Noodles & Company — Form 10-Q Summary
Reporting period: Second fiscal quarter ended July 2, 2013 (13 weeks); year-to-date figures cover the two fiscal quarters ended July 2, 2013. Financial statements are unaudited. The company operates fast-casual restaurants and reported 295 company-owned and 53 franchised locations across 26 states and the District of Columbia.
Financial performance
- Second-quarter revenue: $89.2 million, up 18.2% from $75.5 million. Restaurant revenue was $88.4 million; franchising royalties and fees were $0.9 million. New restaurants contributed $10.4 million of the $13.6 million increase in restaurant revenue.
- Comparable sales and AUV: Company-owned comparable restaurant sales grew 4.7% in the quarter and 3.5% year to date; system-wide comparable sales grew 4.4% in the quarter and 3.0% year to date. Management attributed most of the quarterly comparable-sales increase to traffic and estimated the Easter calendar shift contributed 0.8 percentage points to system-wide growth. Quarterly company-owned AUV was $1.184 million, up 1.2%.
- Profitability: Operating income fell to $0.9 million from $5.2 million; operating margin declined to 1.0% from 6.9%. Net income was $68,000 versus $2.2 million, and diluted EPS rounded to $0.00 versus $0.09. The quarter included $5.7 million of IPO-related expenses. Adjusted EBITDA, a non-GAAP measure, was $12.6 million versus $10.1 million; EBITDA was $6.0 million versus $9.3 million.
- Year to date: Revenue rose 17.3% to $170.5 million, while operating income fell 59.6% to $3.5 million and net income fell 71.4% to $1.0 million. Diluted EPS was $0.04 versus $0.15.
- Restaurant cost trends: Quarterly cost of sales improved to 26.1% of restaurant revenue from 26.7%; labor rose to 29.8% from 29.7%; occupancy held at 9.7%; and other restaurant operating costs increased to 13.1% from 13.0%. Year-to-date labor, occupancy, and depreciation percentages increased versus the prior year.
- Cash flow and investment: For the first two quarters, operating cash flow was $19.7 million, capital expenditures were $25.7 million, and financing cash flow was $6.0 million. Cash ended at $618,000, up from $581,000 at fiscal-year start.
- Debt and liquidity: The July 2 IPO generated approximately $100.2 million in net proceeds, used to repay the $75.0 million term loan and nearly all revolving borrowings. Debt outstanding was $207,000, with $42.5 million available under the facility after letters of credit. The company reported a $7.2 million working-capital deficit and said it was in covenant compliance.
Material changes and unusual items
- The company completed its IPO on July 2, issuing 6,160,714 Class A shares at $18 per share. It reported $5.7 million in IPO-related expenses: $3.2 million in stock-based compensation, $1.7 million in employee transaction bonuses and payroll taxes, and $0.8 million in payments to equity sponsors.
- General and administrative expense rose 103.4% in the quarter, largely due to IPO expenses. Excluding those expenses, management said G&A declined as a percentage of revenue. The management-services agreement and Class C share were terminated or redeemed in connection with the IPO; management fees will no longer be incurred.
- Stock-based compensation expense was $3.6 million in the quarter, including accelerated option vesting at the IPO. The company noted that public-company costs, including legal, accounting, insurance, and compliance expenses, will increase.
- Interest expense declined year over year. Management expects reduced interest expense following debt repayment, offset in part by additional public-company costs.
Outlook, risks, and contingencies
- Management expected to open 40–42 company-owned restaurants net of one closure, and 6–8 franchise restaurants in 2013. At the reporting date, 20 company-owned and two franchise restaurants had opened in 2013.
- Estimated 2013 capital expenditures, net of lease incentives, were $44–$48 million, including $18.3–$22.3 million for the remainder of the year. Management expected to fund needs with operating cash flow and available revolver capacity and believed it could maintain covenant compliance over the next 12 months.
- Management noted seasonal sales variation, food and labor inflation, commodity-price volatility, wage increases, construction costs, competition, and execution of restaurant growth as relevant risks. Pricing or changes in product delivery may mitigate commodity-cost increases, but could not assure full offset.
- Routine legal claims were disclosed; management considered an unfavorable outcome remote or any potential loss immaterial, while noting that a significant increase in claims or a larger successful claim could adversely affect results. The filing reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales and traffic momentum can persist as new-store growth continues; assess the Easter timing effect and the difference between company-owned and system-wide measures.
- How much of the earnings decline reflects one-time IPO costs versus ongoing restaurant-level cost pressure, and whether adjusted EBITDA reconciles consistently to GAAP results.
- Whether planned restaurant openings and $44–$48 million of capital spending are achieved while maintaining returns and liquidity.
- Post-IPO share count, option dilution, and the ongoing effect of public-company costs; the quarter’s weighted-average diluted shares were 24.2 million.
- Revolver availability, covenant headroom, variable-rate exposure, and any developments in legal claims or commodity costs.