Noodles & Company — Q3 2021 Form 10-Q
Business and period: The company operates fast-casual restaurants and reports one segment. This unaudited filing covers the fiscal quarter ended September 28, 2021 and the first three fiscal quarters of 2021; the comparable periods ended September 29, 2020. At quarter-end it operated 374 company-owned and 76 franchised restaurants in 29 states.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First three quarters 2021 | First three quarters 2020 |
|---|---|---|---|---|
| Total revenue | $125.1 million | $106.0 million | $360.4 million | $286.5 million |
| Operating income (loss) | $5.3 million | $0.7 million | $10.2 million | $(16.7) million |
| Net income (loss) | $4.7 million | $(0.1) million | $8.4 million | $(19.4) million |
| Diluted EPS | $0.10 | — | $0.18 | $(0.44) |
| Adjusted EBITDA | $13.2 million | $7.7 million | $33.2 million | $6.2 million |
| Operating margin | 4.3% | 0.7% | 2.8% | (5.8)% |
| Net margin | 3.8% | (0.1)% | 2.3% | (6.8)% |
Q3 system-wide comparable restaurant sales rose 16.3% year over year (company-owned 15.3%; franchise 21.0%). For the first three quarters, system-wide comparable sales rose 26.0% (company-owned 25.4%; franchise 29.4%). The company said comparisons benefited in part from recovery from pandemic-disrupted 2020 periods. Company-owned average unit volume was $1.377 million in Q3 and $1.298 million year to date.
Q3 cost of sales was 25.1% of restaurant revenue, versus 24.8% a year earlier; labor was 30.0%, versus 29.9%. Occupancy improved to 9.3% from 11.2%, and other restaurant operating costs to 17.5% from 18.6%. Year-to-date labor, occupancy, and other restaurant costs were 30.5%, 9.8%, and 17.7% of restaurant revenue, respectively, compared with 32.7%, 12.5%, and 18.3%. Management cited sales leverage and labor initiatives, alongside wage inflation and higher commodity costs.
Cash, debt, and liquidity
- Year-to-date operating cash flow was $29.9 million, versus $8.3 million in 2020; capital spending was $13.0 million. Investing cash outflow was $12.6 million and financing cash outflow was $22.0 million, primarily reflecting debt and finance-lease repayments.
- Cash was $3.1 million at September 28, 2021, down from $7.8 million at December 29, 2020. The company reported $71.8 million available for future borrowing under its credit facility.
- Debt outstanding was $23.7 million before $1.4 million of unamortized issuance costs; the balance sheet reported $22.3 million in current and long-term debt, net. The company repaid $20.1 million of debt year to date and was in compliance with covenants at quarter-end.
- Total lease liabilities were $237.5 million. Management said it expected available cash, operating cash flows, and credit capacity to meet needs for at least 12 months.
Changes, outlook, and risks
- Compared with the prior-year periods, revenue and earnings improved substantially, with year-to-date net income replacing a significant loss. Management attributed improvement to higher restaurant volumes, reopened dining rooms, digital and off-premise sales, and recovery from the initial pandemic impact.
- Management estimated fiscal 2021 capital expenditures of approximately $20–$22 million, primarily for five to seven company-owned openings, kitchen equipment initiatives, and maintenance. It targeted system-wide unit growth of at least 8% annually beginning in 2022, with a path toward at least 1,500 units; these are forward-looking targets, not guarantees.
- The filing reported four company-owned and one franchise opening year to date, and eight company-owned closures (including one relocation); one franchise location also closed in Q3 due to eminent domain. Management did not anticipate significant permanent closures in the foreseeable future.
- COVID-19 and the delta variant remained uncertain risks, as did restaurant staffing availability, wage inflation, food and transportation costs, supply-chain disruption, delivery fees, commodity prices, and consumer demand. Management noted some temporary restaurant closures related to labor availability.
- The effective tax rate was 0.6% for Q3 and year to date, reflecting a valuation allowance against deferred tax assets. Management estimated a 2021 annual effective tax rate of 0.25%–1.25% and did not expect material tax expense or benefit for the remainder of the year.
- Q3 restaurant impairment, closure, and asset-disposal charges were $1.1 million, including one restaurant impairment. Year-to-date charges were $2.7 million; the company impaired two restaurants and closed eight company-owned locations. The filing describes ordinary-course legal claims as remote or not material in management’s view, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether comparable-sales and unit-volume growth can persist as pandemic comparisons normalize, and how much growth reflects traffic versus pricing and mix.
- Whether labor availability, wage inflation, commodity prices, and supply conditions pressure restaurant margins despite recent sales leverage.
- Actual capital spending and restaurant openings against the 2021 estimate, and progress toward the stated 2022-and-beyond unit-growth targets.
- Liquidity and covenant headroom, including the terms and availability of the revolving facility, while cash remains low and lease obligations are substantial.
- Whether the tax valuation allowance remains appropriate and whether any material legal claims or restaurant impairments emerge.