Noodles & Company — Q1 2016 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 29, 2016 and comprised 13 operating weeks. Noodles & Company operated 436 company-owned restaurants and 71 franchised restaurants across 35 states, the District of Columbia, and one Canadian province. The company reports one operating segment.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $114.0 million | $105.8 million |
| Operating loss | $2.8 million | $4.3 million |
| Net loss | $2.4 million | $2.8 million |
| Diluted loss per share | $0.09 | $0.09 |
| Operating cash flow | $5.7 million | $13.3 million |
| Capital expenditures | $12.3 million | $9.8 million |
| Adjusted EBITDA | $5.4 million | $8.8 million |
- Revenue rose 7.8%; restaurant revenue increased 7.7% and franchise royalties and fees increased 14.5%. Growth reflected restaurant openings, partly offset by 16 company-owned restaurant closures in Q4 2015.
- Company-owned comparable sales were flat; franchise comparable sales declined 0.5%, and system-wide comparable sales declined 0.1%. Company-owned AUVs fell 3.1% to $1.101 million.
- Net loss narrowed by $0.4 million, while operating loss improved by $1.5 million. Lower impairment and closure-related charges—$1.0 million versus $6.1 million—were a major factor. Adjusted EBITDA declined 38.6%.
- Restaurant cost pressures included labor at 33.2% of restaurant revenue versus 31.5%, other restaurant costs at 15.0% versus 14.0%, and cost of sales at 26.7% versus 26.5%. Management cited wage and benefit increases, lower AUV leverage, training investment, marketing, and modest commodity inflation.
- Cash and cash equivalents were $1.9 million at quarter-end. Current liabilities were $31.3 million versus current assets of $26.7 million. Long-term debt was $74.1 million; the credit facility had $74.6 million outstanding, $2.7 million of letters of credit, and $22.7 million available. The company was in compliance with debt covenants.
- Cash from operations fell year over year, primarily reflecting lower Adjusted EBITDA and working-capital changes. The quarter’s $12.3 million of capital spending exceeded operating cash flow; financing activities provided $6.5 million, principally through revolving-credit borrowings.
Outlook, commentary, and risks
- Management estimated 2016 capital expenditures of $45–$50 million, including $35–$40 million for new restaurant construction before landlord reimbursements. It expected funding from operating cash flow and revolving-credit borrowings.
- Management believed cash, expected operating and franchise cash flows, and available credit would fund working capital and capital needs for the next 12 months. It also said expected cash flows and planned borrowing capacity were adequate for 2016 obligations.
- The estimated 2016 effective tax rate was 50%–55%, versus 38.8% in 2015, primarily due to nondeductible expenses and a valuation allowance on Canadian deferred tax assets. Canadian operations were not yet profitable.
- Interest expense increased 174% to $0.6 million, reflecting higher average borrowings used to fund the 2015 share repurchase program and higher credit-facility rates. A 1 percentage-point rate change would affect annualized pretax interest expense by approximately $0.7 million.
- Management expected wage inflation to continue. Food commodity prices, labor, energy, construction costs, weather, competition, traffic, and consumer spending were identified as potential business pressures.
- Former employees filed a collective and class action alleging unpaid overtime for assistant general managers under federal and state wage laws. The case was at an early stage; the company could not estimate a probable loss and intended to defend it. A similar case had been filed in Colorado.
- The company reported no material changes to previously disclosed risk factors and no off-balance-sheet arrangements. Disclosure controls were assessed as effective; no material change in internal control was reported.
Most important facts for investors to verify
- Whether comparable sales, AUVs, and restaurant-level cost percentages stabilize or continue to weaken.
- Whether planned restaurant openings and $45–$50 million of annual capital spending produce returns sufficient to support cash generation and debt service.
- Credit-facility utilization, remaining borrowing capacity, covenant compliance, and sensitivity to variable interest rates.
- The drivers of lower operating cash flow and Adjusted EBITDA, including labor, marketing, and other restaurant-cost trends.
- Developments in the wage-and-hour litigation and any effect on financial exposure.
- Whether the higher projected tax rate and Canadian deferred-tax valuation allowance change as operating results develop.