Noodles & Company — Q2 2014 Form 10-Q
Business context and reporting period. The filing covers the 13-week fiscal quarter ended July 1, 2014, and the first two fiscal quarters of 2014. The company operated 343 company-owned and 67 franchised restaurants across 31 states and the District of Columbia, reporting as one segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First two quarters 2014 | First two quarters 2013 |
|---|---|---|---|---|
| Total revenue | $99.5 million | $89.2 million | $189.0 million | $170.5 million |
| Operating income | $5.9 million | $0.9 million | $8.4 million | $3.5 million |
| Net income | $3.5 million | $0.1 million | $5.0 million | $1.0 million |
| Diluted EPS | $0.11 | — | $0.16 | $0.04 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $19.1 million | $19.7 million |
- Revenue increased 11.5% in both the quarter and first half. Company-owned restaurant revenue grew 11.1% in Q2 and 10.5% in the first half; franchise royalties and fees rose 43.9% and 42.3%, respectively.
- Operating margin was 6.0% in Q2 versus 1.0% a year earlier, and 4.4% for the first half versus 2.1%. Net margin was 3.5% in Q2 and 2.6% for the first half.
- Restaurant cost pressures included cost of sales rising to 26.8% of restaurant revenue in Q2 from 26.1%, and occupancy rising to 10.4% from 9.7%. First-half cost of sales was 26.9% versus 26.3%, and occupancy was 10.8% versus 10.0%. Management cited promotions and modest ingredient-cost increases, and higher costs at newer restaurants.
- Adjusted EBITDA, a company-defined non-GAAP measure, was $12.6 million in Q2, unchanged year over year, and $21.0 million for the first half versus $20.8 million. Q2 results included $5.7 million of IPO-related expenses in the prior-year comparison period.
- Cash and equivalents were $0.7 million at July 1, 2014, compared with $1.0 million at December 31, 2013. Total assets were $202.6 million and stockholders’ equity was $131.9 million.
- Long-term debt was $9.6 million. The $45.0 million revolving facility had $31.8 million available after outstanding letters of credit; the company reported covenant compliance. The facility carried a 3.25% rate in each of the first two quarters.
- First-half capital expenditures were $24.5 million. Operating cash flow less capital expenditures was negative $5.3 million; financing activities provided $5.1 million, and cash declined $0.3 million over the period.
Changes versus prior comparable periods
- Comparable restaurant sales declined 0.6% at company-owned locations and 1.2% at franchised locations in Q2; system-wide they fell 0.7%. For the first half, company-owned comps declined 1.0%, franchise comps 2.2%, and system-wide comps 1.1%. Management attributed the Q2 system-wide decline partly to one fewer operating day because of the Easter calendar shift; first-half weakness also reflected severe first-quarter weather and a fiscal-calendar shift.
- Company-owned AUV was $1.156 million, down 2.0% from $1.180 million.
- Net income improved substantially, while lower G&A and interest expense contributed to the comparison: prior-year Q2 included $5.7 million in IPO-related expenses and management fees, and the IPO proceeds had repaid most outstanding debt. Meanwhile, several restaurant operating-cost ratios and depreciation as a share of revenue increased.
- The company opened 12 company-owned and four franchise restaurants in Q2; 25 company-owned and five franchise restaurants in the first half.
Outlook, risks and notable items
- Management expected to open 45–50 company-owned and 10–15 franchise restaurants in 2014, including openings through Q2. Estimated 2014 capital expenditures were $50–55 million, excluding the franchise-restaurant acquisition.
- On the first day of Q3, the company acquired 16 existing franchise restaurants for approximately $13.6 million, primarily funded with the revolving credit facility.
- Management estimated a 2014 annual effective tax rate of 41.2%. It did not expect adoption of the new revenue-recognition standard to significantly affect financial position or results.
- Risks discussed include variable-rate debt, food commodity prices, labor and construction inflation, consumer demand, weather, competition, and execution of restaurant development. A 1% rate change on the debt outstanding at quarter-end would change annualized pretax interest expense by approximately $96,000.
- A Delaware action alleges failures to report and remit unclaimed gift-card funds and seeks damages, potentially including treble damages. The case was at an early stage; the company said it could not estimate any probable loss or range and intended to defend itself. The filing reported no material changes to previously disclosed risk factors.
Facts investors should verify
- Whether comparable-sales trends, traffic, AUVs, and restaurant-level cost ratios improve or continue to weaken.
- Whether planned restaurant openings and the acquired 16 locations deliver expected returns without pushing capital spending or debt materially higher.
- Cash generation, remaining revolver availability, covenant compliance, and the impact of variable rates as borrowing needs evolve.
- The outcome and potential financial exposure of the Delaware gift-card litigation.
- How much reported earnings growth reflects operating performance versus the absence of prior-year IPO costs and lower interest expense.