cash-on-cash return model, again, perfectly suited for today's environment.

This model, which incorporates our order had drive-through we know in an operating model that reflects the progress made over the last few years in terms of labor efficiencies, continues to gain positive attention from the franchise community as well. As we disclosed earlier this quarter, in January, we closed the transaction with an established 150-plus unit multi-concept franchise to be our exclusive partner for California. This transaction included the sale of 15 existing company-owned restaurants, as well as the development agreement that provides for the opening of 40 new locations over the next several years. This agreement, the recent strong opening of our newest franchisee in South Carolina and the previously announced franchise deal to expand into West Texas and Southern New Mexico, opportunity, and we are pleased with the current quality and trajectory of our conversations with additional prospective franchisees.

As we enter the space in accelerated growth, the importance of our team cannot be overstated. While we hope the end of the staffing challenges seen throughout the industry in recent months, we're highly encouraged with both the improvement in our overall staffing levels and our ability to retain the key talent that is critical to the execution of our new unit acceleration. Our management tenure remains extraordinarily strong, and we're on track to open nearly 100% of new units with experienced proven general managers prepared to introduce the brand to new trade areas throughout the country. As always, my thanks to our team for their incredible dedication toward delivering tremendous execution to our guests during an unprecedented time.

And I look forward to joining you on the journey, we accelerate all aspects of the company growth story. I'll now turn it over to Karl to discuss some more depth on our financial results and expectations within 2022.

Carl Lukach -- Chief Financial Officer

Thank you, Dave, and good afternoon, everyone. We are very proud of our full year financial results, which represent strong upward momentum toward our accelerated growth objectives even with a challenging market backdrop. For the full year, total revenue in 2021 was $475 million, a nearly 21% increase compared to last year. Underlying our revenue growth, our average unit volumes were $1.3 million for the year, a 22% increase from last year and an 11.3% increase versus 2019.

More specifically on the fourth quarter. Total revenue was $114.8 million, an increase of 7.1% compared to prior year. Comparable restaurant sales increased 11.2% systemwide, comprised of a 9.5% increase in company-owned locations and a 20.8% increase at franchise restaurants. Average unit volumes for the fourth quarter were $1.31 million, representing a 14.9% growth, compared to 2020 and a 10.8% growth rate compared to 2019.

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

Restaurant contribution margin for the fourth quarter was 12.4%, compared to a 13.6% margin during the fourth quarter of 2020. For the full year, contribution margin increased 400 basis points versus prior year to 15.9%. Cost of goods sold was 25.9% of sales in the fourth quarter, an increase of 70 basis points from last year. The increase during the fourth quarter was predominantly driven by ongoing market challenges in supply chain and a volatile commodity environment.

Our cost of goods sold inflation was approximately 8% during the quarter, largely driven by our protein basket, specifically the price of chicken breast. Our full year cost of goods sold was 25.2% and roughly flat versus 2020. Labor costs for the quarter was 33.2% of sales, which is 110 basis points above last year. Fourth quarter labor costs include approximately $1.1 million of onetime expenses related to retention, hiring and COVID-related expenses such as vaccination and sick pay.

In total, our core wage inflation for the fourth quarter was approximately 9%. For the full year, labor costs declined 130 basis points as a percentage of sales to 31.2%. Other operating costs for the quarter were 18.4% of sales, which was essentially flat to last year, given a similar mix in our delivery business and with 17.9% of sales for the full year. Delivery fees were 5.9% of sales in the fourth quarter, compared to 5.7% in the fourth quarter of last year.

G&A for the quarter was 11.4% -- sorry, $11.4 million, which was essentially flat to last year. G&A includes noncash stock-based compensation of $700,000 during the fourth quarter, compared to $600,000 last year. GAAP net loss for the fourth quarter was $4.7 million or $0.10 per diluted share, compared to a net loss of $3.8 million last year or $0.09 per diluted share. We also reported net income on an adjusted basis, which adjusts for the impact of impairment, divestitures and closures.

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

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

Now let's start first with our expectations from a revenue perspective. For the first quarter, we anticipate total revenues to range between 110 and $113 million, inclusive of mid-single-digit comparable restaurant sales growth. As Dave indicated, the onset of Omicron variant during the beginning of 2022 had a material impact on our business in January and to a lesser extent, in February. However, just as we saw in the fourth quarter with the Delta variant, comparable restaurant sales have rebounded as Omicron has subsided.

Comp restaurant sales increased 2.7% at company-owned locations in fiscal January and have increased 7.5%, thus far, in February. It's also worth noting that with the successful close of our franchise transaction with Warner Foods, our prior California locations are no longer included in restaurant revenue as of mid-January and instead, we recorded in franchise royalties. We estimate that the net impact in the first quarter from a total revenue perspective is $4 million. The impact to EBITDA will be negligible in 2022 and accretive as the territory is built out thereafter.

Now let's look at our cost expectations. Today, we reiterated our target of 20% restaurant-level margins by 2024, driven by acceleration of our average unit volume, continued labor efficiencies and a return to a more normalized level of food inflation. There is no question that the first quarter will be impacted by Omicron and inflationary pressures, compounded by our historic seasonality, and we anticipate Q1 of 2022 restaurant-level contribution margins of 7% to 9%. However, we expect a meaningful acceleration of margin as the year goes on, culminating the restaurant-level margins in the high teens during the back half of the year.

For the components of restaurant-level expense, we'll start with cost of goods sold. Our cost of goods sold margin is expected to be unusually high in the first quarter of 2022, given a reset in some of our annual food contracts and industrywide record levels of inflation, particularly in protein. We expect COGS of 28% to 29% this quarter with a linear progression back to our long-term goal of 25% by the second half of the year. Our COGS in the short term is particularly impacted by inflation we're seeing in protein, which accounts for approximately a quarter of our cost of goods sold.

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

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

We anticipate general and administrative expense of approximately $12 million in the first quarter, inclusive of stock-based compensation. We expect stock-based compensation to be around $1.2 million. Switching to development. We continue to see excellent performance from our new restaurants and anticipate seven openings during the first quarter, primarily company-owned restaurants.

For the full year, we expect approximately 35 systemwide openings with roughly 70% of openings being company operated. We do expect the pipeline to be somewhat backloaded, with roughly a third of our 2020 openings occurring in the fourth quarter. From the restaurant closure perspective, while we are confident that we are now at the end of closures related to real estate that is not well suited for today's current environment. In the first quarter, we anticipate two closures, one which consigned with the California transaction and one mall-based location in the D.C.

metro area. We continue to believe that our best use of capital is investing in new unit development, particularly given the strong performance of our recent classes, which are on track to support our target of 30% cash-on-cash return at new restaurants. For 2022, we anticipate $30 million to $34 million in capital spend, of which roughly two-thirds will support new unit development. Despite the inflation we are seeing in construction and raw materials for development, we expect average net investment for due locations to be at or just above $800,000 per location.

We expect the remainder of our capital to be allocated to ongoing restaurant maintenance and continued investments in technology to enhance both our digital business and our best engagement. Our accelerated unit growth is supported by a strong balance sheet. At the end of fiscal 2021, we had cash and cash equivalents of $2.3 million and a total debt balance of approximately $22.3 million. We anticipate that our 2022 restaurant developed needs development needs will be funded through our operating cash flow.

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

Dave Boennighausen -- Chief Executive Officer

2021 was an extremely successful year for Noodles & Company despite the low document industry challenges related to COVID, staffing challenges and increases in inflation. We enter 2022. The fundamental business has never been stronger with significant improvements in our culinary innovation, digital and marketing capabilities and operating model efficiencies all bolstered by a value proposition that allows us to mitigate the current inflationary environment. Most importantly, the brand is now embarking on accelerated unit growth with the model perfectly suited for today's environment.

But despite the strength of recent classes, the expected opening of seven systems -- seven location systemwide this first quarter and increased momentum from our franchise sales initiative. Noodles & Company is well-positioned to be one of the premier growth stories in the restaurant industry. I look forward to sharing our success with you in 2022 and beyond. With that, Alexander, please open the lines for Q&A.

Questions & Answers:

Operator

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

Jack Corrigan -- Truist Securities -- Analyst

Hey, guys, thanks for taking the question. Yeah, my first one is just on what's implied by your same-store sales guidance with single digits in the first quarter. If I'm doing the math right, with 2.7% in January and 7.5% in February, you're sort of already at mid-single digits. So does that imply just mid-single digits in March? And I guess, why wouldn't we see an acceleration from here?

Dave Boennighausen -- Chief Executive Officer

Yeah, Jack, we certainly think that there's the opportunity for acceleration from here. The only aspect that we'd like to keep in mind is the weather. I mean, we saw at the upper Midwest preponderance of our restaurants in the Rocky Mountains that have an impact on the business and just knowing the volatility that has the potential to impact March as well.

Jack Corrigan -- Truist Securities -- Analyst

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

Dave Boennighausen -- Chief Executive Officer

Yeah. We think the leverage on sales is very minimal. So it's a very small percentage of our restaurants that are now creditably short staffed. Not out of the woods yet by any stretch, but at the same type of momentum has been extraordinary and the retention of the team has been great.

I think, one thing, Jack, that we point to that we're particularly proud of it is so looking at that recovery from a staffing side, our cup times actually thus far in 2022 are the best they've been in the history of the company. So we not only have got staffing to a much better level, but we are executing at a very high level. Part of that has to do with the steamer initiative for sure, but a big part of staffing coming not quite to where we're 100% we are getting much closer.

Jack Corrigan -- Truist Securities -- Analyst

That's really helpful. And then, just last one on development. You had elevated store closures in '21. And you said you expect too in the first quarter.

Is that the only closures you expect for all of '22?

Dave Boennighausen -- Chief Executive Officer

So there are some sites that from a financial perspective, it makes sense for us to wait until the lease was over before we ultimately close, and we're now at the end of that. So there's always the potential for one or two where either the developer has something happening or if we see we see a different opportunity in relocation or something like down the road like that. That's not as possible. We'll be we're filing out at the end.

I don't know how all these closures were related to really just the review of the portfolio and how we have trade dynamics and the consumer needs change. And as you know, one of those locations as an example, was a small location that we expect to close here in Q1.

Jack Corrigan -- Truist Securities -- Analyst

Great. Thanks. for the questions. 

Operator

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

Andrew Strelzik -- BMO Capital Markets -- Analyst

Hey, good afternoon. My first question, you mentioned some of the inefficiencies, as well as some onetime expenses in the quarter. Can you quantify how much the onetime stuff was in the quarter? And then, is there any assumption for 1Q and the guidance you gave as well for kind of nonpermanent costs.

Dave Boennighausen -- Chief Executive Officer

Sure. For the quarter, the onetime impact that we had, which particularly showed up in our labor margins was $1.1 million. That was related to onetime staffing such as the retention bonus sign-on bonuses, but also related to the COVID-related vaccine pay. From a go-forward basis, in our Q1 guidance, there is no expectation for any of those to continue over onetime charges.

We don't anticipate that to be throughout the duration of next year -- sorry, this year.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Yeah, got it. OK. So that's helpful. And then, obviously, I understand the kind of regional pressures in some of your key areas in the upper Midwest and the Rockies.

I guess, I'm just curious, what are the trends look like in maybe the rest of the country? I mean, did you see -- just as we're kind of thinking about understanding how temporary this is and those types of things, just kind of maybe more durability in some of the other regions. Could you speak to some of those trends, please?

Dave Boennighausen -- Chief Executive Officer

Yeah. Absolutely. So as you look at the Mid-Atlantic, if you look at some of the South West Coast markets that were not impacted by Delta, one of that was encouraging was that that they carry over the moment managers from what we've seen in Q3 pretty much throughout all of Q4. And so, they didn't actually start seeing the impact of our business until here very big with Omicron, which gives us that confidence in terms of the overall trajectory of the business in that underlying momentum.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Got it. OK. And then, my last question is just on the menu. So recently here, just announced some of the new salads going on the menu.

You talked about linguine recently. I mean, it just feels like the menu news pace has kind of accelerated here. Is that right? Is that intentional maybe some holdover from the last 24 months or maybe that the environment wasn't as conducive. I'm just kind of curious how you're thinking about further opportunities across the menu as well kind of rolling forward here? Thanks.

Dave Boennighausen -- Chief Executive Officer

Yeah. I mean, let's start with just the overall power of. I mean, we think that one has just great actual similar for the brand in terms of expanding the overall reach into so many different types of occasion and gas profiles. That's why they're sending test for a long time.

Salad was something that we've been in test as well. This is ultimately a pretty deliberate disciplined process where we all lots of different items in tests. And you can expect to continue to see that really for the foreseeable future, Andrew, in terms of every three or four months, that us having some big new news. As we do it, we take things off the menu as well to ensure that we don't sacrifice operational complexity.

But I will say they will be pulled by a salad refresh category. We are excited about certainly the wise the one that as we look at 2022, we think will be a great driver and another reason we are such great confidence that we're getting women throughout this year.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Got it. Thank you very much. I'll go ahead and pass it on.

Operator

We have your next question from Andrew Barish with Jefferies. Your line is open.

Andrew Barish -- Jefferies -- Analyst

Hi. I wanted to just get a sense on the marketing side. To clarify, did you say with the COVID surge that you actually kind of pulled back on what you would have expected from a marketing side? And then, I think, it's the messaging and the creative is supposed to evolve a little bit in '22. Can you kind of let us know how that kicks off in the 2Q beyond just product news?

Dave Boennighausen -- Chief Executive Officer

Yeah. You'll see things shift from being more transactional, which is what we saw during the first part of COVID and then you're correct. It wasn't that we pulled back significantly from a marketing perspective, but there was a little bit of a muted nature to it, given all the staffing challenges that you saw throughout the industry, as well as the impact of Delta and Omicron. What you will see as we look into 2022 is us harness the full power of all the data on sites we've had, the improvements we've made to the digital assets, which you'll see those continue to evolve and improve as well.

In general, is making the brand more visible, pointing out all those great aspects from our cooking methodology to how we approach people to service the value proposition to the variety of the food. This brand has so many great attributes and elements to it that we still feel we're just scratching the service in terms of consumers really truly knowing that. And what's great about the data that we've got and the improvements we've made throughout our guest engagement, as well as our rewards platform as we're so confident that the activation is going to be effective and efficient as well.

Andrew Barish -- Jefferies -- Analyst

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

Carl Lukach -- Chief Financial Officer

Yeah, that's right. So first, from a run rate perspective, I would assume that it's a somewhat lower quarter than the full year, if you think about annualizing the quarters, just given some of the cadence of our historical spend. So I would anticipate that 2Q and beyond, we see a little bit elevated G&A expense. In terms of California, there is a net benefit there, certainly.

So I would expect that that is baked into our number. It does help us streamline some of the operations. 

Andrew Barish -- Jefferies -- Analyst

OK. Thanks, guys.

Operator

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

James Rutherford -- Stephens Inc. -- Analyst

Thanks for taking questions. Hey, Dave, Carl, I wanted to dig in a little bit on the margin guidance for the 1Q and most importantly, the ramp through into the back half of the year. Starting on the COGS side of it, I think I heard you say that you're expecting 28% to 20% COGS margin in the first quarter then back to 25% in the back half of the year. We know your menu price assumptions for each quarter.

What are you assuming on the commodity inflation front to get you back to that 25% COGS margin by the back half of the year?

Carl Lukach -- Chief Financial Officer

Sure, James. Let me walk you through a little bit. So first of all, we are continuing to see this inflation pressure on our cost of food. It's really driven by the commodity price volatility, staffing pressures and as I mentioned, particularly protein.

In the first quarter, we do see elevated levels of inflation. What we're estimating right now is around 18%. These challenges we are seeing ongoing, and we're still seeing some elevated pricing even at where we are today, particularly in protein. In terms of the go forward, there's really two elements here.

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

James Rutherford -- Stephens Inc. -- Analyst

OK. Thanks for that. Flipping over to the wage piece of it. If I have my notes correct, I think, wage inflation was around mid-single digits last quarter.

I think, you said high single digits, 9%-ish this quarter and then guided low double for the first quarter. Correct me if I'm wrong on those numbers, but where do you think we find the top end of that? It sounds like most of your restaurants are fully staffed based on what Dave was saying earlier. What are you predicting for wage inflation, how that progresses through the year?

Carl Lukach -- Chief Financial Officer

So first of all, you're correct on those assumptions. That's what we've seen so far, and that's what we're anticipating in the first quarter. We are anticipating that wage inflation for the most part continues. There will be some relief as you go throughout the year, but we're anticipating that that remains at elevated levels.

A lot of that is due to rehire rates, in addition to increasing our wage band as we remain competitive in each of these markets. As I think about what's going to get us back to that 30% target by the second half of the year, it's really three things. First, it's ongoing efficiencies that we are now anniversary-ing and having a full run rate, particularly our savers, which we're going to complete in this quarter. The second is there were some onetime associated costs with our labor force in 2021 that we are no longer going to be anticipating this year.

And then, finally, it's our sales leverage. As we look at the continuing growth in traffic and pricing, we're anticipating sales helping to drive that 30% target cost for labor.

James Rutherford -- Stephens Inc. -- Analyst

Very helpful. Thank you. And if I could slip in one more. Dave, on the unit growth expectation for next year, which I think is still 10% conceptually, what kind of mix do you think is probably expect numbers, but between kind of company-owned franchise? And what sort of visibility do you have into that growth acceleration?

Dave Boennighausen -- Chief Executive Officer

Yeah. Visibility continues to strengthen, and we're really encouraged by just the sheer number and quality that we're seeing going through the pipeline as you know the development environment is a little bit volatile, but we're very pleased with what we are seeing there. The overall mix, I think, it's going to be a little bit dependent upon how we see the franchise community can change your salary growth, that we're seeing some good momentum there. I would expect the majority of the open in 2023 to be company-owned and then shifting in 2024 and beyond to be closer to a 50-50 mix in terms of company and franchise opting.

James Rutherford -- Stephens Inc. -- Analyst

Excellent. Thank you, guys. Really appreciate the help.

Operator

We have your next question from Nicole Miller with Piper Sandler. Your line is open.

Nicole Miller -- Piper Sandler -- Analyst

Thank you. Good afternoon. Just super quick on 4Q. Was the $1.1 million labor investment you're talking about, was that all in 4Q?

Carl Lukach -- Chief Financial Officer

That's correct.

Nicole Miller -- Piper Sandler -- Analyst

OK. And so, the question is then on the $8 million of sales impact from Omicron is the only store-level margin impact that $1.1 million? Or did that hit other areas of the store-level margin?

Carl Lukach -- Chief Financial Officer

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

Nicole Miller -- Piper Sandler -- Analyst

So the $1.1 million translates to 100 basis points. So if you didn't have these COVID variants, store-level margin would have been 13.4% instead of 12.4%. Just to put a finer point on it, you're saying there's other things that take into consideration, it would have been even better than 13.4%.

Carl Lukach -- Chief Financial Officer

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

Nicole Miller -- Piper Sandler -- Analyst

OK. I mean, I'm sure it's difficult to tease out, but if there is a number to throw out, let us know. And what was the percent marketing in 4Q?

Dave Boennighausen -- Chief Executive Officer

So fourth quarter marketing was just around 1%, which is consistent with what we've seen in prior quarters as well, a little bit lower in terms of dollars spread versus what we've seen partially as you saw the impact on the revenue side of Delta.

Nicole Miller -- Piper Sandler -- Analyst

And I ask that then in the context of coming forward to 1Q with all the conversation and guidance you've already addressed at this point and assuming the marketing isn't changing too much in the operating line, then the store-level margin in total for 1Q is barely going to be double digit. I just want to make sure we're all on the same page before we hang up here. Is that the indication because you didn't really address occupancy and other operating costs?

Dave Boennighausen -- Chief Executive Officer

Yeah, Nicole, that's about right. Yes, that's it. So we actually guided to 7% to 9% in terms of, oh, do I think work, right, everybody in the historical seasonality, we have in our brand. It has to be 100 basis points lower from a margin perspective than what you see through the balance of the year.

So as we talked about on the call, that Q1 margin guidance, it incorporates not just a pretty meaningful seasonal impact that we have that we always had, but also kind of that elevated element that we've seen in inflation perspective and the impact of Omicron. But as we said, we expect this is going to materially improve throughout the course to expect that we'll be approaching 40% margins toward the back half of the year.

Nicole Miller -- Piper Sandler -- Analyst

Just one more last question on the subject, and I realize it's a very challenging question. But if we could absorb all the detail and just back up high level and say, gosh, you're making a little bit less here than in any other period if you wanna pick the same quarter or different quarters, but for the same or different reasons, right? It's a little bit of a question mark. Is the delta between like Omicron market -- or let's say, COVID market conditions, I think the delta then is just the commodity inflation. Can you slice and dice it that way and say, OK, that 7% to 9% store-level margin should be this if demand had been normalized and it should be this if commodities, if you could keep pace with price action?

Dave Boennighausen -- Chief Executive Officer

Yeah. I think, how we articulated a bit is how expect a normal environment is around 25%. And due to inflation, we expect that to be 28% to 29%. So significant inflation here during the first part during Q1.

Now we'll elevate a bit not just through -- we expect some proven inflation over the course of the year, but also through the price of action that we're taking. From a labor perspective, again, expectations between 33% and 34%. Always a bit higher in Q1, again, from the seasonality perspective. So this one is more related to just some of the inefficiencies through Omicron.

We would expect that labor line to have some neat opportunity to actually have leverage over the course of the balance.

Nicole Miller -- Piper Sandler -- Analyst

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

Dave Boennighausen -- Chief Executive Officer

Yes, very positive, actually. They understand the impact that Delta has had on the business, as well as some inflation. These type of multiunit operators that they're honoring all of this in their growth business as well. They're attractive to us because they see that pricing power and the value proposition.

Most importantly, they see the track record of 30%, plus cash-on-cash returns from our most recent classes. That's even before we're able to implement some potential cost savings. So they're encountering the same challenges in their markets that we are seeing throughout the industry. And if you look back at 2021 as a whole, extremely strong year for us on for margin expansion, as well as AUV expansion perspective.

And we see the cadence to 2022 being remarkable as well, and there remains tremendous confidence around that side.

Nicole Miller -- Piper Sandler -- Analyst

Thank you.

Operator

[Operator instructions] We have your next question from Todd Brooks with the Benchmark Company. Your line is open.

Todd Brooks -- The Benchmark Company -- Analyst

Hey, good afternoon, guys. Thanks for the questions. A couple of questions here. One, you've bumped the AUV goal for fiscal '24 by another 50,000 here, so $1.5 million.

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

Carl Lukach -- Chief Financial Officer

So Todd, we have our existing restaurant base, I would say anywhere from 30% to 35% that's already above that level. And they're operating certainly above the 20% contribution margin. When we were looking at this at $1.45 million our prior target, over 40% of our current locations were at that current level also and again, operating at 20% contribution margin or above.

Todd Brooks -- The Benchmark Company -- Analyst

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

Dave Boennighausen -- Chief Executive Officer

I don't know if we'd say realities versus uncertainties in terms of we feel that this concept has been really to expand margins meaningfully not just enough this year but beyond. But just wanna reflect that there is uncertainty in terms of what the overall inflation looks link in 2023 and beyond. So it really reflects that in terms of the overall confidence level that the brand can lever beyond '20, its size ever.

Todd Brooks -- The Benchmark Company -- Analyst

OK. Great. And then, can you share with us the proceeds to the company from the sale of the 15 units to Warner Foods?

Dave Boennighausen -- Chief Executive Officer

Now another way that we will be disclosing, as Carl mentioned, in terms of the overall impact on the business from an EBIT perspective, relatively not negligible for 2022. What we're excited about in terms of this transaction is such a great established partner and as they build out that territory to be meaningfully accretive. I'm kind of across the board throughout our P&L. But the proceeds, very solid deal, but at the same time, not material enough to having to move the needle significantly in terms of the overall balance sheet.

Todd Brooks -- The Benchmark Company -- Analyst

OK. Great. And then, finally, on the franchising pipeline. Just you talked about maybe a little bit more of a corporate store mix to the '23 openings before getting to 50-50 now and '24.

Is that just reflective of some lost momentum with discussions due to Omicron -- or how would you talk through that pipeline and the momentum that you would have around additional announcements here in the near term?

Dave Boennighausen -- Chief Executive Officer

Yeah, actually, that was always our expectation. Just given the realities of as we sign on these new transactions, delivering in 2022 or in 2023. As you build more and more momentum, there's a waterfall effect that ultimately that gets to a roughly 50-50 split, which is the math behind it. It doesn't really happen until 2024.

So that was actually always the expectation was that we were not going to be able to kind of get to that 50-50 split from a growth perspective until 2024.

Todd Brooks -- The Benchmark Company -- Analyst

OK. And do you feel like Omicron slowed down the ability for us to see more announcements in the near term? Is it just pushing out kind of closing deals, the reality that everybody had to operate through?

Dave Boennighausen -- Chief Executive Officer

We don't think so. We certainly recognize that during the staffing crisis we talked about a little bit, I think we saw more of that during the staffing crisis Todd, our operating partners that we were talking about, they were talking with this prospective franchisees, they would typically have their own concepts during the staffing crisis, they want to make sure that they have under control. Omicron is a little bit different in terms of it's been relatively short in terms of its impact. We saw a significant spike clearly throughout the industry in January, and that come down materially and almost subside here in February.

So that impact has been fair why people will pass that pretty quickly. So momentum, we feel actually is very strong.

Todd Brooks -- The Benchmark Company -- Analyst

OK. Great. Thanks for the questions.

Operator

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

Dave Boennighausen -- Chief Executive Officer

Thanks, Alexander. I appreciate everyone's time today and hope that you have a great evening. Thank you very much.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Carl Lukach -- Chief Financial Officer

Dave Boennighausen -- Chief Executive Officer

Jack Corrigan -- Truist Securities -- Analyst

Andrew Strelzik -- BMO Capital Markets -- Analyst

Andrew Barish -- Jefferies -- Analyst

James Rutherford -- Stephens Inc. -- Analyst

Nicole Miller -- Piper Sandler -- Analyst

Todd Brooks -- The Benchmark Company -- Analyst

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