Business context and reporting period
Noodles & Company operates fast-casual restaurants serving noodle and pasta dishes and related menu items. This unaudited Form 10-Q covers the fiscal quarter and first three fiscal quarters ended October 1, 2013, compared with periods ended October 2, 2012. At quarter-end, the company had 310 company-owned and 58 franchised restaurants in 29 states and the District of Columbia.
Financial performance and position
Unless otherwise indicated, amounts are in millions of dollars.
| Metric | Q3 2013 | Q3 2012 | First three quarters 2013 | First three quarters 2012 |
|---|---|---|---|---|
| Total revenue | $88.9 | $77.1 | $259.5 | $222.5 |
| Income from operations | $5.6 | $4.0 | $9.1 | $12.7 |
| Net income | $3.3 | $0.1 | $4.3 | $3.6 |
| Diluted EPS | $0.11 | $0.01 | $0.16 | $0.16 |
| Operating cash flow | — | $32.5 | $25.4 | |
| Capital expenditures | — | $39.8 | $30.5 |
- Q3 revenue increased 15.4%; restaurant revenue rose 15.1%, while franchising royalties and fees rose 35.2%. Restaurant openings contributed substantially to restaurant revenue growth.
- Q3 operating margin was 6.3%, versus 5.2% a year earlier; net margin was 3.7%, versus 0.2%. Q3 2012 included $2.6 million of debt-extinguishment expense.
- For the first three quarters, operating margin declined to 3.5% from 5.7%, despite revenue growth of 16.6%. Net income rose 18.1% to $4.3 million. Period results included $5.7 million of IPO-related expenses in 2013, while 2012 included $2.6 million of debt-extinguishment expense.
- Q3 company-owned comparable restaurant sales increased 2.4%; management separately reported system-wide comparable sales growth of 2.1%. First-three-quarter company-owned comparable sales increased 3.1%, while the highlights report system-wide growth of 2.7%. Company-owned average unit volume was $1.181 million, up 0.6%.
- Q3 restaurant cost of sales was 26.3% of restaurant revenue (26.5% prior year) and labor was 30.0% (30.2%). Occupancy rose to 10.1% from 9.8%, and other restaurant operating costs rose to 12.9% from 12.4%. For the first three quarters, occupancy, labor and other operating cost ratios increased year over year, while cost of sales improved slightly.
- Operating cash flow was $32.5 million, below $39.8 million of capital expenditures; cash and cash equivalents increased only $8,000 to $589,000 over the first three quarters.
- At October 1, total assets were $181.8 million, total liabilities $59.3 million, and stockholders’ equity $122.5 million. Current assets of $18.5 million were below current liabilities of $27.6 million.
- Long-term debt was $1.7 million, with no current portion. The $45 million revolving facility had $41.3 million available, after $1.7 million of borrowings and $2.0 million of outstanding letters of credit. The company reported covenant compliance.
Material changes, outlook and risks
- The July 2 IPO issued 6,160,714 Class A shares at $18.00 per share and generated approximately $100.2 million net proceeds. Proceeds repaid the $75 million term loan and nearly all revolving borrowings. Interest expense fell substantially; management services fees to former equity sponsors also ended. Public-company compliance costs are expected to add expense.
- The company opened 15 company-owned and five franchise restaurants in Q3; year to date it opened 35 company-owned and seven franchise restaurants. Management expected 41–42 company-owned openings net of one closure, and nine–ten franchise openings, for 2013.
- Estimated 2013 capital expenditures were $46–$50 million, including $6.2–$10.2 million for the remainder of the year. Management expected seven to eight additional restaurant openings in Q4 and planned to fund growth and other investment with operating cash flow and revolving-credit availability. It believed liquidity and covenant compliance would be adequate for the next 12 months.
- Management cited food, labor, energy and construction costs, minimum-wage increases, lease-related inflation, commodity-price volatility, competition, consumer spending and new-restaurant maturation as business risks. Pricing or changes to product purchasing may mitigate some commodity pressures, but not necessarily all.
- Routine legal claims were pending; management considered an unfavorable outcome remote or any potential loss not material, while noting outcomes are uncertain. No material changes to previously disclosed risk factors were reported. No off-balance-sheet arrangements were reported.
- Q3 2013 stock-based compensation was $131,000; first-three-quarter stock-based compensation included $2.0 million from accelerated option vesting and $1.2 million for IPO-related executive option awards. These items and transaction bonuses and sponsor payments contributed to the $5.7 million of IPO-related costs.
Important facts for investors to verify
- Reconcile the different system-wide and company-owned comparable-sales figures and assess the contribution of new restaurants versus same-store growth.
- Evaluate whether cost pressures—particularly occupancy, labor and other restaurant operating costs—can be contained as the restaurant base expands.
- Review cash generation against the substantial development program, planned capital expenditures and limited cash balance; confirm continued access to the revolving facility and covenant compliance.
- Assess recurring earnings separately from IPO-related stock compensation and transaction costs, as well as the continuing costs of operating as a public company.
- Consider potential share dilution from outstanding options and warrants; the filing reports 29,422,939 common shares issued and outstanding at October 1, 2013.