Noodles & Company — Q1 2014 Form 10-Q
Business context and period: The 13-week fiscal quarter ended April 1, 2014. The company operated 331 company-owned and 63 franchised restaurants across 30 states and the District of Columbia, reporting as one segment. Comparisons are with the quarter ended April 2, 2013.
Financial highlights
| Metric | Q1 2014 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $89.5 million | $81.3 million | +10.1% |
| Income from operations | $2.5 million | $2.6 million | -4.5% |
| Operating margin | 2.7% | 3.2% | -0.5 percentage points |
| Net income | $1.4 million | $0.9 million | +54.1% |
| Diluted EPS | $0.05 | $0.04 | — |
| Adjusted EBITDA | $8.4 million | $8.2 million | — |
| Operating cash flow | $10.3 million | $8.0 million | +$2.3 million |
| Capital expenditures | $11.5 million | $13.3 million | -$1.8 million |
Revenue growth reflected new restaurant operating weeks and openings; comparable sales declines partly offset that growth. Restaurant revenue was $88.4 million, while franchise royalties and fees were $1.1 million. Comparable sales fell 1.4% at company-owned restaurants, 3.3% at franchised restaurants, and 1.6% system-wide. Company-owned average unit volume was $1.163 million, down 1.4%.
Costs pressured operating performance: cost of sales rose to 27.0% of restaurant revenue from 26.5%, and occupancy to 11.2% from 10.4%; labor remained 30.8%. Management attributed higher food costs partly to waste on low-volume days during severe weather and increased promotions, and higher occupancy costs partly to snow removal. Net income benefited from interest expense falling to $20,000 from $1.1 million following debt repayment after the 2013 IPO. The effective tax rate was 41.5%, versus 39.2%.
Financial position and liquidity
At April 1, 2014, cash was $0.7 million, total assets $192.3 million, current assets $17.8 million, and current liabilities $24.5 million. The company reported $6.6 million of revolving-credit borrowings, $2.8 million of letters of credit, and $35.6 million available under its $45 million facility, which expires in November 2018. It was in compliance with debt covenants. Operating cash flow was below capital expenditures by $1.3 million for the quarter; cash ended at $0.7 million, down $0.3 million from year-end.
Outlook, risks, and unusual items
- Management expected to open 42–50 company-owned and 10–15 franchised restaurants in 2014, including first-quarter openings. Estimated 2014 capital expenditures were $50–$55 million.
- Management said first-quarter comparable-sales weakness reflected traffic declines from abnormally severe weather, partly offset by price and mix. Restaurant sales are seasonal, generally lower in the first and fourth quarters.
- A Delaware lawsuit alleges failure to remit unclaimed gift-card funds and seeks, among other relief, treble damages. The case was at an early stage; the company could not estimate a probable loss or range and said it would vigorously defend itself.
- The company identified exposure to variable interest rates and volatile food, labor, energy, and construction costs. A 1 percentage-point rate change on quarter-end borrowings would affect annualized pretax interest expense by about $66,000. It reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales trends and traffic recovered after the quarter’s severe weather, and how pricing and promotions affected demand and food costs.
- Whether planned restaurant openings and $50–$55 million of capital spending were achieved, and the resulting effect on cash and liquidity.
- Subsequent developments in the Delaware gift-card litigation and any change in the company’s ability to estimate potential exposure.
- Whether margins improve as new restaurants mature, given lower operating margin and higher cost-of-sales and occupancy ratios.