Noodles & Company — Q2 2018 Form 10-Q
Reporting period: Fiscal quarter ended July 3, 2018; comparative quarter ended July 4, 2017. The company operated 404 company-owned and 65 franchised restaurants in 29 states and the District of Columbia.
Financial performance
- Q2 revenue: $117.4 million, up 4.1% year over year. Restaurant revenue was $116.5 million; franchise royalties and fees were $0.9 million.
- Comparable sales: Q2 system-wide comps rose 5.4% (company-owned +5.0%; franchise +8.0%). Management attributed growth primarily to traffic and operating and brand initiatives, plus modest pricing. Holiday timing added approximately 100 basis points. Company-owned average unit volume was $1.092 million, up 2.5%.
- Profitability: Q2 operating loss was $4.2 million versus $0.8 million; net loss was $5.9 million versus $1.8 million. Diluted loss per share was $0.14 versus $0.22. Adjusted EBITDA, a non-GAAP measure, was $9.1 million versus $8.7 million. Operating margin was negative 3.5% versus negative 0.7%. Restaurant contribution margin, calculated from reported restaurant revenue and restaurant operating costs, was approximately 15.5% versus 15.0%.
- First half: Revenue was $227.9 million, down 0.7%; comparable sales increased 2.7% system-wide. Net loss was $9.5 million versus $28.7 million, and adjusted EBITDA was $14.7 million versus $12.5 million. The prior-year comparison included substantial closure and impairment costs associated with 55 restaurant closures.
- Costs and margins: Q2 cost of sales was 26.7% of restaurant revenue, up from 26.5%, partly reflecting higher-cost zucchini noodles. Labor was 32.7%, compared with 32.6%; management cited wage inflation, largely offset by labor initiatives and higher sales. Occupancy improved to 10.6% from 11.3%. G&A rose 57.7% to $14.8 million, including data-breach and gift-card litigation charges.
- Cash flow and capital spending: First-half operating cash flow was $2.8 million versus cash used of $8.2 million; investing cash outflow was $7.1 million, primarily capital expenditures, versus $12.2 million. Cash increased $0.3 million to $3.6 million.
- Liquidity and debt: At July 3, cash was $3.6 million, current assets $23.1 million, and current liabilities $44.0 million. Debt was $65.2 million, including $0.7 million current; letters of credit totaled $3.8 million. The company had a four-year, $25 million term loan and $65 million revolving facility, with a possible increase to $75 million. Variable borrowing rates ranged from 4.95% to 7.25% during the first half. The company reported compliance with debt covenants.
Changes, outlook, and risks
- In May 2018, the company replaced its prior credit facility with the U.S. Bank facility and recorded a $0.6 million debt-extinguishment loss. Interest expense increased year over year, partly due to higher average borrowing rates and debt-cost amortization.
- Q2 included a $3.4 million charge for the final payment-card data-breach assessment and a $0.3 million charge related to a Delaware gift-card litigation settlement. The $11.0 million final data-breach assessment was paid early in Q3. The settlement did not resolve separate estimated abandoned-property claims for 2011–2013.
- The company closed seven company-owned restaurants in Q2 and nine in the first half; it opened one company-owned restaurant in the first half. It did not intend to open additional restaurants in 2018 and did not anticipate significant closures in the foreseeable future, while retaining the option to close locations near lease expiry.
- Management estimated 2018 capital expenditures of $13–$16 million, including $6–$9 million for the remainder of the year. It expected $5–$8 million of lease-termination costs over the next three to six months and stated that cash flows and borrowing capacity were expected to fund requirements for the next 12 months.
- Management cited ongoing wage inflation and exposure to food, energy, and other input costs. A 1-percentage-point change in the effective interest rate would change annualized pretax interest expense by approximately $0.7 million. The company expected to meet facility covenants through fiscal 2018 but warned that a breach could require a waiver or amendment, with no assurance of approval.
- The company did not anticipate material income tax expense or benefit for the remainder of 2018, given its valuation allowance; some Tax Act accounting remained provisional. Adoption of the new lease standard was expected to significantly increase reported assets and liabilities. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether comparable-sales growth, including the benefit from holiday timing, continues and translates into sustainable restaurant-level margins.
- Debt-facility borrowing, covenant headroom, interest-rate exposure, and liquidity after the $11.0 million data-breach payment and expected lease-termination costs.
- The final amounts and resolution of data-breach, Delaware gift-card, and other abandoned-property liabilities.
- Whether planned capital expenditures, limited restaurant development, and continued wage inflation affect cash generation and operating performance as expected.
- Adjusted EBITDA and restaurant contribution are non-GAAP or supplemental measures; assess them alongside GAAP results and their stated exclusions.