Noodles & Company — FY2018 Form 10-K
Business and period: The company operates fast-casual restaurants focused on globally inspired noodle and pasta dishes. This 10-K covers the 52-week fiscal year ended January 1, 2019; fiscal 2017 also comprised 52 weeks. At year-end, it operated 394 company-owned and 65 franchised restaurants in 29 states and the District of Columbia.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $457.8 million | $456.5 million |
| Operating loss | $3.8 million | $33.9 million |
| Net loss | $8.4 million | $37.5 million |
| Adjusted EBITDA (non-GAAP) | $33.4 million | $30.6 million |
| Operating cash flow | $5.3 million | $4.1 million |
| Capital expenditures | $14.3 million | $20.8 million |
- Restaurant revenue increased 0.5%; franchise royalties and fees declined 14.8%. Total revenue grew 0.3%.
- Company-owned comparable sales rose 3.4%; system-wide comparable sales rose 3.7%. Company-owned average unit volume increased 4.4% to $1.119 million.
- Restaurant contribution was $68.2 million, with a 15.0% margin, compared with $64.0 million and 14.2% in 2017. These are non-GAAP restaurant-level measures and exclude corporate costs.
- Fourth-quarter revenue was $113.2 million, operating income was $1.0 million, and net income was $19,000. Fourth-quarter comparable sales increased 3.7%.
- Year-end cash was $4.7 million. Debt under the credit facility was $46.6 million, with $3.7 million of letters of credit outstanding and $39.4 million available for future borrowing. Total current assets were $23.4 million versus current liabilities of $33.1 million.
- Contractual obligations totaled $316.3 million, including $227.4 million of lease obligations and $46.6 million of debt. Operating cash flow was below capital expenditures by approximately $9.0 million.
Changes, outlook, and notable items
- Losses narrowed substantially from 2017, helped by improved comparable sales and lower restaurant impairment and closure charges: total such charges fell to $7.1 million from $37.4 million. The company identified one impaired restaurant in 2018 versus 34 in 2017.
- The company closed 19 company-owned restaurants and opened one in 2018; franchisees closed one and opened none. Management said it did not anticipate significant closures in the near term and planned a modest growth approach.
- Management planned to open four to six company-owned restaurants in 2019 and expected capital expenditures of $24 million to $30 million. It provided no specific earnings or revenue forecast.
- Management cited labor inflation as an ongoing pressure, while reporting that labor efficiencies helped offset higher wage costs in 2018. It also highlighted menu innovation, operational efficiency, pickup and delivery convenience, and team training as priorities.
- A new $25 million term loan and $65 million revolving facility replaced the prior credit facility in May 2018; the facility matures May 9, 2022. The company was covenant-compliant at year-end and expected to remain compliant through fiscal 2019, while cautioning that future compliance was not assured. Debt is variable-rate and secured by substantially all personal property assets and subsidiary stock.
- The company raised $23.0 million net in a July 2018 public stock offering and used proceeds to reduce borrowings and fund working capital. The offering increased shares outstanding.
- The final $11.0 million payment-card company assessment for the 2016 data breach was paid in 2018; the company recorded a further $3.4 million charge and stated no data-breach liability remained. A $0.3 million Delaware gift-card litigation settlement was also recorded.
- Adoption of lease-accounting guidance in fiscal 2019 was expected to add approximately $262 million of operating lease liabilities and $198 million to $228 million of right-of-use assets to the balance sheet, without a material effect on results or cash flows.
Investor verification points
- Confirm whether comparable-sales momentum and restaurant-level margin improvement continued after fiscal 2018, and whether planned 2019 openings and capital spending were achieved.
- Monitor labor, food, and delivery costs against the company’s ability to maintain or improve restaurant contribution margins.
- Review liquidity, variable-rate borrowing costs, debt-covenant headroom, and the May 2022 facility maturity alongside significant lease commitments.
- Assess the effect of lease-accounting adoption on reported assets, liabilities, leverage measures, and covenant calculations.
- Track restaurant closures, impairment charges, digital and delivery profitability, and any developments in ordinary-course litigation or food-safety matters.