Noodles & Co. vs. Potbelly: Who Wins This Food Fight?

Noodles & Co. (NASDAQ: NDLS  ) and Potbelly Corporation (NASDAQ: PBPB  )  went public this year and both were hot on their first days of trading. Each company has reported earnings in the last month, with one missing estimates and the other exceeding estimates. Noodles currently sits over 23% below its 52-week high and Potbelly is more than 19% lower; with these large pullbacks, now is the perfect time to take a look and see which of the two restaurant chains has the best long-term potential for investors.

The restaurant chains
Noodles & Co. is a fast-casual restaurant chain that offers the world's favorite noodle dishes, sandwiches, salads, and soups. The core principle of the company is that quality food can be served fresh, fast, and in an inviting atmosphere, without emptying the wallets of its customers. The company was founded in 1995 and went public in June of this year.

Potbelly owns and operates Potbelly Sandwich Shops. Its products include sandwiches, soups, salads, and shakes, all of which are made fresh to order. The company's vision is to become "The Best Place for Lunch" in every market it opens a location. Potbelly was founded in 1977 and went public in October of this year.

Recent reports

Noodles

On Nov. 6, Noodles reported third quarter results that did not sit well with the market. Here's an overview of the key metrics:

Metric Reported Expected
Earnings Per Share  $0.11  $0.11
Revenue  $88.9 million  $91.0 million

Earnings per share grew to $0.11 from $0.01 during the same period in 2012, while revenue rose 15.4% to $88.9 million; these were both driven by a 2.4% increase in comparable-restaurant sales. Arguably the strongest metric reported was adjusted net income rising 44.6% to $3.3 million and management was vocal about this statistic in the report. Noodles opened 20 new restaurants during the quarter, of which 15 are company owned and the other five are franchises. The company now has 368 locations in 29 states and the District of Columbia.

Potbelly

Third quarter earnings were released on Nov. 12 and Potbelly exceeded analyst expectations on both the top and bottom lines. Here's a summary of the report:

Metric Reported Expected
Earnings Per Share  $0.15  $0.09
Revenue  $78.00 million  $77.88 million

Potbelly's earnings per share increased 25% and revenue rose 11.7% year over year. Comparable-restaurant sales grew 2.5% and the company's adjusted net income rose an impressive 26.7%. Nine new locations were opened during the quarter, including eight company-owned restaurants and one franchise. Potbelly now has 307 locations in 18 states, the District of Columbia, and the Middle East. 

Management's thoughts

The comments made by management teams in quarterly reports can be a direct indicator of how well a company is performing now and going forward. Here are the two key comments made by the Chief Executive Officers of each company:

Noodles

"Our excellent 45% earnings growth in the third quarter despite a tepid consumer environment is continued evidence of Noodles & Company's ability to sustain our long track record of strong, consistent growth." CEO Kevin Reddy

"...our investments in building the brand have us well positioned to increase our guidance on comparable restaurant sales and new unit growth for the full year 2013, supporting one of the most attractive growth profiles in the industry." CEO Kevin Reddy

Potbelly

"This was our first quarter of reporting as a public company and it was important that we achieved the growth results in line with our long-term targets... Additionally, as a result of our IPO, we have significant excess cash to fund our growth." CEO Aylwin Lewis

"We view the IPO as a significant milestone, but not a destination. Our focus remains on operating the business and delivering long-term shareholder value." CEO Aylwin Lewis

Both companies are very positive on the future and this is what investors like to hear. The comments on growth being their primary visions are fantastic, as each company has under 400 locations; I believe both could have over 1,250 locations in 10 years if expansion efforts and plans are executed perfectly. Overall, I think these CEOs are two of the best in the restaurant business. 

Guidance for 2013

Noodles and Potbelly also updated their guidance for fiscal 2013. Here are the current expectations:

Noodles

Noodles sees full-year earnings coming in around $0.39-$0.41, representing a 26%-32% growth from 2012. Revenue is projected to be $348-$352 million, based on comparable-restaurant sales growing 3.25%-3.75%. The company expects to open 41 to 42 company-owned restaurants and 9 to 10 franchised locations. 

Potbelly

Potbelly predicts net income of $7.5 million-$8.1 million, in-line with the consensus earnings per share estimate of $0.39. Revenue is expected to come in around $300-$303 million, a rise of about 9.7% on average from 2012, with comparable-restaurant growth being in the low single-digits. The company expects to open 40-42 net new locations during the year. 

And the best restaurant chain is....

After reviewing the companies' product offerings, recent earnings, comments by management, and guidance for the full-year of 2013, I believe Potbelly is the better long-term investment today. I believe its product offerings of fresh sandwiches, soups, and shakes tend to appeal to more consumers' taste-buds than the noodles dishes offered by Noodles. Noodles does offer sandwiches and soups as well, but the name points toward an entirely different vision of the menu. Both companies have similar growth prospects when it comes to financials and expansion, but I like that Potbelly is expanding more in its known markets and franchising elsewhere, to keep operations running smoothly.

Potbelly and Noodles have the potential to grow into chains like Panera Bread and Chipotle Mexican Grill. Both reported solid numbers in recent reports, but Potbelly was more loved by the market. I believe Potbelly is the better of the two companies today. However, in the long-term picture an investor could not go wrong with either of them. Take a look and see if your portfolio could use one of these freshly public restaurant chains.

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Related Tickers

7/22/2014 3:59 PM
NDLS $28.23 Up +0.03 +0.00%
Noodles & Company CAPS Rating: *
PBPB $11.88 Up +0.11 +0.00%
Potbelly Corporati… CAPS Rating: **

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