Noodles & Company — Q1 2023 Form 10-Q
Reporting period: Fiscal quarter ended April 4, 2023 (13 weeks), compared with the quarter ended March 29, 2022. Noodles & Company operated 461 restaurants in 31 states: 369 company-owned and 92 franchised.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $126.1 million | $112.6 million | +12.0% |
| Restaurant revenue | $123.2 million | $110.0 million | +12.1% |
| Operating loss | $2.2 million | $6.1 million | Loss narrowed |
| Net loss | $3.1 million | $6.4 million | Loss narrowed |
| Basic and diluted loss per share | $0.07 | $0.14 | Loss per share narrowed |
| Restaurant contribution margin | 13.7% | 9.7% | +4.0 percentage points |
| Adjusted EBITDA | $7.0 million | $2.2 million | Improved |
| Operating cash flow | $7.2 million | $(6.1) million | Improved |
System-wide comparable restaurant sales increased 6.4% (company-owned: 6.9%; franchise: 4.1%). Company-owned average unit volume was $1.343 million, up 7.5%. Management attributed revenue growth to comparable-sales gains, menu price increases, recovery from temporary Omicron-related closures in the prior period, and new restaurants. New openings since the start of Q1 2022 added $4.3 million in revenue; closures and refranchising reduced revenue by $1.4 million.
Cost of sales fell to 25.2% of restaurant revenue from 28.0%, mainly reflecting lower food commodity costs, particularly protein. Labor remained 32.3% of restaurant revenue as labor efficiencies and lower health insurance costs offset wage inflation. Occupancy improved to 9.3% from 10.1%, while general and administrative expense rose to 10.8% of revenue from 10.5%. Interest expense increased to $1.0 million from $0.4 million.
Cash, debt, and liquidity
Cash and cash equivalents were $2.1 million at April 4, 2023, versus $1.5 million at January 3, 2023. The company used $10.4 million in investing activities, primarily for new restaurants and digital menu-board technology, and received $3.8 million from financing activities. Operating cash flow benefited partly from working-capital timing, including payroll and accrued expenses.
Outstanding credit-facility borrowings were $52.8 million, excluding $1.6 million of unamortized debt issuance costs; the balance sheet reported long-term debt, net, of $51.2 million. The company also had $3.0 million of letters of credit outstanding and $69.3 million available for future borrowing. Revolver rates were 6.63%–7.2%; swingline rates were 8.75%–9.25%. The facility matures July 27, 2027, and the company reported compliance with its covenants. Total operating and finance lease liabilities were $220.4 million.
Management stated that available cash, expected operating cash flows, and borrowing availability should cover liquidity needs for at least 12 months. Fiscal 2023 capital expenditures were estimated at $53–$58 million, including $42.6–$47.6 million for the remainder of the year.
Outlook, risks, and unusual items
- Management cited a pipeline supporting approximately 7.5% system-wide unit growth in 2023 and expects a 7%–10% unit-growth pipeline thereafter. Three company-owned restaurants opened and two closed in Q1 2023. Development delays from utilities, permitting, inspections, construction, and labor challenges were expected to continue during 2023.
- Management noted ongoing exposure to inflation, consumer spending and sentiment, wage increases, commodity and supply-chain volatility, construction costs, and interest rates. Food costs improved in Q1, while wage inflation remained above historical averages. The company said it could not predict customer willingness to dine out amid inflationary and recessionary pressures.
- Q1 restaurant impairments, closure costs, and asset disposals totaled $1.6 million, including closure costs related to two restaurants closed in the quarter and early lease-termination settlements. The filing states there were no restaurant impairments in either comparative quarter. The company did not anticipate a significant number of permanent closures in the foreseeable future.
- Borrowings bear variable interest rates. The filing estimated that a 1 percentage-point rate change would affect annualized pretax interest expense by approximately $0.5 million. The average borrowing rate was 7.74% in Q1 2023 versus 3.22% in Q1 2022.
- The company reported no material legal proceedings and no material changes to the risk factors in its prior Form 10-K. It described ordinary-course claims as uncertain, but believed unfavorable outcomes were remote or potential losses immaterial. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable-sales and unit growth can continue, and how much growth reflects pricing, traffic, and new-store contributions.
- Whether restaurant-level margin improvement is sustainable as food costs, wages, occupancy, and other operating costs change.
- Whether the company can fund its $53–$58 million capital-expenditure plan while maintaining liquidity, given low cash, substantial lease obligations, and variable-rate debt.
- Whether Q1 operating cash flow improvement persists; management attributed part of it to working-capital timing.
- Whether development delays, consumer pressures, inflation, or higher interest rates affect planned openings, sales, and profitability.