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Noodles & Company (NASDAQ: NDLS ) looks like the newest Wall Street darling. Shares of the fast casual concept jumped from the $18 IPO price two weeks ago all the way up to $51, before settling in the $40 range it trades in today. Among the more flattering comparisons the pasta chain has received is that it's the "next Chipotle (NYSE: CMG ) ," the burrito chain whose shares are up about 800% since its 2006 IPO.
On the surface, there are several similarities between the two restaurateurs: both started in Denver, Noodles CEO Kevin Reddy used to work at Chipotle, and both employ a similar concept -- starting with a base product that's easily customizable: burritos for Chipotle, pasta for Noodles. Despite the fact that Chipotle is much bigger, both companies are nearly the same age: Chipotle was founded in 1993, and Noodles in 1995. A closer look at the numbers, however, reveals that this comparison is a bit facile, as Noodles just isn't packing the same punch as Chipotle.
Average unit volume
For example, Noodles severely lags Chipotle in sales per restaurant, one of the more overlooked metrics in the industry. In 2012, Noodles had an average unit volume of $1.178 million in 2012, compared to $2.07 million for Chipotle in 2012. In 2006, the year Chipotle had its IPO, average unit volume was $1.53 million, and has grown through an impressive track record of comparable sales.
From 2004-2006, same-store sales increased by an average of 12.4%, a sure sign of a brand on fire. By comparison, Noodles & Company averaged a same-store sales increase of just 4.2% in the last three years, indicating that, despite a smaller store count and more capacity, the brand just doesn't seem to have the draw of Chipotle.
Ultimately, sales only matter if the dollars are hitting the bottom line. Here, Chipotle's ahead, as well. At Noodles, last year's net margin was just 1.7%, while Chipotle's in 2006 was 5%. Restaurant level operating margins, perhaps a better long-term indicator of success, were 27.1% at Chipotle last year, having grown steadily for much of the last 10 years. Operating margins at Noodles, on the other hand, have held near 20.5% over the last three years, actually falling slightly during that time.
Noodles and burritos
The real appeal of Noodles and Company seems to come from its ambitious expansion plan. In its S-1 filing, management says it believes the company's store count can grow from 339 stores today to 2,500 in 15-20 years. There's no question that management can continue opening stores, but the company needs to be able to maintain enough appeal to make the expansion profitable. Jack in the Box (NASDAQ: JACK ) , by comparison, has over 2,500 restaurants nationwide, including 600 Qdoba Mexican Grills, yet its market cap sits at just $1.8 billion, a similar valuation to the much smaller Noodles. Notably, Qdoba was once hailed as the successor to Chipotle, but its parent company recently announced it would close 67 underperforming locations of the burrito chain because of declining same-store sales.
Noodles may not be the next Qdoba, but it won't the next Chipotle either, and shareholders need to be wary of the cannibalization that could result from overexpansion. Investors should wait to see some improvement in the above categories before pushing Noodles' share price above its already bloated level.
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