Noodles & Company — Q2 2015 Form 10-Q
Reporting period: Fiscal quarter ended June 30, 2015, and first two fiscal quarters of 2015, compared with the periods ended July 1, 2014. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
The company develops and operates fast-casual restaurants and reports as one segment. At June 30, 2015, it had 411 company-owned and 61 franchised restaurants across 35 states, the District of Columbia, and one Canadian province.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | First two quarters 2015 | First two quarters 2014 |
|---|---|---|---|---|
| Total revenue | $115.2 million | $99.5 million | $221.0 million | $189.0 million |
| Operating income | $5.0 million | $5.9 million | $0.7 million | $8.4 million |
| Net income | $3.1 million | $3.5 million | $0.3 million | $5.0 million |
| Diluted EPS | $0.10 | $0.11 | $0.01 | $0.16 |
| Adjusted EBITDA | $12.7 million | $12.6 million | $21.5 million | $21.0 million |
| Operating margin | 4.4% | 6.0% | 0.3% | 4.4% |
| Net margin | 2.7% | 3.5% | 0.1% | 2.6% |
- Q2 restaurant revenue increased 15.9%; management attributed the increase primarily to more operating weeks and restaurant growth. Company-owned comparable sales rose 0.1%, while system-wide comparable sales were flat. Company-owned average unit volume fell 2.9% to $1.123 million, which management attributed to a higher proportion of immature restaurants.
- For the first two quarters, total revenue grew 16.9%; company-owned comparable sales increased 0.4%. Cost of sales improved as a share of restaurant revenue, but labor, occupancy, and other restaurant operating costs increased as a share of sales.
- Cash from operating activities was $22.7 million for the first two quarters, versus $19.1 million a year earlier. Investing cash use was $22.5 million, including $21.9 million of property and equipment purchases and $0.6 million for a franchise restaurant acquisition. Cash increased $0.1 million to $2.0 million.
- At June 30, cash was $2.0 million, current assets were $23.2 million and current liabilities were $28.8 million. Long-term debt was $29.9 million. The company had $42.3 million available under its revolving facility after letters of credit; it was in compliance with covenants.
Material changes and unusual items
- First-half operating income and net income declined substantially year over year, mainly reflecting $5.9 million of restaurant impairment expense, primarily for eight restaurants assessed to have weaker expected future cash flows. The company said further impairment charges could occur.
- Q2 operating income fell 15.6% and net income fell 13.2% despite higher revenue. Labor costs rose to 30.9% of restaurant revenue from 29.9%; occupancy rose to 11.0% from 10.4%; and other restaurant operating costs rose to 13.3% from 12.5%. Cost of sales improved to 26.2% from 26.8%, partly due to a price increase taken in Q4 2014.
- On June 4, the company amended its credit facility, increasing revolving capacity from $45 million to $75 million and extending maturity from November 2018 to June 2020. The facility bore interest at 3.50% during the first two quarters.
- The company began a share-repurchase program of up to $35 million, expiring June 4, 2016. It repurchased 407,240 shares for approximately $6.3 million during Q2, leaving $28.7 million authorized.
- First-half tax provision was a benefit of $0.04 million, including employment tax credits. Management estimated a 2015 annual effective tax rate of 39%–40%, versus 38.4% in 2014.
Outlook, risks, and contingencies
- The company estimated full-year 2015 capital expenditures of $55 million–$60 million, including $45 million–$50 million for new restaurant construction before landlord reimbursements. It expected to fund spending with operating cash flow and credit-facility borrowings.
- The filing provides no specific revenue, comparable-sales, or earnings guidance. Management noted seasonality, with revenue typically lower in the first and fourth quarters and higher in the second and third.
- Risks discussed include variable-rate debt, commodity-price volatility, food and labor inflation, minimum-wage increases, and construction-cost inflation. A 1 percentage-point rate change on outstanding borrowings would change annualized pretax interest expense by approximately $0.3 million.
- Routine legal claims remained unresolved; management considered an unfavorable outcome remote or the potential loss immaterial, but noted that a significant increase in claims or larger-than-expected losses could adversely affect results. The company reported no off-balance-sheet arrangements and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable sales and average unit volumes improve, and whether new restaurants mature enough to offset their higher labor and occupancy burden.
- Whether restaurant-level performance supports the carrying values of the eight impaired locations and whether additional impairment charges arise.
- Capital-spending execution, funding needs, and the impact of share repurchases on cash and debt availability.
- Progress against the projected annual tax rate and sensitivity to variable interest rates, labor costs, and commodity prices.