Noodles & Company — Q1 2019 Form 10-Q
Business context and reporting period. The company operates fast-casual restaurants and reports as one segment. This 13-week fiscal quarter ended April 2, 2019; the comparable quarter ended April 3, 2018. At quarter-end, it had 395 company-owned and 64 franchised restaurants.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $110.0 million | $110.5 million |
| Operating loss | $1.1 million | $2.7 million |
| Net loss | $1.9 million; $0.04 per share | $3.6 million; $0.09 per share |
| EBITDA | $4.4 million | $3.1 million |
| Adjusted EBITDA | $5.6 million | $5.6 million |
| Operating cash flow | $0.1 million provided | $1.0 million used |
Restaurant revenue fell 0.8%, while franchise royalties, fees and other revenue rose 40.3%. Comparable sales increased 3.0% system-wide (3.0% company-owned; 2.8% franchised); company-owned average unit volume rose 4.7% to $1.131 million. Management said the Easter timing shift added approximately 50 basis points to Q1 comparable sales.
Restaurant contribution, calculated as restaurant revenue less restaurant operating costs, was approximately $13.7 million, or 12.6% of restaurant revenue, versus $14.1 million, or 12.9%, a year earlier. Labor costs increased to 34.1% of restaurant revenue from 33.4%, reflecting wage inflation and higher benefit costs. Cost of sales remained 26.7%; occupancy and other restaurant costs declined as a share of restaurant revenue. Lower impairment and closure costs and lower interest expense helped narrow the net loss.
Liquidity, debt and balance sheet
- Cash was $1.8 million at April 2, down from $4.7 million at January 1. Cash decreased $2.9 million during the quarter.
- Debt outstanding under the credit facility was $49.3 million, excluding $1.5 million of unamortized issuance costs; $3.2 million of letters of credit were also outstanding. The company reported $36.8 million available for future borrowings and compliance with debt covenants.
- The $65 million revolving facility (with a potential increase to $75 million) and term loan mature May 9, 2022. Borrowings bore rates of 5.59%–7.25% during the quarter.
- Operating lease liabilities totaled $258.9 million; total lease liabilities, including finance leases, were $260.0 million. These lease obligations are distinct from reported bank debt.
- Management believes cash, operating cash flows and available credit are sufficient for the next 12 months. Q1 investing cash use was $5.6 million, including $1.4 million to acquire a franchise restaurant.
Changes, outlook and risks
- Total revenue declined 0.4%, primarily reflecting company-owned restaurant closures since the start of 2018, partly offset by comparable-sales growth. The restaurant base was 459 locations, versus 476 a year earlier.
- The company adopted lease accounting standard Topic 842 on January 2, 2019. It recognized $218.3 million of operating lease assets and $258.9 million of operating lease liabilities at quarter-end; the adoption reduced opening retained earnings by $6.0 million. The standard materially changed the balance sheet, but did not materially affect Q1 operating results. Comparative periods were not restated.
- Management plans to open four to six company-owned restaurants in 2019 and estimates full-year capital expenditures of $14.5 million–$19.0 million, including $4.0 million–$7.0 million for new restaurant construction before landlord reimbursements. No company-owned restaurants opened and none closed in Q1; one franchised restaurant was acquired.
- Management expects labor costs to continue rising and noted minimum-wage increases, commodity prices, staffing, consumer demand, food-safety concerns, weather, competition and execution of sales and development plans as risks. The company expects no material income tax expense or benefit for the remainder of 2019 due to its valuation allowance.
- Restaurant impairments, closure costs and asset disposals were $0.4 million versus $1.6 million in Q1 2018. No restaurant was impaired in Q1 2019; the period included a $0.3 million closure-cost gain offset by ongoing costs for previously closed restaurants.
- The company reported ordinary-course litigation and claims, but said an unfavorable outcome was remote or the potential loss range was not material. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales growth persists, considering the disclosed approximately 50-basis-point Easter timing benefit.
- Whether labor inflation and benefit costs continue to pressure restaurant contribution margins.
- Progress toward the four-to-six-unit opening plan, capital spending estimates and expected cash generation.
- Available credit, covenant headroom and variable-rate exposure; a 1% rate change would alter annualized pretax interest expense by approximately $0.5 million.
- The effects of lease accounting and substantial future lease payments on leverage and liquidity; verify comparisons account for the non-restated prior period.