Noodles & Company — Q2 2020 Form 10-Q
Reporting period: Fiscal quarter ended June 30, 2020, compared with the quarter ended July 2, 2019; year-to-date figures cover the first two fiscal quarters. The company operated 380 company-owned and 76 franchised restaurants in 29 states and the District of Columbia. COVID-19 materially affected operations, including dining-room restrictions and a shift toward off-premise sales.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First two quarters 2020 | First two quarters 2019 |
|---|---|---|---|---|
| Total revenue | $80.2 million | $120.2 million | $180.5 million | $230.2 million |
| Operating income (loss) | $(12.5) million | $1.2 million | $(17.4) million | $0.1 million |
| Net income (loss) | $(13.5) million | $0.4 million | $(19.3) million | $(1.4) million |
| Diluted EPS | $(0.30) | $0.01 | $(0.44) | $(0.03) |
| Adjusted EBITDA | $(3.3) million | $10.9 million | $(1.5) million | $16.5 million |
- Q2 revenue declined 33.3% year over year; first-half revenue declined 21.6%. Q2 company-owned comparable sales fell 30.1%, franchise comparable sales fell 35.4%, and system-wide comparable sales fell 30.9%.
- Restaurant operating cost ratios reflected significant deleveraging from lower sales. In Q2, labor was 33.9% of restaurant revenue versus 32.7% a year earlier; occupancy was 14.6% versus 10.4%; and other restaurant operating costs were 19.7% versus 14.2%. Cost of sales improved to 25.0% from 25.6%.
- Cash provided by operations was $6.7 million for the first two quarters, down from $9.0 million. Investing activities used $6.8 million; financing activities provided $51.7 million, primarily from $55.5 million of credit-facility borrowings.
- At June 30, cash and cash equivalents were $62.1 million, compared with $10.5 million at year-end 2019. Debt was $95.7 million, excluding $2.0 million of unamortized issuance costs; only $0.5 million was available for additional borrowing, and letters of credit outstanding were $3.2 million. Current assets were $77.7 million and current liabilities were $61.0 million.
- Reported lease liabilities totaled $258.5 million, including $255.3 million of operating lease liabilities and $3.1 million of finance lease liabilities.
Material changes and notable items
- Revenue and comparable sales were sharply affected by COVID-19 dining-room restrictions. Management attributed part of the revenue decline to refranchising 14 restaurants since Q2 2019; nine company-owned restaurants were sold to a franchisee in January 2020.
- The company forgave franchise royalties due for Q2; it expected to resume recognizing royalty revenue and collecting cash in Q3. Landlord agreements executed through June 30 deferred $4.0 million of rent.
- Q2 included $2.1 million of restaurant impairment charges for five restaurants; the company recorded $2.2 million for two restaurants in Q2 2019. Goodwill was assessed qualitatively and was not impaired.
- On June 16, the credit facility was amended: leverage and fixed-charge covenants were waived through Q1 2021, later covenant thresholds were revised, and capital spending limits were reduced. Borrowings carried interest at LIBOR plus 3.25% through Q3 2021. The company reported covenant compliance at quarter-end.
Outlook, risks and contingencies
- Management said comparable sales improved through Q2 and into Q3. System-wide comparable sales were down 48.2% for the four weeks ended April 28, down 30.1% for the four weeks ended May 26, and down 17.8% for the five weeks ended June 30. For the two weeks ended July 28, company-owned comparable sales were down 3.8% and system-wide sales were down 4.4%.
- The company estimated fiscal 2020 capital expenditures of $10 million to $12 million, mainly for repairs, maintenance, and two to four company restaurant openings. New-unit development and other discretionary investment had been substantially halted in Q2; management expected to incorporate increased development into its 2021-and-beyond growth plan.
- Management believed available cash and expected operating cash flows would cover liquidity and capital needs for at least 12 months. It cautioned that the pandemic’s duration, renewed restrictions, customer willingness to dine out, economic conditions, franchisee liquidity, supply disruptions, labor costs, delivery fees, and financing availability could change results. Increased off-premise mix supported sales but pressured restaurant-level margins, including through third-party delivery fees.
- Other risks include variable-rate debt and uncertainty around LIBOR after 2021, commodity and wage inflation, cybersecurity threats, and ordinary-course litigation. The filing says the potential litigation loss was considered remote or not material, but outcomes were uncertain.
Key facts for investors to verify
- Whether sales recovery and dining-room reopening continued after the filing date, and whether Q3 comparable-sales trends were sustained.
- Cash burn, operating cash flow, and the amount of usable borrowing capacity, given $62.1 million of cash but only $0.5 million available under the facility at quarter-end.
- Compliance with amended covenants when waivers expire, the cost of variable-rate debt, and the company’s LIBOR transition plans.
- Whether the $10 million to $12 million capital-spending estimate and plan for two to four openings remained achievable.
- Further restaurant impairment or closure charges, landlord rent deferrals or concessions, and the financial condition of franchisees.