Noodles & Company (NDLS) — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013 (52 weeks); fourth quarter ended December 31, 2013. Comparisons are with fiscal 2012, ended January 1, 2013, also a 52-week year. Amounts are in U.S. dollars.
Business context
Noodles & Company operates fast-casual restaurants serving globally inspired noodle and pasta dishes, soups, salads and sandwiches. At year-end it had 380 restaurants in 29 states and the District of Columbia: 318 company-owned and 62 franchised. It opened 42 net company-owned restaurants and 11 franchise restaurants during 2013. Management describes new restaurant development as the principal growth driver.
Financial and operating performance
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Total revenue | $350.9 million | $300.4 million | Up 16.8% |
| Restaurant revenue | $347.1 million | $297.3 million | Up 16.8% |
| Franchise royalties and fees | $3.8 million | $3.1 million | Up 20.3% |
| Operating income | $14.3 million | $16.1 million | Down 11.2%; operating margin 4.1% versus 5.3% |
| Net income | $6.7 million | $5.2 million | Up 29.1%; net margin 1.9% versus 1.7% |
| Diluted earnings per share | $0.24 | $0.22 | |
| Operating cash flow | $43.6 million | $32.1 million | |
| Capital expenditures | $54.4 million | $47.4 million | Operating cash flow less capital expenditures was negative $10.8 million in 2013 |
| Cash and cash equivalents | $1.0 million | $0.6 million | At fiscal year-end |
| Long-term debt | $6.3 million | $93.7 million | Substantially reduced after IPO proceeds repaid debt |
Company-owned comparable restaurant sales rose 4.3% for the year; management reported system-wide comparable sales growth of 3.0%. Average unit volume was $1.179 million, approximately flat with 2012. Restaurant contribution was $72.0 million, or 20.7% of restaurant revenue, compared with 21.2% in 2012. EBITDA was $34.3 million and adjusted EBITDA was $47.2 million; adjusted EBITDA is a non-GAAP measure and includes substantial exclusions, including IPO-related costs and stock compensation.
For the fourth quarter, revenue was $91.5 million and net income was $2.4 million, compared with $77.9 million and $1.6 million, respectively, in the fourth quarter of 2012. Fourth-quarter operating income was $5.2 million; company-owned comparable sales increased 4.3%, and restaurant contribution margin was 21.0%.
At year-end, current assets were $18.3 million and current liabilities were $24.2 million. The company had a $45 million revolving credit facility, $6.3 million of borrowings, $2.8 million of letters of credit and $35.9 million of available borrowing capacity. It reported compliance with its debt covenants. Contractual operating lease obligations totaled $247.9 million, including $33.9 million due within one year.
Material changes versus 2012
- Revenue growth reflected new restaurants and comparable sales: company-owned comparable sales contributed $9.3 million of restaurant revenue growth, while restaurants outside the comparable base contributed $40.6 million.
- Operating income declined despite higher sales. Occupancy, other restaurant operating costs, depreciation and general and administrative expenses rose faster than revenue in percentage terms. Other restaurant operating costs increased to 12.7% of restaurant revenue from 12.2%; occupancy increased to 10.1% from 9.9%.
- Net income increased partly because interest expense fell to $2.2 million from $5.0 million following repayment of most debt after the IPO. Operating income itself declined.
- The July 2013 IPO raised approximately $100.2 million net; proceeds repaid the $75 million term loan and nearly all revolving borrowings. The December follow-on offering was primarily a sale by existing shareholders; the company received no net proceeds and incurred approximately $0.7 million in costs.
Outlook, commentary and risks
For 2014, management expected to open 42–50 company-owned restaurants and 10–15 franchise restaurants. It anticipated approximately $50 million in capital expenditures, including about $42 million for new restaurant construction before landlord reimbursements, and average development costs of $750,000–$775,000 per new restaurant, net of reimbursements. Management stated that operating cash flow and planned borrowing capacity should fund obligations and investment needs for the next 12 periods.
Key risks include securing suitable sites and opening restaurants on schedule and profitably; maintaining comparable sales and restaurant margins as the company expands; food and labor cost inflation and supply interruptions; food safety events and adverse publicity; competition, weather and consumer spending; and the burden of long-term, largely non-cancelable leases. Management also cited expected healthcare-law requirements beginning in 2015 that could increase benefit and administrative costs. The filing does not provide a specific earnings or comparable-sales forecast.
Unusual 2013 items included $5.7 million of IPO-related expenses and approximately $0.7 million of follow-on offering expenses. The company reported ordinary-course legal claims but said management believed unfavorable outcomes were remote or potential losses immaterial; the ultimate aggregate exposure was not determinable. The financial statements received an unqualified audit opinion. As an emerging growth company, the filing did not include auditor attestation on internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales growth, traffic and average unit volumes support the planned pace of new openings.
- Whether restaurant-level cost pressures, particularly occupancy and other operating costs, stabilize or continue to erode contribution margins.
- Actual 2014 openings, capital spending and development costs compared with management’s stated plans.
- Available revolver capacity, covenant headroom and cash generation relative to capital spending and $247.9 million of operating lease commitments.
- The amount and recurrence of IPO, offering and stock-based compensation costs when assessing reported earnings and adjusted EBITDA.
- Potential ownership and governance influence of major shareholders; a March 3, 2014 Class B share conversion changed their voting-power profile.