Noodles & Company — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the 13-week fiscal quarter ended September 27, 2022, and the first three fiscal quarters of 2022, compared with the corresponding 2021 periods. The company operated 459 restaurants in 31 states: 366 company-owned and 93 franchised.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 3 quarters 2022 | First 3 quarters 2021 |
|---|---|---|---|---|
| Revenue | $129.4 million | $125.1 million | $373.0 million | $360.4 million |
| Operating income (loss) | $1.5 million | $5.3 million | ($2.7 million) | $10.2 million |
| Net income (loss) | $0.8 million | $4.7 million | ($4.3 million) | $8.4 million |
| Adjusted EBITDA | $9.8 million | $13.2 million | $23.2 million | $33.2 million |
| Comparable sales, system-wide | +2.1% | — | +4.5% | — |
Q3 diluted EPS was $0.02, versus $0.10; first-three-quarter diluted loss per share was $0.09, versus earnings of $0.18. Q3 company-owned comparable sales rose 3.4%, while franchise comparable sales fell 3.8%. Q3 average unit volume was $1.387 million, up 0.7%.
Restaurant economics. Restaurant contribution, calculated as restaurant revenue less cost of sales, labor, occupancy and other restaurant operating costs, was approximately $18.2 million, or 14.4% of restaurant revenue, in Q3, versus approximately $32.3 million, or 26.2%, a year earlier. For the first three quarters, it was approximately $48.8 million, or 13.4%, versus $60.3 million, or 17.0%. These are derived from reported figures and exclude corporate costs.
Cash flow and balance sheet. First-three-quarter operating cash flow was $7.8 million, down from $29.9 million; capital expenditures were $22.5 million, versus $13.0 million. Cash declined $0.4 million from year-end to $1.8 million. At September 27, 2022, reported long-term debt, net, was $36.1 million; borrowings under the credit facility were $37.9 million before $1.7 million of unamortized issuance costs, with $3.0 million of letters of credit outstanding. The company reported $84.2 million available for future borrowing and compliance with debt covenants. Total lease liabilities were $230.1 million. Current assets were $21.7 million and current liabilities were $66.5 million.
Material changes and management commentary
- Revenue increased 3.4% in Q3 and 3.5% year to date, supported by comparable-sales growth, pricing and new restaurants. Refranchising 15 company-owned restaurants in January reduced reported restaurant sales by approximately $4.5 million in Q3 and $12.6 million year to date.
- Cost pressure weakened profitability: Q3 cost of sales rose 14.8% and labor 5.8%, exceeding revenue growth. Cost of sales increased to 28.1% of restaurant revenue from 25.1%; labor increased to 30.8% from 30.0%. Management cited food and protein inflation, wage and health-insurance costs, delivery fees and utilities.
- Operating cash flow was lower primarily because of reduced earnings and working-capital changes. Capital spending increased as the company opened 11 company-owned restaurants in the first three quarters, versus four in the prior-year period.
- On July 27, 2022, the company amended its credit facility, increasing capacity from $100 million to $125 million, eliminating the term loan and principal amortization, removing the capital-expenditure covenant and extending maturity to July 27, 2027. Borrowing costs transitioned from LIBOR to SOFR plus a 1.50%–2.50% margin, subject to leverage.
Outlook, risks and contingencies
- Management estimated FY2022 capital expenditures of $30 million–$33 million, including $7 million–$10 million in Q4, before landlord reimbursements. It expected funding from cash, operating cash flow and, if needed, the credit facility.
- The company said it planned to build a development pipeline supporting long-term unit growth of approximately 5% in 2022 and 7% in 2023. A 12-year franchise-partner growth plan includes 40 California locations.
- Management expected food commodity markets, particularly chicken, to improve materially, with benefits anticipated in Q4 2022 and 2023. It also reported that inflation could continue to pressure food, labor, utilities and construction costs; consumer inflation and recessionary conditions could affect restaurant demand.
- The company believed available liquidity and expected cash flows would meet needs for at least 12 months. It estimated a 1-percentage-point change in borrowing rates would change annualized pretax interest expense by approximately $0.4 million. The effective tax rate estimate for 2022 was 0.25%–1.25%; a valuation allowance remained against deferred tax assets.
- The company reported no material legal proceedings and said there were no material changes to previously disclosed risk factors. It noted ordinary-course claims whose ultimate financial impact could not be determined, while stating that unfavorable outcomes were considered remote or potential losses immaterial.
Important facts for investors to verify
- Whether menu pricing and comparable-sales gains can offset persistent food, labor, delivery and utility inflation without weakening traffic or demand.
- Whether management’s expected commodity-cost improvement materializes and supports a recovery in restaurant contribution margins.
- Whether operating cash flow can support the planned $30 million–$33 million FY2022 capital program while cash remains low and borrowings are variable-rate.
- Progress and economics of new restaurant openings, the California franchise development commitment, and the impact of refranchising on sales and profitability.
- Facility availability, interest-rate exposure, covenant compliance and the company’s substantial lease obligations.