Noodles & Company — Q3 2019 Form 10-Q
Business context and period: The company operates fast-casual restaurants and reports as one segment. This 10-Q covers the fiscal quarter and first three fiscal quarters ended October 1, 2019; comparable periods ended October 2, 2018. At quarter-end, it operated 391 company-owned and 67 franchised restaurants.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First three quarters 2019 | First three quarters 2018 |
|---|---|---|---|---|
| Total revenue | $118.3 million | $116.7 million | $348.5 million | $344.6 million |
| Operating income (loss) | $5.0 million | $2.1 million | $5.2 million | $(4.7) million |
| Net income (loss) | $4.2 million | $1.1 million | $2.8 million | $(8.5) million |
| Diluted EPS | $0.09 | $0.02 | $0.06 | $(0.20) |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $16.3 million | $(4.9) million |
- Sales and margins: Q3 total revenue rose 1.4%; system-wide comparable sales increased 2.1% (company-owned 2.2%, franchise 1.6%). Company-owned AUV was $1.157 million, up 4.5%. Restaurant contribution was approximately $20.0 million, or 17.1% of restaurant revenue, versus $18.9 million, or 16.4%, a year earlier. GAAP operating margin improved to 4.3% from 1.8%; net margin was 3.6% versus 0.9%.
- First-three-quarter trends: Revenue increased 1.1%, system-wide comparable sales increased 3.3%, and company-owned AUV rose 4.5% to $1.157 million. Restaurant contribution was approximately $54.1 million, or 15.7% of restaurant revenue, versus $51.1 million, or 15.0%. The company moved from an operating and net loss to positive income.
- Cost performance: Q3 food cost fell to 25.3% of restaurant revenue from 26.5%, reflecting pricing and supply-chain savings. Labor declined slightly as a percentage of restaurant revenue, to 32.5% from 32.7%, as efficiencies offset wage inflation. Other restaurant costs rose to 14.7% from 14.0%, primarily due to third-party delivery fees.
- Cash and debt: Cash was $3.1 million at October 1, versus $4.7 million at January 1. Debt was $44.4 million, excluding $1.3 million of unamortized issuance costs; $3.2 million of letters of credit were outstanding. The company reported $41.4 million available for future borrowings under its credit facility and compliance with debt covenants. First-three-quarter investing cash outflow was $14.8 million; financing cash outflow was $3.0 million.
- Lease obligations: Adoption of lease accounting materially increased reported assets and liabilities. At October 1, operating lease assets were $212.8 million and total lease liabilities, including finance leases, were $252.5 million. The company states the adoption did not materially affect 2019 operating results.
Changes, outlook and risks
- Management attributed Q3 sales growth to increased off-premise sales, a new menu pricing structure and favorable sales mix. Supply-chain initiatives helped lower food costs; delivery fees increased other restaurant costs.
- The company opened three restaurants and acquired one franchise restaurant during the first three fiscal quarters, sold five company-owned restaurants to a franchisee, and closed two company-owned restaurants. Management planned two further system-wide openings in Q4, pursued modest near-term growth, and targeted a 5% annual unit growth rate by 2021.
- Management estimated full-year 2019 capital expenditures of $17 million to $19 million, including $3 million to $5 million for the remainder of the year. It expected sufficient liquidity for the next 12 months from cash, operating cash flow and undrawn credit capacity.
- The company cited continuing wage and benefit inflation, commodity price volatility, consumer and weather variability, and execution risks. It expected wage inflation to continue. A 1 percentage-point change in borrowing rates would affect annualized pretax interest expense by approximately $0.4 million.
- The company expected to meet applicable financial covenants through at least year-end 2019 but cautioned that failure to comply could require a lender waiver or amendment, with no assurance of approval. Its $44.4 million of variable-rate borrowings are secured by substantially all personal property assets and subsidiary stock.
- Management did not anticipate material income tax expense or benefit for the remainder of 2019 due to a valuation allowance against deferred tax assets. No material change to previously reported risk factors was noted, except for expanded cybersecurity disclosures. The filing discusses the prior payment of approximately $11 million related to a 2016 payment-card breach and ongoing cyber risks; pending ordinary-course claims were assessed as remote or not material.
- Unusual items included a $3.4 million data-breach liability charge and $0.3 million gift-card litigation settlement in the first three quarters of 2018, as well as a $0.6 million debt-extinguishment loss in 2018. Q3 2019 stock-based compensation included a credit associated with the former Executive Chairman’s departure.
Investor verification priorities
- Confirm comparable-sales momentum and whether the Q3 drivers—off-premise sales, pricing and mix—persist without materially increasing delivery costs.
- Track labor inflation and the durability of supply-chain savings against restaurant-level margins.
- Review cash generation, capital spending, debt repayments, revolver availability and ongoing covenant headroom.
- Assess restaurant openings, closures, franchise transfers and progress toward the stated 5% annual unit-growth target.
- Monitor lease obligations, restaurant impairment assumptions, the deferred-tax valuation allowance and potential cybersecurity or litigation costs.