Noodles & Company — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2018 (52 weeks); comparator FY2016 ended January 3, 2017 and contained 53 weeks. The filing also reports fourth-quarter results; FY2017 Q4 ended January 2, 2018.
Business context
Noodles & Company operates a fast-casual restaurant chain focused on globally inspired noodle and pasta dishes, soups, salads, and appetizers. At year-end it had 412 company-owned and 66 franchised restaurants in 29 states and the District of Columbia. The company closed 57 company-owned restaurants during 2017, including 55 in the first quarter, and closed all Canadian restaurants and discontinued foreign operations.
Key financial and operating metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $456.5 million | $487.5 million |
| Operating loss | $33.9 million | $67.5 million |
| Net loss | $37.5 million | $71.7 million |
| Net loss attributable to common stockholders | $45.4 million, including $8.0 million preferred-stock accretion | $71.7 million |
| Loss per share, basic and diluted | $1.20 | $2.58 |
| Restaurant contribution / margin | $64.0 million / 14.2% | $61.8 million / 12.8% |
| Adjusted EBITDA | $30.6 million | $25.9 million |
| Cash from operating activities | $4.1 million | $24.7 million |
| Capital expenditures | $20.8 million | $43.3 million |
FY2017 revenue fell 6.4%, reflecting restaurant closures and lower comparable sales, partly offset by openings. The prior year’s extra week added approximately $8.1 million of revenue. Company-owned comparable restaurant sales declined 2.7%; franchise comparable sales declined 0.5%; system-wide comparable sales declined 2.4%. Company-owned average unit volume was $1.072 million, down 0.3%.
FY2017 Q4: Revenue was $112.8 million, operating income was $0.1 million, net loss was $0.5 million, comparable sales declined 0.9%, and restaurant contribution margin was 15.1%. Quarterly results were affected by restaurant impairments and closures; FY2016 Q4 had an additional operating week.
Liquidity and debt: Year-end cash was $3.4 million; current assets were $22.1 million and current liabilities were $43.9 million. Long-term debt was $57.6 million net on the balance sheet; borrowings under the revolving facility were $58.8 million, with $3.3 million in letters of credit outstanding. The $97.5 million facility matures in June 2019 and is subject to financial covenants. The company reported covenant compliance at year-end. In 2017 it raised $50.0 million gross through private placements and amended its credit facility.
Contractual obligations included $244.7 million of lease payments and $58.8 million of debt principal. Operating cash flow was reduced by lease-termination payments, litigation settlement payments, data-breach payments, and working-capital changes.
Material changes and management outlook
- Restaurant-level contribution margin improved from 12.8% to 14.2%, while GAAP losses continued. Lower promotional activity and marketing expense, operating initiatives, and closing underperforming restaurants contributed to margin improvement.
- Management plans only 1–4 company-owned openings in 2018, primarily in established markets, and expects limited near-term unit growth while it focuses on restaurant operations and profitability. No specific revenue or earnings guidance was provided.
- Management expected 2018 capital expenditures of approximately $10 million, including about $2 million for new restaurants before landlord reimbursements. It expected $6–$10 million of further restaurant-closure payments and approximately $8 million of remaining data-breach payments, with potential additional data-breach liability of up to $5.5 million.
- Management expected impairment charges to decline meaningfully in 2018, but noted that further impairments remain possible. It cited continuing wage and benefit inflation and expected modest commodity inflation.
- Planned initiatives included menu development, loyalty and digital ordering, delivery and pickup convenience, labor and supply-chain efficiencies, self-bussing stations, and improved employee training.
Risks, contingencies, and unusual items
- Restaurant impairments, closure costs, and asset disposals totaled $37.4 million in FY2017, including $16.2 million of impairments and $20.1 million of closure costs. Thirty-four restaurants were identified as impaired.
- A 2016 payment-card data incident resulted in a $10.6 million recorded liability; the filing says additional liability could be up to $5.5 million greater. A related financial-institution lawsuit was settled with insurance proceeds, but payment-card claims and related costs remained.
- Delaware gift-card litigation remained unresolved. A summary-judgment motion was awaiting a ruling, with trial scheduled for May 21, 2018; the company warned losses could exceed its recorded accrual.
- The credit facility matures in 2019 and includes leverage and fixed-charge covenants. Amendments raised certain leverage limits and interest margins and imposed quarterly reductions in facility capacity. Failure to meet covenants or refinance could harm liquidity.
- Long-term non-cancellable leases, labor and food-cost inflation, food safety, competition, employee retention, and cybersecurity are significant business risks. Lease commitments are substantial; adoption of the new lease accounting standard was expected to materially increase reported assets and liabilities.
- The company maintained a $35.8 million valuation allowance against U.S. deferred tax assets due to uncertainty about realizing future tax benefits. The tax reform accounting was provisional; management expected any material tax-law adjustments to be offset by the valuation allowance.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The independent auditor did not attest to internal-control effectiveness because the company was still an emerging growth company.
Important facts for investors to verify
- Whether comparable sales, traffic, and unit-level margins stabilize after the closures and operational changes.
- Cash generation and liquidity against debt maturity, covenant requirements, lease obligations, and expected closure and data-breach payments.
- The final amount and timing of data-breach liabilities, and the outcome and potential exposure in the Delaware gift-card case.
- Whether management achieves its modest 2018 opening plan and realizes expected reductions in impairment and operating costs.
- The effects of lease-accounting adoption, tax-law measurement, and potential dilution from outstanding warrants, options, and equity awards.