Noodles & Company — FY2015 Form 10-K Summary
Business context and reporting period
Noodles & Company operates fast-casual restaurants serving globally inspired food. This annual report covers the 52-week fiscal year ended December 29, 2015; the fourth quarter comprised 13 weeks. At year-end, the company operated 422 company-owned and 70 franchised restaurants across 35 states, the District of Columbia, and one Canadian province.
Financial performance and key metrics
- FY2015 revenue: $455.5 million, up 12.8% from $403.7 million. Restaurant revenue was $450.5 million; royalties and fees were $5.0 million.
- FY2015 profitability: Operating loss was $21.1 million versus operating income of $18.9 million in 2014; net loss was $13.8 million versus net income of $11.4 million. Diluted loss per share was $0.48.
- Fourth quarter: Revenue was $117.1 million versus $108.5 million a year earlier; operating loss was $6.5 million and net loss was $4.3 million, compared with prior-year operating income of $5.5 million and net income of $3.5 million.
- Restaurant economics: Company-owned comparable sales declined 0.2% for the year (system-wide decline: 0.3%); average unit volume fell to $1.103 million from $1.147 million. Restaurant contribution was $73.0 million, or 16.2% of restaurant revenue, versus $76.2 million, or 19.1%, in 2014.
- Costs and adjusted results: Labor rose to 31.8% of restaurant revenue from 30.2%; occupancy rose to 11.2% from 10.7%; other restaurant operating costs rose to 14.1% from 13.2%. Cost of sales improved to 26.7% from 26.9%. EBITDA was $6.7 million versus $43.7 million; adjusted EBITDA, a non-GAAP measure, was $38.0 million versus $46.5 million.
- Cash flow and investment: Operating cash flow was $44.5 million, down from $49.0 million. Capital expenditures were $50.1 million. Cash and cash equivalents were $1.9 million at year-end.
- Debt and liquidity: Credit-facility borrowings were $68.2 million; $29.0 million remained available after letters of credit. The company reported $67.7 million of long-term debt on the balance sheet and was in compliance with its covenants. Current assets were $25.4 million and current liabilities $32.9 million.
Material changes versus the prior year
- Revenue growth was driven principally by restaurants outside the comparable base; comparable sales weakened, and average unit volumes declined.
- Restaurant impairments, closure costs, and asset disposals rose to $29.6 million from $1.4 million. The company impaired 39 restaurants and closed 16 company-owned locations in 2015; 15 of the impaired restaurants were closed that year.
- The company repurchased 2,423,871 shares for $35.0 million, completing its repurchase program. Management attributed higher interest expense partly to increased borrowings used to fund the buyback.
- The revolving credit facility was expanded to $100 million and extended to June 2020.
Outlook, management commentary, risks, and unusual items
- Management expected approximately 50 system-wide restaurant openings in 2016, with capital expenditures of $45–$50 million. Estimated 2016 development cost was $750,000–$775,000 per new restaurant, net of landlord reimbursements.
- The company introduced its “Made. Different.” positioning and committed to remove artificial colors, flavors, preservatives, and sweeteners from its core menu, with stated exceptions. It also committed to offer meat and poultry never given antibiotics or hormones by 2017.
- Management cited wage inflation, healthcare costs, and lower unit volumes as pressures on margins. Other principal risks include execution of restaurant expansion, food safety, competition, commodity and labor costs, leased-property obligations, and reliance on suppliers and information systems.
- A Delaware action concerning unclaimed gift-card funds remained pending; the company accrued an estimated probable loss that was not material to results. A former employee filed a wage-and-hour class/collective action in February 2016; the company said the potential loss could not yet be reasonably estimated.
- The company expected operating cash flow and borrowing capacity to fund obligations for the next year. It does not anticipate paying cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether comparable sales and average unit volumes stabilize, and whether new restaurants achieve planned sales and profitability.
- How much of the 2015 impairment and closure expense is nonrecurring, and whether further impairment charges or closures occur.
- Whether restaurant-level margins recover amid labor, healthcare, occupancy, and marketing cost pressures.
- Debt levels, remaining revolver availability, covenant compliance, and the cash demands of capital spending and long-term leases.
- Developments in the gift-card and wage-and-hour litigation, including any change in estimated exposure.