Noodles & Company — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the fiscal quarter ended September 29, 2020, and the first three fiscal quarters of 2020, compared with the periods ended October 1, 2019. Noodles & Company operated 454 restaurants in 29 states: 378 company-owned and 76 franchised. COVID-19 materially disrupted restaurant operations; the company reported that more than 90% of dining rooms were open at quarter-end.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First three quarters 2020 | First three quarters 2019 |
|---|---|---|---|---|
| Total revenue | $106.0 million | $118.3 million | $286.5 million | $348.5 million |
| Operating income (loss) | $0.7 million | $5.0 million | $(16.7) million | $5.2 million |
| Net income (loss) | $(0.1) million | $4.2 million | $(19.4) million | $2.8 million |
| Adjusted EBITDA | $7.7 million | $11.0 million | $6.2 million | $27.6 million |
| Operating cash flow | Not separately stated | Not separately stated | $8.3 million | $16.3 million |
- Q3 revenue fell 10.4% year over year; first-three-quarter revenue fell 17.8%. Company-owned comparable sales were down 3.6% and franchise comparable sales down 5.0% in Q3, for a 3.8% system-wide decline. For the first three quarters, system-wide comparable sales declined 14.3%.
- Comparable sales improved during Q3: system-wide sales were down 8.2% in the four weeks ended July 28, down 4.7% in the four weeks ended August 25, and up 0.4% in the five weeks ended September 29. Company-owned sales were up 1.1% in that final period.
- Q3 operating margin was 0.7%, versus 4.3% a year earlier; the first-three-quarter operating margin was (5.8)%, versus 1.5%. Q3 net margin was (0.1)%; year-to-date net margin was (6.8)%.
- Q3 restaurant-level cost of sales and labor improved as a share of restaurant revenue: cost of sales was 24.8% versus 25.3%, and labor was 29.9% versus 32.5%. Occupancy rose to 11.2% from 10.4%, while other restaurant operating costs rose to 18.6% from 14.7%, largely reflecting increased delivery fees.
- At September 29, cash was $8.6 million, total assets $363.2 million, and total stockholders’ equity $32.9 million. Debt was $44.0 million before $1.8 million of unamortized issuance costs; operating lease liabilities totaled $244.8 million. The company reported $52.3 million available for future borrowing and $3.2 million of letters of credit outstanding.
- For the first three quarters, investing cash outflow was $9.9 million, mainly capital expenditures of $9.9 million; financing cash outflow was $0.3 million. Cash decreased $1.8 million from year-end 2019.
Material changes and notable items
- COVID-19 shifted demand toward takeout and delivery. Management said off-premise strength and digital growth helped sales recover, but delivery fees pressured restaurant-level margins. Third-party delivery fees were 5.5% of total revenue in Q3 2020, versus 1.6% in Q3 2019.
- The company amended its credit facility in June 2020. The amendment set borrowing rates at LIBOR plus 3.25% through Q3 2021, waived specified leverage and fixed-charge covenants through Q1 2021, revised later covenant thresholds, and restricted capital expenditures. The company stated it was covenant-compliant at quarter-end.
- Operating cash flow fell to $8.3 million from $16.3 million year to date, reflecting the pandemic-related decline in earnings and working-capital changes. The company drew $55.5 million and repaid $54.1 million of debt during the period.
- Four company-owned restaurants were permanently closed in the first three quarters, and five restaurants were impaired. The company also recorded $4.0 million of impairment, closure and disposal costs year to date.
- Q3 franchise royalties resumed after the company forgave royalties due for Q2 because of the pandemic. Nine company-owned restaurants were sold to a franchisee in 2020; the filing attributes part of the year-over-year revenue decline to refranchising.
Outlook, risks and contingencies
- Management estimated FY2020 capital expenditures of approximately $11.5 million to $12.0 million, primarily for maintenance and four company-owned restaurant openings. It expected to increase unit development as part of its 2021-and-beyond growth plan.
- Management believed available cash, expected operating cash flows and borrowing availability would meet liquidity needs for at least the next 12 months. It also stated it expected to remain in compliance with debt covenants.
- The duration and effects of COVID-19 remained uncertain, including possible dining-room restrictions, customer behavior, economic conditions and supply-chain disruption. Management cautioned that these factors could materially adversely affect the business.
- Other disclosed risks include variable-rate debt and uncertainty about the future of LIBOR, commodity and wage inflation, and possible changes in minimum-wage requirements. A 1% interest-rate change would alter annualized pretax interest expense by approximately $0.4 million.
- The company reported ordinary-course legal claims but said an unfavorable outcome was remote or any potential loss range was not material. It stated there were no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether the recent comparable-sales recovery continued after quarter-end, and how much depended on off-premise and digital orders.
- Whether delivery costs, occupancy leverage and other operating expenses continue to pressure margins as dining rooms reopen.
- Cash generation, borrowing availability and covenant compliance under the amended credit facility, including the effect of its covenant waivers and future thresholds.
- Whether planned FY2020 capital spending and restaurant openings were achieved, and whether the anticipated development expansion for 2021 remained viable.
- The future impact of COVID-19, lease obligations, restaurant impairments or closures, and variable-rate borrowing costs.