Noodles & Company — Q3 2018 Form 10-Q
Business context and period: The company operates fast-casual restaurants and reported one operating segment. The fiscal quarter ended October 2, 2018; year-to-date figures cover the first three fiscal quarters. At quarter-end it had 401 company-owned and 65 franchise restaurants.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First three quarters 2018 | First three quarters 2017 |
|---|---|---|---|---|
| Total revenue | $116.7 million | $114.2 million | $344.6 million | $343.7 million |
| Operating income (loss) | $2.1 million | $(7.5) million | $(4.7) million | $(33.9) million |
| Net income (loss) | $1.1 million | $(8.3) million | $(8.5) million | $(37.0) million |
| Adjusted EBITDA | $10.4 million | $9.5 million | $25.0 million | $22.0 million |
| Operating cash flow | Not separately stated for the quarter | $(4.9) million | $(6.9) million |
Q3 operating margin was 1.8% and net margin was 0.9%, compared with operating and net losses in the prior-year quarter. Restaurant contribution, a company-defined measure before corporate costs, was approximately $18.9 million, or 16.4% of restaurant revenue, versus approximately $17.6 million, or 15.6%, in Q3 2017. Q3 company-owned comparable sales rose 5.2%; system-wide comparable sales rose 5.5%. Company-owned average unit volume was $1.107 million, up 3.8% year over year.
For the first three quarters, company-owned comparable sales increased 3.3% and system-wide comparable sales increased 3.6%. Diluted EPS was $0.02 in Q3 and $(0.20) year to date, versus $(0.20) and $(1.23), respectively, in the prior-year periods.
Liquidity, debt and cash flows
Cash and cash equivalents were $1.9 million at October 2, 2018, down from $3.4 million at January 2, 2018. Current assets were $20.6 million and current liabilities $30.1 million, a working-capital deficit of approximately $9.5 million. Year-to-date operating and investing activities used $4.9 million and $9.4 million, respectively; financing activities provided $12.9 million.
Debt under the May 2018 credit facility was $49.6 million, with $3.8 million of letters of credit outstanding. The facility includes a $25 million term loan and a $65 million revolver, which may be increased to $75 million, and matures May 9, 2022. Debt carried variable rates; the company reported rates of 4.95%–7.25% during the first three quarters and compliance with covenants at quarter-end. The company estimated full-year 2018 capital expenditures of $13–$16 million and said cash flows and borrowing capacity should fund expected needs for the next 12 months.
Material changes and unusual items
- Q3 revenue grew 2.2%, with comparable-sales gains attributed mainly to improved traffic from operational and brand initiatives and a modest price increase. The shifted timing of the July 4 holiday reduced comparable sales by about 50 basis points.
- Lower impairment and closure costs were a major reason for improved results: Q3 charges were $1.8 million versus $10.3 million; year-to-date charges were $6.0 million versus $35.1 million. The prior-year periods included closures of 55 restaurants and substantial impairments.
- The company closed 12 company-owned restaurants in the first three quarters of 2018, including three in Q3, and opened one during the year to date. It did not intend further 2018 openings and was pursuing modest growth for 2019 and 2020.
- A $3.4 million charge for the final data-breach assessment and a $0.3 million Delaware gift-card settlement were recorded year to date. The $11 million data-breach assessment was paid in Q3; the company reported no further data-breach liability. It also recorded an accrual for Delaware unclaimed-gift-card claims relating to 2011–2013, outside the settled litigation.
- A July public offering of 2.5 million shares at $10 per share provided approximately $23.2 million in net proceeds, used to reduce credit-facility borrowings and fund working capital. Refinancing the prior facility resulted in a $0.6 million debt-extinguishment loss.
Outlook, risks and contingencies
Management cited rising wages and benefits as an expected ongoing cost pressure, including potential effects from minimum-wage increases. Commodity costs, consumer spending, staffing, food-safety concerns, weather, competition and successful execution of operating initiatives were also identified as risks. The company expected to meet credit covenants through at least fiscal 2018, but cautioned that failure to comply could require a lender waiver or amendment and adversely affect liquidity. No material changes to previously disclosed risk factors were reported.
The company expected no material income-tax expense or benefit for the remainder of fiscal 2018 given its valuation allowance. It was preparing to adopt the new lease standard in fiscal 2019 and expected a significant increase in reported assets and liabilities; the effects on earnings and cash flows remained under evaluation. Management expected $3–$6 million of lease-termination costs over the next three to six months.
Important facts for investors to verify
- Whether comparable-sales gains persist and are sustained by traffic rather than pricing or calendar effects.
- Whether wage inflation and other restaurant costs offset continued improvement in restaurant contribution margins.
- Available revolver capacity, covenant headroom and cash needs after debt service, capital spending and restaurant-closure obligations.
- The ultimate cost of unclaimed gift-card claims for 2011–2013 and any further closure-related liabilities.
- Actual 2018 capital expenditures and the pace and economics of planned 2019–2020 restaurant development.
- The balance-sheet and operating effects of adopting the lease accounting standard.