Noodles & Company — Q1 2018 Form 10-Q
Reporting period: Fiscal quarter ended April 3, 2018 (13 weeks), compared with the quarter ended April 4, 2017. The company operated 411 company-owned and 65 franchised restaurants in 29 states and the District of Columbia.
Financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $110.5 | $116.7 |
| Restaurant revenue | $109.6 | $115.5 |
| Operating loss | $(2.7) | $(25.6) |
| Net loss | $(3.6) | $(26.8) |
| Adjusted EBITDA | $5.6 | $3.8 |
| Loss per share, basic and diluted | $(0.09) | $(0.99) |
| Cash from operating activities | $(1.0) | $(8.1) |
| Capital expenditures | $4.8 | $6.6 |
Q1 2018 net loss margin was approximately 3.2%, versus 23.0% in Q1 2017. The prior-year quarter included $19.9 million of closure costs, principally associated with closing 55 restaurants; the corresponding impairments, closure costs and asset disposals fell to $1.6 million in Q1 2018 from $22.1 million. Adjusted EBITDA is a non-GAAP measure.
- Comparable sales: System-wide down 0.2%; company-owned down 0.3%; franchise up 0.9%. Management estimated the Easter timing shift reduced comparable sales by about 50 basis points.
- Restaurant costs: Cost of sales was 26.7% of restaurant revenue, down from 27.8%, reflecting favorable commodity pricing. Labor was 33.4%, down from 34.3%, partly due to labor initiatives and closure of underperforming restaurants. Other restaurant costs rose to 15.4% from 14.8%, with marketing and off-premise initiative spending cited.
- Liquidity and debt at April 3: Cash was $2.6 million; current assets were $20.0 million and current liabilities $38.6 million. Long-term debt, net, was $62.9 million; gross indebtedness under the existing facility was $63.9 million, with $3.3 million of letters of credit outstanding. The company reported compliance with debt covenants.
Changes, outlook and risks
- Revenue declined 5.3% year over year, primarily reflecting the prior-year closure of 55 company-owned restaurants, partly offset by openings since then. Company-owned AUVs were $1.08 million, up 1.2% year over year.
- On May 9, 2018, after quarter-end, the company entered a four-year U.S. Bank facility comprising a $25 million term loan and a $65 million revolver, expandable to $75 million. Proceeds repaid the former facility. The new agreement includes financial and capital-expenditure covenants; management expected compliance through fiscal 2018 but cautioned there was no assurance.
- Management planned one to four company-owned openings in 2018, with no entry into new markets, and estimated full-year capital expenditures of approximately $10 million. It expected $6–$9 million of lease-termination costs over the next six months and approximately $8 million of remaining data-breach liabilities, potentially up to $5.5 million more than the recorded estimate.
- Management said cash, operating cash flows and credit availability should fund requirements for the next 12 months. The quarter ended with $2.6 million cash and negative working capital. Wage inflation, commodity prices, restaurant execution, financing and covenant compliance were identified as risks.
- The 2016 payment-card data breach remains a potential source of additional costs; the company warned losses could materially affect future results. Delaware gift-card litigation remained pending: summary judgment was denied April 30, 2018, with trial set for September 10, 2018. The company had an accrual, but stated losses could be greater.
- Adoption of the new revenue standard did not materially affect Q1 operations; it deferred recognition of initial franchise fees over franchise terms and established a $1.5 million opening contract liability. The company expected no material income tax expense or benefit for the rest of 2018, subject to its valuation allowance and ongoing Tax Act analysis.
Investor verification points
- Review comparable-sales trends and whether the Easter timing effect and modest AUV increase persist.
- Track cash generation, available borrowing capacity, debt costs and compliance with the new facility’s covenants.
- Verify actual lease-termination and data-breach payments against management’s estimates, including the potential additional $5.5 million exposure.
- Monitor the Delaware gift-card case, its September 2018 trial and potential liability beyond the recorded accrual.
- Compare actual 2018 restaurant openings and capital expenditures with the stated plans.