Noodles & Company — Q3 2014 Form 10-Q
Reporting period: Fiscal quarter ended September 30, 2014, and first three fiscal quarters of 2014; comparisons are with the quarter ended October 1, 2013, and the corresponding 2013 year-to-date period. Amounts below are in millions unless noted. The company operated 370 company-owned and 55 franchised restaurants at quarter-end.
Financial performance
| Metric | Q3 2014 | Q3 2013 | First 3 quarters 2014 | First 3 quarters 2013 |
|---|---|---|---|---|
| Total revenue | $106.2 | $88.9 | $295.2 | $259.5 |
| Income from operations | $5.0 | $5.6 | $13.4 | $9.1 |
| Net income | $2.9 | $3.3 | $7.9 | $4.3 |
| Diluted EPS | $0.10 | $0.11 | $0.25 | $0.16 |
| Operating margin | 4.8% | 6.3% | 4.6% | 3.5% |
| Net margin | 2.8% | 3.7% | 2.7% | 1.6% |
| Operating cash flow | — | — | $37.5 | $32.5 |
| Capital spending and acquisitions | — | — | $53.6 used in investing | $39.8 used in investing |
Q3 total revenue rose 19.4%; restaurant revenue increased 19.7%, while franchising royalties and fees were essentially flat. Growth was primarily associated with more operating weeks and restaurant expansion. Company-owned comparable sales increased 1.6% in Q3, but fell 0.1% year to date; company-owned average unit volume was $1.152 million, down 2.5% year over year.
Q3 earnings weakened despite higher sales: operating income fell 9.6% and net income fell 9.9%. Restaurant cost of sales rose to 27.0% of restaurant revenue from 26.3%, labor to 30.3% from 30.0%, occupancy to 10.5% from 10.1%, and other restaurant operating costs to 13.8% from 12.9%. Management cited promotions and ingredient costs, lower AUVs and catering launch costs, newer restaurants’ higher occupancy burden, and higher marketing expense.
Year-to-date net income increased 85.4%, with operating income up 47.9%. The comparison benefited from lower interest expense after debt repayment following the 2013 IPO and from $5.7 million of IPO-related costs recorded in 2013. Year-to-date adjusted EBITDA was $33.1 million versus $32.0 million; the company’s adjusted measure excludes specified expenses and is not a GAAP measure.
Cash, debt, and liquidity
- Cash and cash equivalents were $2.2 million at September 30, 2014, versus $1.0 million at December 31, 2013.
- Operating activities provided $37.5 million; investing activities used $53.6 million, including $39.9 million of property and equipment purchases and $13.6 million to acquire 16 franchised restaurants.
- Financing activities provided $17.4 million. Long-term debt was $21.5 million at quarter-end, compared with $6.3 million at year-end 2013.
- The $45 million revolving credit facility had $20.8 million available for borrowing after $21.5 million of borrowings and $2.7 million of letters of credit. The facility expires in November 2018; the company reported compliance with its covenants.
Material changes, outlook, and risks
- On July 2, 2014, the company acquired 16 restaurants from a franchisee for $13.6 million. The acquisition increased company-operated locations and produced preliminary goodwill of approximately $6.5 million; its pro forma impact was described as immaterial.
- During the first three quarters, the company opened 36 company-owned and nine franchised restaurants. For 2014, management anticipated 48–50 company-owned and 10–12 franchise openings, including openings through Q3.
- Management estimated 2014 capital expenditures of approximately $50–$55 million, excluding the $13.6 million restaurant acquisition, funded by operating cash flow and revolver borrowings.
- Management expected a 2014 annual effective tax rate of 40%–41%. Q3 and year-to-date effective rates were 40.3% and 40.5%, respectively.
- Year-to-date comparable sales were affected by severe first-quarter weather and a fiscal-calendar shift. Management also cited higher promotional and ingredient costs, utilities and maintenance, and construction and operating costs as relevant pressures.
- The company faces a Delaware action alleging failure to remit unclaimed gift-card funds and related false claims. The case was at an early stage; the company could not estimate a probable loss or range and intended to defend it. Management said other ordinary-course matters were not expected to be material, while noting outcomes are uncertain.
- No material changes to previously reported risk factors were identified. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable sales and AUVs improve, and whether restaurant-level cost inflation continues to compress margins.
- Actual restaurant openings, capital spending, and returns from the 16 acquired locations relative to management’s plans.
- Revolver borrowings, remaining availability, covenant compliance, and cash generation as expansion continues.
- Developments and any eventual loss estimate in the Delaware gift-card litigation.
- The reported growth in year-to-date earnings against the prior-year IPO-cost and debt-interest effects, including the assumptions behind adjusted EBITDA.