Noodles & Company — Q2 2021 Form 10-Q
Business context and period: The filing covers the fiscal quarter and first two fiscal quarters ended June 29, 2021, compared with periods ended June 30, 2020. Noodles & Company operated 451 restaurants in 29 states: 374 company-owned and 77 franchised. It reports as one operating segment. Results improved from the severe COVID-19 disruption in 2020; year-over-year comparisons, especially comparable sales, benefit substantially from that depressed base.
Financial performance
| Metric | Q2 2021 | First two quarters 2021 |
|---|---|---|
| Total revenue | $125.6 million, up 56.8% year over year | $235.2 million, up 30.3% |
| Net income (loss) | $5.7 million; diluted EPS $0.12 | $3.7 million; diluted EPS $0.08 |
| Operating income (loss) | $6.2 million | $4.8 million |
| Operating cash flow | Not separately stated for the quarter in the provided text | $23.2 million, versus $6.7 million |
| Capital expenditures | Not separately stated for the quarter | $7.5 million |
- Q2 operating margin was 4.9% versus negative 15.6% in Q2 2020; net margin was 4.5% versus negative 16.8%. First-half operating margin was 2.1% versus negative 9.6%, and net margin was 1.6% versus negative 10.7%.
- Q2 comparable restaurant sales rose 56.8% system-wide (55.7% company-owned; 63.8% franchised). First-half comparable sales rose 30.6% system-wide. Management attributed much of the increase to comparison with pandemic-affected 2020 results.
- Q2 company-owned average unit volume was $1.350 million, up 51.5%; first-half AUV was $1.260 million, up 30.4%.
- Restaurant cost ratios improved year over year: Q2 cost of sales was 24.9% of restaurant revenue, labor 29.8%, occupancy 9.3%, and other restaurant operating costs 17.0%. Sales leverage contributed to lower ratios.
- Adjusted EBITDA, a non-GAAP measure, was $13.8 million for Q2 and $20.0 million for the first half, versus losses of $3.3 million and $1.5 million, respectively, in 2020.
Financial position and liquidity
- Cash and cash equivalents were $17.3 million at June 29, 2021, up from $7.8 million at December 29, 2020. Current assets were $35.0 million and current liabilities $70.8 million.
- Debt outstanding was $38.8 million before $1.5 million of unamortized issuance costs; the company also had $3.2 million of letters of credit. It repaid $5.0 million of debt in the first half. The filing reports $57.0 million available for future borrowing under the credit facility and compliance with debt covenants.
- Total lease liabilities were $240.7 million, including operating and finance leases. Operating lease liabilities were $233.1 million.
- Cash provided by operating activities was $23.2 million; investing activities used $7.5 million and financing activities used $6.3 million. Cash increased by $9.5 million in the first half. Management stated it expected sufficient liquidity for at least the next 12 months.
Changes, outlook, and risks
- Revenue and earnings recovered sharply from 2020, supported by reopened dining rooms, off-premise and digital sales, and fewer temporary closures. Franchise revenue also benefited from royalties being forgiven in Q2 2020 and reinstated afterward.
- The company permanently closed six company-owned restaurants in the first half, all in Q1, and opened two company-owned restaurants and one franchise restaurant. There were no restaurant impairments in Q2 2021; Q2 2020 included five. Q2 2021 impairment, closure, and disposal costs included a $0.4 million insurance recovery.
- For fiscal 2021, management estimated capital expenditures of $20–$24 million, primarily for 8–11 company-owned openings, equipment initiatives, and maintenance. It expected to pay down some additional debt over the following two quarters.
- Management’s development plan targets at least 7% annual system-wide unit growth beginning in 2022, with a path to 10% annual growth and at least 1,500 units. Recent new restaurants, many with drive-thru pickup windows, were described as performing at the highest sales level of any new-restaurant class in company history.
- COVID-19 remained an uncertain risk, including potential effects from the Delta variant, renewed restrictions, customer behavior, labor availability, and supply-chain conditions. Management also cited wage inflation, possible minimum-wage increases, commodity and construction costs, and third-party delivery fees.
- Debt bears variable interest; the company disclosed LIBOR transition uncertainty and estimated a 1 percentage-point rate change would alter annualized pretax interest expense by about $0.4 million. The credit facility included amended covenant terms and capital expenditure limits.
- Management said it did not anticipate material income tax expense or benefit for the remainder of 2021 because of a valuation allowance against deferred tax assets. Routine legal claims were disclosed; management considered adverse outcomes remote or potential losses not material, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much of comparable-sales and earnings growth reflects recovery from the unusually weak Q2 2020 comparison, and whether positive trends persisted afterward.
- Whether labor availability, wage inflation, food and packaging costs, and delivery fees pressure restaurant-level margins.
- Progress against the 2021 opening and capital expenditure plans and the longer-term unit-growth targets.
- Debt repayment, borrowing availability, covenant compliance, variable-rate exposure, and the transition away from LIBOR.
- The sustainability of operating cash flow and liquidity given the company’s substantial lease obligations and planned investment.
- Potential effects of further COVID-19 developments, restaurant closures, and unresolved legal matters.