Noodles & Company — Q3 2023 Form 10-Q
Business and period: The company operates fast-casual restaurants and reports as one segment. The fiscal quarter ended October 3, 2023; comparisons are with the quarter ended September 27, 2022. At quarter-end, it had 468 restaurants in 31 states: 377 company-owned and 91 franchised.
Financial results
| Metric | Q3 2023 | Q3 2022 | First three quarters 2023 | First three quarters 2022 |
|---|---|---|---|---|
| Total revenue | $127.9 million | $129.4 million | $379.1 million | $373.0 million |
| Operating income (loss) | $2.0 million | $1.5 million | ($0.5) million | ($2.7) million |
| Net income (loss) | $0.7 million | $0.8 million | ($3.7) million | ($4.3) million |
| Adjusted EBITDA | $11.7 million | $9.8 million | $28.0 million | $23.2 million |
| Restaurant contribution margin | 16.4% | 14.4% | 15.0% | 13.4% |
Q3 company-owned comparable sales declined 4.3% and franchise comparable sales declined 1.2%; system-wide comparable sales fell 3.7%. Company-owned average unit volume was $1.335 million, down 3.7%. For the first three quarters, system-wide comparable sales declined 1.1% and average unit volume was $1.335 million, down 1.3%.
Q3 cost of sales improved to 25.1% of restaurant revenue from 28.1%, primarily due to lower food and protein commodity costs. Labor rose to 31.3% from 30.8%, while occupancy increased to 9.2% from 8.8%. Third-party delivery fees were 5.7% of total revenue. Net interest expense increased to $1.2 million from $0.7 million.
Cash, debt and liquidity
- First-three-quarter operating cash flow was $27.3 million, versus $7.8 million; capital spending drove investing cash outflow of $36.6 million, versus $21.0 million.
- Cash was $2.5 million at October 3, 2023. Long-term debt, net, was $64.0 million; gross credit-facility borrowings were $65.4 million, with $3.0 million of letters of credit outstanding and $56.6 million available for future borrowing.
- Variable-rate debt carried an average 8.00% rate for the first three quarters, versus 4.09% in 2022. A 1 percentage-point rate change would affect annualized pretax interest expense by approximately $0.7 million. The facility matures July 2027; the company reported compliance with covenants.
- Management believes cash, operating cash flows and available credit are sufficient for at least the next 12 months. Estimated FY2023 capital expenditures were $45–$50 million, including $8–$13 million for the remainder of the year.
Material changes, outlook and risks
- Revenue declined in Q3 as lower guest traffic and comparable sales more than offset new restaurant growth. Management said it believes recent price increases and consumer inflationary pressures contributed to traffic declines, with some improvement in Q3; the duration and extent remain uncertain.
- Lower commodity costs improved food-cost ratios, while wage inflation, sales deleverage and higher delivery, credit-card and utility costs pressured other restaurant margins. Management said inflation had moderated but remained above historical levels.
- The company opened 13 company-owned restaurants and permanently closed four in the first three quarters of 2023; one franchise location closed in Q3. It anticipated approximately 5% system-wide unit growth in 2023, while citing development delays that could persist through 2023 and into 2024.
- Q3 included $2.1 million of restaurant impairments, closure costs and asset disposals, including lease-related write-downs for two previously closed restaurants; no restaurants were closed during the quarter. The company repurchased and retired 1,731,952 shares for approximately $5.0 million at an average $2.86 per share.
- Management estimated a FY2023 effective tax rate of (2.0%) to (1.0%) and did not anticipate material tax expense or benefit for the remainder of the year due to its deferred-tax valuation allowance. Risks include consumer demand and pricing response, labor and commodity costs, interest rates, supply-chain conditions, and restaurant construction delays. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether traffic and comparable-sales trends improve without further pricing pressure on demand.
- Whether lower food costs can offset wage, delivery and other operating-cost inflation.
- Whether planned openings, capital spending and cash generation remain consistent with management’s outlook and available borrowing capacity.
- How variable-rate debt costs, restaurant closures and impairment charges affect future profitability and liquidity.