Noodles & Company — Q2 2019 Form 10-Q
Business context and period. The 13-week second quarter ended July 2, 2019; the year-to-date period covers two fiscal quarters. Noodles & Company operated 395 company-owned and 62 franchised restaurants across 29 states and the District of Columbia. Results are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First two quarters 2019 | First two quarters 2018 |
|---|---|---|---|---|
| Total revenue | $120.2 million | $117.4 million | $230.2 million | $227.9 million |
| Operating income (loss) | $1.2 million | $(4.2) million | $0.1 million | $(6.8) million |
| Net income (loss) | $0.4 million | $(5.9) million | $(1.4) million | $(9.5) million |
| Adjusted EBITDA | $10.9 million | $9.1 million | $16.5 million | $14.7 million |
| Operating cash flow | Not separately provided | Not separately provided | $9.0 million | $2.8 million |
- Q2 revenue grew 2.4%; company-owned comparable sales rose 4.8%, franchise comparable sales 3.7%, and system-wide comparable sales 4.6%. First-half system-wide comparable sales increased 3.8%.
- Q2 operating margin was 1.0%, versus negative 3.5% a year earlier; net margin was 0.4%, versus negative 5.1%. First-half operating margin was 0.1%, versus negative 3.0%; net margin was negative 0.6%, versus negative 4.2%.
- Q2 company-owned average unit volume was $1.148 million, up 5.1%. Management attributed comparable-sales gains principally to off-premise sales, menu pricing and mix, partly offset by an estimated 50-basis-point Easter timing effect.
- Q2 cost of sales improved to 25.6% of restaurant revenue from 26.7%; labor was flat at 32.7%. For the first half, labor rose to 33.4% from 33.0%, reflecting wage inflation and training investments, partly offset by efficiencies.
- First-half operating cash flow was $9.0 million; investing cash outflow was $9.3 million, including $8.2 million in property and equipment purchases and $1.4 million for a franchise restaurant acquisition. Financing cash outflow was $1.1 million. Cash declined $1.3 million to $3.3 million.
- At July 2, cash was $3.3 million and reported availability under the revolving facility was $39.9 million. Credit-facility borrowings were $46.1 million before $1.4 million of unamortized issuance costs; the company was in compliance with debt covenants.
- Operating lease liabilities totaled $255.7 million and finance lease liabilities $1.1 million. Adoption of the new lease standard materially increased reported assets and liabilities; the prior-year balance sheet was not restated. The company reported total assets of $381.4 million and stockholders’ equity of $46.9 million.
Changes, outlook, and risks
- Results improved substantially year over year, including a return to Q2 GAAP profitability. Lower general and administrative expense reflected the absence of a $3.4 million data-breach liability charge recorded in Q2 2018; lower interest expense also helped.
- Q2 included a $2.2 million impairment charge for two restaurants following weaker operating results. First-half restaurant impairment, closure and asset-disposal costs were $3.3 million, down from $4.2 million in the prior-year period. The company closed no company-owned restaurants in the first half and acquired one franchise location.
- Management planned to open four to six company-owned restaurants in 2019, following no company-owned openings in the first half. Estimated full-year capital expenditures were $14.5 million to $19.0 million, including $4.0 million to $7.0 million for new restaurant construction before landlord reimbursements.
- Management believed available cash, operating cash flow and undrawn credit capacity would meet needs for the next 12 months. It expected to meet applicable credit covenants through at least year-end 2019, but noted that covenant failure could require a waiver or amendment and adversely affect liquidity.
- Key risks include continued wage and benefit inflation, commodity-price volatility, restaurant execution and comparable-sales trends, staffing, food safety, consumer spending and access to financing. The company said it did not anticipate material income-tax expense or benefit for the remainder of 2019 because of its valuation allowance.
- Other lawsuits and claims arise in the ordinary course; management considered an unfavorable outcome remote or any potential loss range not material, while noting that outcomes are uncertain. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Whether comparable-sales gains and off-premise growth persist, and how pricing and mix affect traffic and margins.
- Whether wage inflation, delivery fees and other operating costs can be managed without eroding restaurant-level profitability.
- Cash generation, the $39.9 million of reported revolver availability, covenant headroom and refinancing or interest-rate exposure.
- Execution of the 2019 opening and capital-spending plans, and the outlook for restaurants at risk of impairment or closure.
- The effect of substantial lease obligations and the lease-accounting adoption when assessing leverage and liquidity.
- Whether non-GAAP adjusted EBITDA adjustments are useful alongside GAAP results, particularly impairment and other unusual charges.