Noodles & Company — FY2019 Form 10-K
Business context and period. The filing covers the 52-week fiscal year ended December 31, 2019; it is an annual report, not a standalone fourth-quarter filing. Noodles & Company operates fast-casual restaurants serving globally inspired dishes. At year-end it had 389 company-owned and 68 franchised restaurants across 29 states and Washington, D.C.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $462.4 million | $457.8 million |
| Restaurant revenue | $456.7 million | $453.7 million |
| Operating income (loss) | $5.4 million | ($3.8 million) |
| Net income (loss) | $1.6 million | ($8.4 million) |
| Diluted EPS | $0.04 | ($0.20) |
| Operating cash flow | $30.1 million | $5.3 million |
| Capital expenditures | $17.4 million | $14.3 million |
| Cash at year-end | $10.5 million | $4.7 million |
Revenue grew 1.0%. System-wide comparable sales rose 2.8% (company-owned 2.9%; franchise 2.5%); company-owned average unit volume increased 3.9% to approximately $1.16 million. Restaurant contribution, a non-GAAP measure excluding corporate costs, increased to $73.4 million from $68.2 million, and its margin rose to 16.1% from 15.0%. Adjusted EBITDA was $38.4 million versus $33.4 million; GAAP EBITDA was $26.8 million.
Cost of sales fell to 25.7% of restaurant revenue from 26.7%, attributed to supply-chain initiatives and menu pricing. Labor remained 33.0% as efficiency gains offset wage inflation. Other restaurant operating costs rose to 14.6% from 14.5%, partly due to delivery fees. Interest expense declined 31.7% to $2.9 million.
Fourth-quarter 2019 revenue was $113.9 million; operating income was $0.2 million and net loss was $1.2 million. Company-owned comparable sales increased 1.4% in the quarter. Quarterly results were uneven, including an operating loss in Q1 and a net loss in Q4.
Balance sheet, debt, and liquidity
At December 31, 2019, the company reported $42.6 million of borrowings under its credit facility, excluding $1.4 million of unamortized issuance costs, and $3.2 million of letters of credit. Cash was $10.5 million, with $54.0 million available for future borrowing under the amended facility. The company said it was covenant-compliant and expected to meet covenants through at least FY2020, while cautioning there was no assurance.
The November 2019 credit amendment extended maturity to November 20, 2024, increased the revolving facility from $65 million to $75 million, delayed leverage-covenant step-downs, and raised capital expenditure limits. Lease obligations are substantial: undiscounted contractual lease payments were $361.6 million, while recognized lease liabilities totaled $248.6 million. Adoption of lease accounting in 2019 materially increased reported assets and liabilities; year-over-year balance-sheet comparisons are therefore not directly comparable. Total current assets were $29.3 million versus current liabilities of $58.0 million.
Changes, outlook, risks, and unusual items
- The company returned to GAAP profitability after two loss years, with lower impairment and closure costs than in 2017, improved restaurant-level margins, and higher operating cash flow. The 2019 cash-flow improvement also reflects that 2018 included $11.0 million of final data-breach payments.
- Restaurant count declined from 459 to 457. In 2019, the company opened four company-owned restaurants, acquired one franchise restaurant, sold five company restaurants to a franchisee, and closed five company restaurants. The sale of nine restaurants closed in January 2020; FY2019 included a $3.6 million asset write-down related to that transaction. Total restaurant impairment, closure, and disposal expense was $7.7 million.
- Management planned 10–15 system-wide openings in 2020 and targeted 5%–7% annual unit growth beginning in 2021. Elsewhere, the filing says 8–11 company-wide openings in 2020; investors should clarify the difference between these stated plans. Expected 2020 capital expenditures were $20–$30 million.
- Management cited continuing wage and benefit inflation, though labor-efficiency initiatives offset higher base labor costs in 2019. Other key risks include consumer demand and competition, food safety and supply costs, hiring and retention, lease commitments, covenant compliance, variable interest rates, and execution of digital, delivery, and franchise strategies.
- The filing identified COVID-19 as an emerging risk following its December 2019 emergence, but said the extent of any operational or financial impact could not then be predicted. The company also disclosed historical cybersecurity exposure: a 2016 payment-card incident resulted in approximately $11 million in payments to card companies and related costs; it reported no further breach-liability obligations outstanding.
- The company does not anticipate cash dividends in the foreseeable future. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified. Ordinary-course litigation matters were described as remote or not material based on management’s assessment.
Important facts for investors to verify
- Reconcile the 2020 opening outlook of 10–15 system-wide units with the separate 8–11 company-wide target, and track actual openings and the 2021 growth plan.
- Assess whether comparable-sales growth and restaurant contribution margin can be sustained as wage, benefit, and delivery costs rise.
- Review liquidity, debt repayments, covenant headroom, and the effect of variable rates; a 1 percentage-point rate change was estimated to affect annual pretax interest expense by about $0.4 million.
- Monitor lease-related obligations and the distinction between lease liabilities recognized on the balance sheet and undiscounted contractual lease payments.
- Evaluate the impact of COVID-19 and any subsequent developments, which the filing could not quantify, along with impairment risk and the performance of refranchised locations.