Noodles & Company — Q1 2020 Form 10-Q
Reporting period: Fiscal quarter ended March 31, 2020; comparison is with the quarter ended April 2, 2019. The company operated 381 company-owned and 77 franchised restaurants. The filing was delayed under SEC COVID-19 relief, citing pandemic-related operational disruption and staff reductions.
Financial performance
- Revenue: $100.3 million, down 8.8% year over year. Restaurant revenue fell 9.2% to $98.7 million; franchise royalties, fees and other revenue rose 27.4% to $1.6 million. The company attributed the decline mainly to COVID-related traffic losses late in the quarter and refranchising.
- Comparable sales: System-wide down 7.2% for the quarter, with company-owned down 7.0% and franchise down 8.9%. Sales had been positive early in the quarter before restrictions and dining-room closures sharply reduced demand.
- Profitability: Operating loss was $4.9 million versus $1.1 million; net loss was $5.8 million, or $0.13 per diluted share, versus $1.9 million, or $0.04 per share. Adjusted EBITDA was $1.8 million versus $5.6 million.
- Margins and costs: Cost of sales improved to 25.5% of restaurant revenue from 26.7%; labor rose to 34.7% from 34.1%, occupancy to 12.2% from 11.4%, and other restaurant operating costs to 16.9% from 15.1%, partly due to delivery fees. Restaurant contribution margin, calculated from disclosed restaurant revenue and operating costs, was approximately 10.7%, compared with 12.6% in Q1 2019.
- Cash flow: Operating cash use was $0.7 million, versus $0.1 million provided in the prior-year quarter. Investing cash use was $3.9 million. Financing provided $44.6 million, largely from a $47.0 million revolver draw. Cash increased $40.1 million to $50.5 million.
- Debt and liquidity: March 31 debt was $87.4 million, excluding $1.3 million of unamortized issuance costs; $3.2 million of letters of credit were outstanding. The company drew another $8.5 million on April 3. At June 17, cash was $62.4 million and debt was $95.9 million. Management said it expected adequate liquidity and covenant compliance for the next 12 months.
- Balance sheet: Total assets were $414.2 million and total liabilities $369.3 million at March 31. Lease liabilities totaled $253.3 million. Stockholders’ equity was $44.9 million.
Material changes, outlook and risks
- COVID-19 led to closure of nearly all dining rooms from the latter half of March through May, shifting sales toward off-premise channels and reducing restaurant-level margins. By June 16, quarter-to-date comparable sales were down 34.1% system-wide; weekly declines had improved to 15.1% for the week ended June 16.
- The company introduced nationwide direct delivery, expanded third-party delivery, launched curbside pickup, reduced discretionary spending and support-office staffing, sought rent concessions, and drew on its revolver. Management warned that sales, liquidity and results remained highly uncertain and depended on the pandemic, restrictions, consumer behavior and economic recovery.
- On June 16, the company amended its credit facility. The amendment set borrowing rates at LIBOR plus 3.25% through Q3 2021, waived specified leverage and fixed-charge covenants through Q1 2021, revised later covenant thresholds, and restricted capital spending.
- Fiscal 2020 capital expenditures were estimated at $8 million to $10 million, primarily maintenance and two to four restaurant openings; development investment was substantially halted. Management said it anticipated the possibility of returning to 5%–7% unit growth beginning in 2022, subject to recovery and strategic plans.
- Other risks include variable-rate debt and LIBOR transition uncertainty, possible supply-chain disruption, wage and commodity inflation, franchisee liquidity and deferred fees, and increased cybersecurity threats. No goodwill impairment was recorded; the company reported no material change in risk factors apart from its COVID-19 update. Routine legal matters were described as remote or not material, though outcomes are uncertain.
Important facts for investors to verify
- Whether comparable-sales recovery after June 16 continued, and whether dining-room reopenings translated into sustainable traffic and margins.
- Whether cash burn, available revolver capacity and debt service remain consistent with management’s 12-month liquidity and covenant expectations.
- The effect of the June credit amendment, including covenant requirements, borrowing costs and capital-expenditure limits.
- Whether delivery fees, rent concessions, labor actions and other cost controls offset lower sales without lasting operational or customer impacts.
- Whether planned 2020 openings, the $8–$10 million capital-expenditure estimate and potential 2022 unit-growth outlook remain achievable.