Business context and reporting period
Noodles & Company filed this Form 10-K for the 52-week fiscal year ended December 29, 2020. The company operates fast-casual restaurants serving globally inspired dishes. At year-end it had 378 company-owned and 76 franchised restaurants in 29 states.
The filing is an annual report, not a standalone fourth-quarter filing. Fourth-quarter results are noted separately below. COVID-19 drove a sharp shift to off-premise dining; approximately 57% of full-year sales came from digital orders.
Financial and operating performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $393.7 million | $462.4 million |
| Operating income (loss) | ($20.0 million) | $5.4 million |
| Net income (loss) | ($23.3 million) | $1.6 million |
| Diluted EPS | ($0.53) | $0.04 |
| Operating cash flow | $9.1 million | $30.1 million |
| Capital expenditures | $11.8 million | $17.4 million |
| Cash and cash equivalents at year-end | $7.8 million | $10.5 million |
| Long-term debt, net of issuance costs | $40.9 million | $40.5 million |
Revenue fell 14.9%. Company-owned comparable sales declined 11.6% and franchise comparable sales declined 14.5%; system-wide comparable sales were down 12.0%. Average unit volume declined 8.9% to approximately $1.064 million.
Restaurant contribution, a non-GAAP measure excluding corporate-level expenses, was $46.4 million, or 11.9% of restaurant revenue, versus $73.4 million and 16.1% in 2019. Adjusted EBITDA, also non-GAAP, was $11.5 million versus $38.4 million; EBITDA was $1.7 million versus $26.8 million. Cost of sales and labor improved as a share of restaurant revenue, but occupancy and other restaurant operating costs rose as shares of revenue, with higher delivery fees a key factor. GAAP operating margin was negative 5.1%, versus positive 1.2%.
In the fourth quarter, revenue was $107.2 million, operating loss was $3.4 million and net loss was $3.8 million. Company-owned comparable sales declined 4.2%; restaurant contribution margin was 13.6%.
Year-end liquidity included $7.8 million of cash and $52.3 million available for future borrowings under the credit facility. Current assets were $23.7 million and current liabilities were $58.1 million. The company reported $43.8 million of borrowings before unamortized debt costs and $3.2 million of letters of credit under its facility. Operating and finance lease liabilities totaled $244.4 million.
Material changes versus the prior year
- COVID-related restrictions, temporary dining-room closures and weaker traffic reduced revenue and drove the company from a small profit to a substantial net loss.
- Operating cash flow fell by $20.9 million. Cash declined by $2.6 million during the year, versus a $5.8 million increase in 2019.
- Third-party delivery fees and other restaurant operating costs increased despite lower sales; labor and food costs declined in dollars and as a percentage of restaurant revenue.
- The company opened four restaurants, closed six company-owned locations and transferred nine company-owned locations to a franchisee. Franchise restaurants increased to 76 from 68.
- In June 2020, the company amended its credit facility, obtaining covenant relief and changing capital expenditure limits. The amendment set a 3.25% LIBOR margin through the third quarter of 2021.
Outlook, commentary and risks
Management said sales improved sequentially after the initial spring 2020 disruption, with renewed pressure in the fourth quarter. At the filing date, more than 90% of company-owned dining rooms were open, many at limited capacity. Management cited uncertainty around the pandemic, customer willingness to return to dining rooms, restrictions, economic recovery and vaccine distribution.
The company planned 10–15 system-wide openings in 2021 and targeted annual unit growth of approximately 7%–10% beginning in 2022. It expected 2021 capital expenditures of $20–$24 million, funded by operating cash flow and potential revolver borrowings. The filing does not provide specific revenue or earnings guidance.
The credit agreement’s leverage and fixed-charge covenants were waived through the first quarter of 2021, with revised thresholds thereafter. The company was compliant at year-end and expected to meet covenants for at least the next four fiscal quarters, but cautioned that future compliance and access to waivers were not assured. The facility is secured by substantially all personal property assets and subsidiary stock.
Other notable exposures include long-term, generally non-cancelable restaurant leases; possible additional impairment charges (2020 included $4.1 million of restaurant impairment charges); labor and commodity-cost inflation; reliance on delivery platforms and suppliers; cybersecurity and food-safety risks; and uncertain COVID-19 effects. Ordinary-course litigation was described as having remote or immaterial expected outcomes. The auditor issued unqualified opinions on the financial statements and internal controls; impairment of long-lived assets was identified as a critical audit matter.
Important facts for investors to verify
- Review comparable-sales calculations: temporarily closed or capacity-restricted restaurants remained in the 2020 comparable base.
- Assess the cash and borrowing cushion alongside covenant terms, letters of credit, capital spending plans and the large lease obligations.
- Track comparable sales, restaurant contribution margin and delivery costs as dining capacity and customer behavior evolve; restaurant contribution and adjusted EBITDA are non-GAAP measures.
- Evaluate the assumptions behind restaurant impairment tests and the potential for further charges.
- Confirm progress against the 2021 opening and capital expenditure plans and the targeted 2022 unit-growth rate.