Noodles & Company — Q2 2023 Form 10-Q
Business context and reporting period
Fiscal quarter ended July 4, 2023 (13 weeks); comparisons are with the quarter ended June 28, 2022. The first-two-quarter comparison covers periods ended July 4, 2023 and June 28, 2022. Noodles & Company operates one reportable segment. At quarter-end it had 465 restaurants in 31 states: 373 company-owned and 92 franchised.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First two quarters 2023 | First two quarters 2022 |
|---|---|---|---|---|
| Total revenue | $125.2 million | $131.1 million | $251.2 million | $243.6 million |
| Operating income (loss) | ($0.3) million | $1.9 million | ($2.5) million | ($4.2) million |
| Net income (loss) | ($1.3) million | $1.3 million | ($4.4) million | ($5.1) million |
| Diluted EPS | ($0.03) | $0.03 | ($0.10) | ($0.11) |
| Restaurant contribution margin | 14.8% | 15.5% | 14.2% | 12.8% |
| Adjusted EBITDA | $9.3 million | $11.2 million | $16.3 million | $13.4 million |
| Operating cash flow | — | $10.4 million | $6.0 million | |
| Capital expenditures | — | $23.9 million | $16.7 million |
Q2 restaurant revenue fell 4.6% and total revenue fell 4.5%. System-wide comparable sales declined 5.5% in Q2, including a 5.9% decline at company-owned restaurants and 3.4% at franchised restaurants. Company-owned average unit volume was $1.327 million, down 6.6% year over year. For the first two quarters, revenue rose 3.1%, while system-wide comparable sales increased 0.2% and company-owned AUV was essentially flat at $1.335 million.
Q2 cost of sales fell to 25.1% of restaurant revenue from 27.8%, reflecting lower food and protein costs and menu pricing. Labor rose to 32.4% from 30.3%; occupancy rose to 9.3% from 8.6%. Management cited wage inflation and sales deleverage. First-half cost of sales improved to 25.1% from 27.9%, while labor increased to 32.4% from 31.2%.
Balance sheet, debt and liquidity
At July 4, 2023, cash was $3.1 million, versus $1.5 million at January 3, 2023. Long-term debt, net, was $63.2 million; borrowings under the credit facility were $64.7 million before $1.5 million of unamortized issuance costs. The company also had $3.0 million of letters of credit outstanding and reported $57.4 million available for future borrowings. Current liabilities were $64.5 million versus current assets of $23.8 million.
The $125 million revolving credit facility matures July 27, 2027; borrowings bear variable SOFR-based rates. Revolver borrowings were $55.9 million at 7.20%–7.50%, and swingline borrowings were $8.8 million at 9.25%–9.50%. Average borrowing rate for the first two quarters was 7.75%, versus 4.07% in the comparable 2022 period. The company said it was covenant-compliant and expected available cash, operating cash flow and facility capacity to meet needs for at least 12 months.
Changes, outlook and risks
- Q2 revenue and adjusted EBITDA declined year over year, and the company moved from Q2 net income to a net loss. Management attributed weaker sales primarily to lower guest traffic and said recent price increases may have contributed.
- First-half revenue increased mainly from new restaurant openings; lower food costs helped restaurant-level margins, but wage inflation and higher interest expense weighed on results.
- Management anticipated approximately 5% annual system-wide unit growth in 2023 and the near future. Nine company-owned restaurants opened and four closed in the first two quarters; management did not anticipate significant closures in the foreseeable future. Development delays from utilities, permitting, inspections, construction and labor were expected to continue into 2023.
- Fiscal 2023 capital expenditures were estimated at $45–$50 million, including $21–$25 million for the remainder of the year, primarily for new restaurants, existing-store reinvestment and technology.
- Management cited consumer sensitivity to pricing and economic uncertainty, persistent wage inflation, possible commodity and supply-chain volatility, third-party delivery costs, and variable-rate debt exposure. It noted food commodity costs had improved, particularly chicken, while inflation remained above historical levels. A 1 percentage-point interest-rate change was estimated to affect annualized pretax interest expense by about $0.6 million.
- The company expected no material income tax expense or benefit for the remainder of 2023 under its deferred-tax valuation allowance; estimated the annual effective tax rate at 2.0%–2.5%.
- On July 26, 2023, the board authorized a share repurchase program of up to $5 million, expiring after 12 months. Management reported no material legal proceedings and no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether traffic and comparable-sales declines persist, and how customer response to pricing affects revenue and AUVs.
- Whether food-cost improvements can offset labor inflation, promotional discounts and sales deleverage.
- New-store opening pace, capital spending, and funding needs relative to operating cash flow, available facility capacity and variable-rate debt costs.
- Terms and actual use of the $5 million repurchase authorization in light of low cash and outstanding borrowings.
- Potential effects of commodity, labor, construction, consumer-spending and supply-chain changes on the company’s stated growth and liquidity outlook.