Often when I hear that bad weather caused a particular company to miss its earnings estimates, I am somewhat cautious. It is not out of the realm of possibility for a management team to deflect some of the blame for their operating inefficiencies on events largely out of their control. However, in the case of Noodles & Company (NDLS -7.14%), severe weather patterns really did have an enormous, negative impact on the company's earnings in the recently reported quarter. The impact was so large that it sent shares of the company's stock down approximately 8% in after-hours trading.
All other signs, however, point to a robust and viable growth story for Noodles & Company. The recent weakness appears to be a nice buying opportunity for savvy investors seeking long-term growth in the restaurant industry and an alternative to popular names like Chipotle Mexican Grill (CMG 0.40%) and Panera Bread (PNRA).
Source: Company Facebook Page
The weather impact
Noodles' latest results, which represent only the second earnings release of the newly public company, disappointed on both the top and bottom lines.
Fourth-quarter revenue of $91.5 million slightly missed the consensus estimate of $92.5 million. However, diluted earnings per share of $0.08 significantly missed the average analyst estimate of $0.11.
In the company's release, Noodles' Chairman and CEO Kevin Reddy explained the ongoing battle against inclement weather: "Nearly 80% of our restaurants are located in areas severely affected by atypical weather, including the Mid-Atlantic, Upper Midwest[,] and Rocky Mountain West. In fact, more than 30% of our operating days thus far have seen either measurable precipitation or temperatures at least [20] degrees below normal."
The ramifications of the severe winter are expected to transition into the company's first quarter as well. Management expects a 300-350 basis point negative impact to revenue and a $0.03 negative impact to diluted EPS in the current quarter as a direct result of worse-than-anticipated weather.
Growth story is intact
Despite the gloomy, weather-related headlines, Noodles & Company reported solid growth on a year-over-year basis. The company grew revenue 17.4% in the quarter, driven by increases in company-owned store sales of 4.3% and franchised store sales of 1.5%. For the full year, revenue grew 16.8%. Although the company's diluted earnings growth was weaker, the results still showed growth. Noodles & Company grew EPS 14.3% in the fourth quarter and 9.1% for the full year.
Source: Company Facebook Page
While much of the company's growth was slowed due to the aforementioned weather, management still opened up new restaurant locations at a feverish pace. A dozen new locations were opened in the most recent quarter, eight of which were company-owned and four of which were franchised. In 2013, Noodles & Company opened up 53 new restaurants in total, including 42 company-owned locations and 11 franchised locations.
The pace at which the company is opening new locations is impressive. However, equally impressive is its focus on company-owned locations. Considering sales growth at company-owned locations is significantly outpacing that of franchised locations, 4.3% to 1.5% in the most recent quarter, respectively, management's current expansion strategy is ideal.
Also, Noodles & Company is still very small when compared to the industry's more noted and larger peers like Chipotle Mexican Grill and Panera Bread. At the end of the fourth quarter, Noodles & Company had only 380 total restaurant locations, which is far below Chipotle's store count of 1,595 and Panera's 1,777.
The company's small store count leaves massive room for growth in domestic markets. Management at Noodles & Company expects to open 42-50 new company-owned restaurant locations in 2014 and an additional 10-15 new franchised locations. The pace represents solid new-store opening growth and should keep Noodles & Company weighted toward company-owned stores.
The next Chipotle?
Since many investors often refer to Noodles & Company as a smaller version of Chipotle, or even Panera, it is beneficial to see how the company's expected growth stacks up to its larger competitors.
| Company | Revenue Growth | EPS Growth 2014 |
|---|---|---|
| Chipotle | 18% | 23.3% |
| Noodles | 16.6% | 25% |
| Panera | 7.4% | 4% |
Although impressive compared to Panera, Noodles & Company is not expected to grow at rates that are much faster than Chipotle in 2014.
Source: Noodles & Co. Facebook Page
Bottom line
While Noodles & Company appears to be a solid long-term investment, based on its diminutive size and aggressive expansion plans, projections indicate that it is not yet a Chipotle; it can not even match the much larger company's revenue growth.
However, investors seeking a viable alternative to the larger and more popular industry leaders would do well to consider the small-cap company for long-term growth. If management can continue to expand, Noodles & Company could very well end up being a Chipotle in the making and a stock worth holding for years.
