Noodles & Company — Q2 2016 Form 10-Q
Business context and period: The filing covers the 13-week fiscal quarter ended June 28, 2016, and the first two fiscal quarters of fiscal 2016. Noodles & Company operated 443 company-owned and 71 franchised restaurants across 35 states, the District of Columbia, and one Canadian province.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 |
|---|---|---|
| Total revenue | $121.4 million | $115.2 million |
| Operating income (loss) | $(11.3) million | $5.0 million |
| Net income (loss) | $(14.1) million | $3.1 million |
| Basic and diluted EPS | $(0.51) | $0.10 |
| Adjusted EBITDA | $7.5 million | $12.7 million |
| Company-owned comparable sales | (0.9)% | 0.1% |
For the first two quarters, revenue rose 6.5% to $235.4 million, while net loss was $16.5 million versus net income of $0.3 million a year earlier. Adjusted EBITDA declined to $12.9 million from $21.5 million. Q2 operating margin was (9.3)% versus 4.4%; net margin was (11.6)% versus 2.7%.
Q2 company-owned average unit volume was $1.092 million, down 2.8% year over year. System-wide comparable sales declined 1.0% in Q2 and 0.5% in the first half. New restaurant openings supported revenue growth, partly offset by lower comparable sales and the closure of 16 company-owned restaurants in Q4 2015.
For the six months, operating cash flow was $12.3 million, down from $22.7 million; investing cash use was $24.0 million, primarily property and equipment purchases. Cash was $1.9 million at June 28. Long-term debt on the balance sheet was $78.5 million; borrowings under the revolving facility were $79.0 million, with $18.3 million available after letters of credit. Total liabilities were $154.6 million.
Material changes and management commentary
- Operating costs rose faster than revenue. Q2 cost of sales was 26.8% of restaurant revenue versus 26.2%; labor was 32.7% versus 30.9%; occupancy was 11.4% versus 11.0%; and other restaurant operating costs were 15.5% versus 13.3%. Management cited commodity inflation, wage and benefit increases, lower AUVs, marketing, training, and maintenance costs.
- Q2 restaurant impairment, closure, and asset-disposal expense was $11.2 million, compared with $0.3 million a year earlier. Twelve restaurants were identified as impaired in the first half, versus eight in the prior-year period; the company cited expected future cash flows and, at some locations, higher construction costs.
- A $0.9 million first-half valuation allowance against U.S. and Canadian deferred tax assets contributed to a $1.1 million tax provision despite the pretax loss. The company did not anticipate material tax expense or benefit for the remainder of fiscal 2016 from the valuation allowance.
Outlook, risks, and unusual items
- Management estimated fiscal 2016 capital expenditures of $45–$50 million, including $35–$40 million for new restaurant construction before landlord reimbursements. It expected the remaining-year spend to be $21–$26 million and anticipated funding through operating cash flow and credit-facility borrowings.
- Management believed cash, expected operating flows, franchise income, and available credit would fund working capital and capital needs for the next 12 months, and expected to meet debt covenants through fiscal year-end; it cautioned that covenant compliance was not assured.
- On August 2, 2016, after quarter-end, the company amended its credit facility. The amendment revised covenant levels and definitions, allowed certain one-time cost add-backs, and changed interest-rate and commitment-fee pricing. The company reported covenant compliance as of June 28, giving effect to the amendment.
- A payment-card data-security incident disclosed June 28 may have affected customers at certain locations between January 31 and June 2. The company could not estimate potential payment-card claims, litigation, or regulatory costs; uninsured costs could be material. It expected additional legal and professional expenses and said certain costs may be covered by cyber insurance.
- A purported Illinois and Minnesota wage-and-hour class action remained at an early stage, with loss not reasonably estimable. A separate Colorado wage case was dismissed without prejudice on June 29.
- CEO and board chair Kevin Reddy resigned July 25; CFO Dave Boennighausen became interim CEO, and Robert Hartnett became non-executive chair.
Important facts for investors to verify
- Whether comparable sales, AUVs, and restaurant-level cost ratios stabilize or continue to weaken.
- The scope, insurance recovery, and ultimate cost of the payment-card incident, including litigation and regulatory exposure.
- Whether the company meets the amended credit covenants and can fund planned capital expenditures with limited cash and available borrowing capacity.
- Whether additional restaurant impairments, closures, or wage litigation lead to further material charges.
- Leadership changes and any subsequent management updates to the operating or capital-spending outlook.