Noodles & Company — FY2014 Form 10-K
Business context and reporting period. This is an annual report for the 52-week fiscal year ended December 30, 2014, not a standalone fourth-quarter filing. Noodles & Company operated 386 company-owned and 53 franchised fast-casual restaurants across 32 states and the District of Columbia. Fourth-quarter figures below are for the quarter ended December 30, 2014.
Financial and operating performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $403.7 million | $350.9 million |
| Restaurant revenue | $399.0 million | $347.1 million |
| Operating income / margin | $18.9 million / 4.7% | $14.3 million / 4.1% |
| Net income / net margin | $11.4 million / 2.8% | $6.7 million / 1.9% |
| Diluted EPS | $0.37 | $0.24 |
| EBITDA / adjusted EBITDA | $43.7 million / $46.5 million | $34.3 million / $44.0 million* |
| Operating cash flow | $49.0 million | $43.6 million |
| Capital expenditures | $56.4 million | $54.4 million |
| Debt at year-end | $27.5 million | $6.3 million |
*FY2013 adjusted EBITDA is presented as revised in this filing.
Revenue grew 15.1%, driven principally by restaurants outside the comparable base, including new openings and 19 franchise restaurants acquired during 2014. Company-owned comparable restaurant sales rose 0.3%; the filing separately reports system-wide comparable sales growth of 0.2%. Company-owned average unit volume was $1.147 million, down from $1.179 million. Restaurant contribution increased to $76.2 million, but its margin fell to 19.1% from 20.7%.
For the fourth quarter, revenue was $108.5 million versus $91.5 million in the prior-year quarter; net income was $3.5 million versus $2.4 million, and operating income was $5.5 million versus $5.2 million. Comparable restaurant sales increased 1.3%, compared with 4.3% a year earlier. Restaurant contribution margin was 20.0%, versus 21.0%.
FY2014 cost of sales rose to 26.9% of restaurant revenue from 26.5%, labor to 30.2% from 30.0%, occupancy to 10.7% from 10.1%, and other restaurant operating costs to 13.2% from 12.7%. Management attributed pressure to promotions and ingredient costs, the greater share of newer restaurants with lower sales volumes, and higher utility and maintenance costs. General and administrative expense declined to $31.4 million from $35.9 million, principally because FY2013 included IPO and follow-on offering expenses.
Cash and cash equivalents were $1.9 million; current assets were $22.8 million and current liabilities $25.8 million. The $45 million revolving credit facility had $27.5 million drawn, $2.7 million of letters of credit, and $14.8 million available. The company reported compliance with debt covenants. Net cash used in investing activities was $72.1 million, including $15.7 million for franchise acquisitions. No off-balance-sheet arrangements were reported.
Outlook, commentary, and material risks
- Management expected 12%–14% system-wide unit growth in 2015. Planned 2015 capital expenditures were $55–$60 million, including $45–$50 million for new restaurant construction before landlord reimbursements. Average development costs for 2015 openings were projected at $750,000–$775,000 net of landlord reimbursements.
- The company rolled out catering system-wide in 2014, targeting groups of 20 or more; management noted the program was early-stage and might not deliver expected sales.
- No cash performance bonuses were paid to the named executive officers for 2014 because EBITDA targets were not achieved.
- Key risks include weak comparable sales or traffic, food and labor cost inflation, weather disruption, competition, new-unit execution and site availability, restaurant cannibalization, food safety, and reliance on suppliers and franchisees. Long-term non-cancelable leases are a significant fixed obligation; scheduled lease payments totaled $294.4 million.
- A Delaware action alleges the company and other businesses failed to remit unclaimed gift-card funds and seeks damages, including treble damages. The matter was at an early stage; the company could not estimate a probable loss or range of losses and intended to defend itself.
- The company reported effective disclosure controls and internal control over financial reporting. The independent auditor did not attest to internal-control effectiveness because the company qualified as an emerging growth company.
Most important facts for investors to verify
- Whether comparable-sales and traffic trends sustain improvement after FY2014’s 0.3% company-owned annual growth and the fourth-quarter 1.3% result.
- Whether new restaurants reach expected sales and margins, given lower AUVs and declining restaurant contribution margin.
- Whether food, labor, occupancy, and other operating-cost pressures continue to weigh on profitability.
- Whether planned 2015 unit growth and capital spending can be funded while maintaining adequate liquidity and covenant compliance.
- Developments and potential exposure in the Delaware gift-card litigation, for which no loss estimate was available.