Noodles & Company — Q3 2015 Form 10-Q
Reporting period: Fiscal quarter ended September 29, 2015, and first three fiscal quarters of 2015. Figures below are unaudited; dollar amounts are in millions unless stated otherwise. At quarter-end, the company operated 424 company-owned and 64 franchised restaurants.
Financial performance
- Q3 revenue: $117.3, up 10.5% year over year. Restaurant revenue was $116.2; franchise royalties and fees were $1.2. Company-owned comparable sales fell 0.7% (franchise: down 1.9%; systemwide: down 0.9%). Average unit volumes were $1.111 million, down 3.6%.
- Q3 earnings and margins: Operating loss was $15.3, versus operating income of $5.0 a year earlier; net loss was $9.8, or $0.35 per diluted share, versus net income of $2.9, or $0.10 per diluted share. Operating margin was negative 13.1% versus positive 4.8%; net margin was negative 8.4% versus positive 2.8%.
- First three quarters: Revenue was $338.3, up 14.6%; operating loss was $14.6 versus income of $13.4, and net loss was $9.5 versus income of $7.9. Comparable sales were flat (0.0%); AUVs were $1.111 million, down 3.6%.
- Adjusted EBITDA: $8.7 in Q3 versus $12.1; $30.2 for the first three quarters versus $33.1. These company-defined non-GAAP measures exclude impairment, disposal and closure costs, depreciation and amortization, and stock-based compensation.
- Cost and margin pressures: Q3 labor was 32.4% of restaurant revenue versus 30.3%, occupancy 11.1% versus 10.5%, and other restaurant operating costs 14.6% versus 13.8%. Management cited lower unit volumes, wage and benefit increases, training, marketing and maintenance. Cost of sales improved to 26.6% from 27.0%, which management attributed primarily to a prior-year price increase.
- Cash flow and investment: First-three-quarter operating cash flow was $37.9; investing cash outflow was $36.2, including $35.6 of property and equipment purchases. Net cash increased $0.1 to $2.0. Capital expenditures were estimated at $55–$60 for full-year 2015, including $45–$50 for new restaurant construction before landlord reimbursements.
- Debt and liquidity: Long-term debt was $60.4 at September 29, 2015, versus $27.5 at December 30, 2014. The amended revolving facility has $75.0 capacity, matures in June 2020, and had $11.8 available after $2.8 of letters of credit. The company reported compliance with covenants and expected liquidity to cover the next 12 months; it was evaluating refinancing.
- Balance sheet: Total assets were $234.2 and stockholders’ equity $97.5. Cash was $2.0; current liabilities were $32.3 against current assets of $24.1.
Material changes and unusual items
- Revenue growth primarily reflected restaurant expansion; Q3 comparable sales were negative and AUVs declined. The company had 488 total restaurants, versus 425 a year earlier.
- Restaurant impairment, asset disposal and closure costs were $16.5 in Q3 and $22.8 for the first three quarters, compared with $0.3 and $0.7, respectively, in 2014. The company impaired 25 restaurants in Q3 and 33 year to date, based on its assessment of expected future cash flows.
- On November 5, 2015, the company announced plans to close 16 restaurants by year-end. It estimated approximately $5.0 of additional closure charges, including lease termination fees and other direct costs. Impairments had already been recorded for 10 of these locations in Q3, five in Q1, and one in 2010.
- The company completed its $35.0 share repurchase program, buying 2,423,871 shares during the first three quarters. It cited higher average borrowings used to fund repurchases as a factor in increased interest expense.
- The credit facility was amended in June 2015, increasing revolving capacity from $45.0 to $75.0 and extending maturity from November 2018 to June 2020.
Outlook, risks and contingencies
- Management estimated a 2015 effective tax rate of 38%–39%, compared with 38.4% in 2014, and projected remaining-year capital expenditures of $18.6–$23.6.
- Risks discussed include variable-rate debt exposure, commodity price volatility, food and labor inflation, minimum-wage increases, and restaurant-level performance and impairment. A 1 percentage-point change in the effective borrowing rate was estimated to affect annualized pretax interest expense by $0.6.
- The company reported ordinary-course claims and proceedings, with no clear aggregate loss estimate; management considered an unfavorable outcome remote or the potential loss immaterial, while noting that larger or more numerous claims could adversely affect results.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing stated there were no material changes to previously reported risk factors.
Investor verification priorities
- Track comparable sales, traffic, AUVs, and whether revenue growth continues to rely on new openings despite weak existing-store performance.
- Assess whether labor, occupancy, marketing and maintenance pressures persist and whether restaurant-level margins recover.
- Verify the timing, total costs and realized savings from the planned 16 restaurant closures, including the estimated $5.0 of additional charges.
- Monitor impairment tests and any further charges, given the 33 restaurants impaired in the first three quarters.
- Review cash generation against capital spending, debt levels, available revolver capacity, refinancing progress and covenant headroom.
- Confirm the actual full-year capital expenditures and effective tax rate against management’s estimates.