NDLS

Business Context and Reporting Period

Company: Noodles & Company (NDLS)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Fiscal Quarter ended April 1, 2025
Business Overview: The Company operates fast-casual restaurants serving globally-inspired noodle and pasta dishes. As of April 1, 2025, the system comprised 460 restaurants (369 company-owned, 91 franchise) across 31 states. The Company operates as a single reportable segment.

Key Financial Metrics

Note: Total indebtedness includes $102.0 million on the revolver and $0.7 million on the swingline. Interest rates on the revolver ranged from 8.15% to 10.25% during Q1 2025.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 2.0% ($2.4 million) driven by a 4.4% increase in system-wide comparable restaurant sales (4.7% at company-owned locations). This was partially offset by restaurant closures and refranchising activity in the prior year.
• Profitability Decline: Net loss widened 47.5% to $9.1 million. Operating loss increased 55.9% to $6.4 million. Adjusted EBITDA declined significantly to $2.4 million from $5.5 million.
• Cost Pressures:
  • Cost of Sales: Increased 8.7% ($2.6 million) to 26.6% of restaurant revenue, attributed to new menu offerings with higher costs and inflation.
  • Labor Costs: Increased 2.5% ($1.0 million) to 32.5% of revenue due to wage inflation and one-time training expenses for the new menu rollout.
  • Other Operating Costs: Increased 9.3% ($2.2 million) to 21.1% of revenue, driven by higher third-party delivery fees, marketing for the new menu, and utilities.
• Interest Expense: Increased 33.8% ($0.7 million) to $2.6 million due to higher average debt balances.
• Restaurant Activity: The Company opened 1 new company-owned restaurant and closed 3 company-owned restaurants in Q1 2025.

Guidance, Outlook, and Risks

• Capital Expenditures: Management estimates fiscal year 2025 capital expenditures will be between $11.0 million and $13.0 million, with $8.0 million to $10.0 million expected for the remainder of the year. Funding will come from cash on hand, operating cash flows, and the revolving credit facility.
• Liquidity: As of April 1, 2025, the Company had $1.4 million in cash and $19.3 million available under its credit facility. Management believes these resources are sufficient for the next 12 months.
• Debt Covenants: The Company amended its credit agreement in October 2024, increasing the maximum leverage ratio to 5.50:1.00 through September 2025. The Company was in compliance with all covenants as of April 1, 2025.
• Outlook Risks:
  • Tariffs: Potential impact on food, beverage, construction, and equipment costs due to import tariffs on produce from Mexico and other countries.
  • Menu Costs: The comprehensive menu upgrade introduced in March is expected to increase food costs for the remainder of fiscal 2025.
  • Macroeconomics: Near-term sales growth remains constrained by macroeconomic uncertainty and consumer sentiment.

Investor Verification Checklist

• Debt Servicing Capacity: Verify the sustainability of the $102.7 million debt load given the current net loss and high interest rates (8.15% - 10.25%).
• Margin Compression: Assess the long-term impact of the new menu on food costs and whether price increases can offset the 26.6% cost of sales ratio.
• Third-Party Delivery Dependency: Review the trend of third-party delivery fees, which contributed significantly to the increase in "Other restaurant operating costs."
• Store Portfolio Optimization: Monitor the pace of closures versus openings and the impact on the comparable restaurant sales base.
• Covenant Compliance: Track the Consolidated Total Lease Adjusted Leverage Ratio to ensure it remains below the 5.50:1.00 threshold required by the amended credit agreement.