Noodles & Company — Q2 2022 Form 10-Q
Business context and reporting period. The unaudited quarter ended June 28, 2022; comparisons are with the quarter ended June 29, 2021. Noodles & Company operated 456 restaurants in 31 states: 363 company-owned and 93 franchised. The company reports one operating segment.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First two quarters 2022 | First two quarters 2021 |
|---|---|---|---|---|
| Total revenue | $131.1 million | $125.6 million | $243.6 million | $235.2 million |
| Operating income (loss) | $1.9 million | $6.2 million | $(4.2) million | $4.8 million |
| Net income (loss) | $1.3 million | $5.7 million | $(5.1) million | $3.7 million |
| Diluted EPS | $0.03 | $0.12 | $(0.11) | $0.08 |
| Adjusted EBITDA | $11.2 million | $13.8 million | $13.4 million | $20.0 million |
| Operating cash flow | Not separately stated | Not separately stated | $6.0 million | $23.2 million |
| Capital expenditures, net of divestiture proceeds | Not separately stated | Not separately stated | $15.1 million | $7.5 million |
Q2 revenue grew 4.3%; first-half revenue grew 3.6%. Company-owned average unit volume was $1.421 million in Q2, up 5.3%, and $1.337 million for the first half, up 6.1%. Q2 system-wide comparable sales rose 5.1%; first-half system-wide comparable sales rose 5.7%.
Restaurant contribution, calculated as restaurant revenue less cost of sales, labor, occupancy and other restaurant operating costs, was approximately $19.9 million (15.5% of restaurant revenue) in Q2 versus $23.4 million (18.9%) a year earlier. For the first half it was approximately $30.6 million (12.8%) versus $38.0 million (16.4%). These are calculations from the filing’s reported figures, not GAAP measures.
At June 28, 2022, cash was $1.8 million, total current assets were $20.5 million and current liabilities were $70.0 million. Debt was $32.2 million before $1.1 million of unamortized issuance costs; $3.0 million of letters of credit were also outstanding. Availability under the then-current facility was $60.9 million. Total operating and finance lease liabilities were $227.9 million.
Material changes and drivers
- Despite higher sales, profitability declined: Q2 net income fell 76% year over year, while the first half shifted from net income to a loss. First-half adjusted EBITDA decreased by $6.7 million.
- Food costs rose faster than revenue: cost of sales was 27.8% of restaurant revenue in Q2, versus 24.9%; first-half cost of sales was 27.9%, versus 25.0%. Management cited commodity and protein inflation, packaging and distribution costs.
- Labor was 30.3% of Q2 restaurant revenue, versus 29.8%, and 31.2% for the first half, versus 30.8%; management cited wage inflation and first-quarter operating inefficiencies.
- Q2 restaurant impairment, closure and asset-disposal costs increased to $2.0 million from $0.4 million. Two restaurants were identified as impaired in the first half, and two company-owned restaurants were closed. The $3.4 million first-half expense included costs related to the Warner Sale.
- Fifteen company-owned restaurants were sold to a franchisee in January 2022, reducing reported restaurant revenue; management estimated the impact at approximately $4.1 million in Q2 and $7.1 million in the first half. The company opened eight company-owned and two franchise restaurants in the first half.
- Operating cash flow declined to $6.0 million from $23.2 million, attributed primarily to lower earnings and working-capital changes. The company spent $16.7 million on property and equipment and received $1.6 million from restaurant divestitures.
Outlook, risks and other notable items
- Management estimated FY2022 capital expenditures of $30 million to $33 million and said it planned approximately 5% unit growth in 2022, with 10% unit growth thereafter. A new California franchise partner has a 12-year development commitment for 40 locations.
- Management said it expected adequate liquidity and covenant compliance for at least the next 12 months. It estimated the 2022 annual effective tax rate at 0.25% to 1.25%, and did not anticipate material tax expense or benefit for the remainder of the year.
- On July 27, 2022, after quarter-end, the company amended its credit facility: capacity increased from $100 million to $125 million, the term loan and principal amortization were eliminated, the capital-expenditure covenant was removed, and borrowing spreads were lowered. The facility was to transition to SOFR-based pricing.
- Management cited food commodity volatility, wage and other inflation, staffing and supply-chain constraints, delivery fees, COVID-19 uncertainty, consumer spending and interest-rate exposure as risks. A 1% interest-rate movement on quarter-end borrowings would change annualized pretax interest expense by approximately $0.3 million.
- The company said it was in compliance with debt covenants at quarter-end, had no material legal proceedings and had no off-balance-sheet arrangements. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether menu pricing and comparable-sales growth can offset continued food, labor, construction and other inflation without reducing demand or margins.
- Whether operating cash flow and available borrowing capacity will support the stated development and capital-spending plans, particularly given low cash on hand and substantial lease liabilities.
- The terms, pricing, covenants and subsequent implementation of the July 27 credit-facility amendment, including the transition to SOFR.
- Whether new restaurant openings and the 40-location California franchise commitment meet management’s development expectations.
- The assumptions behind restaurant impairment assessments, closure and divestiture costs, and the valuation allowance against deferred tax assets.