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Earnings Reports From Noodles & Company and Panera Make Chipotle Look Extraordinary

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Fast-casual restaurants Noodles & Company (NASDAQ: NDLS  ) and Panera Bread (NASDAQ: PNRA  ) reported earnings last week. The numbers were mixed for both companies, and one important takeaway for investors is that the level of performance being delivered by Chipotle Mexican Grill (NYSE: CMG  ) is truly extraordinary in comparison with its competitors.

Noodles & Company is already getting cold
Noodles & Company had its IPO last June, and appetite for shares in the soup and pasta restaurant chain was quite healthy at the time: Shares of Noodles & Company more than doubled in their first day of trading as many investors believed the company was on its way to becoming the next Chipotle.

Those expectations proved to be overly optimistic, though. Noodles has delivered a disappointing performance over the past several quarters, and the numbers reported last week are hardly a reason for much optimism.

Noodles & Company announced an increase of 10.1% in total sales during the first quarter of 2014 to $89.5 million. However, this increase was solely due to 14 new restaurants opened during the quarter, as comparable restaurant sales declined by 1.6% on a systemwide basis versus the same quarter in the prior year.

With a relatively small store base of 331 company-owned restaurants and 63 franchised locations as of the end of the last quarter, Noodles & Company is materially smaller than Chipotle and its 1,637 restaurants.

However, while Chipotle is generating extraordinary growth rates in same-store sales, Noodles & Company seems to be reaching a slowdown at a much earlier stage, and this says a lot about demand strength when comparing Chipotle with Noodles.

Panera needs some improvements
Panera announced a sales increase of 8% to $605 million during the first quarter of 2014. Like Noodles & Company, the company relied mostly on new stores for that growth, as same-bakery-cafe sales remained almost flat during the quarter, with increases of only 0.1% at both company-owned and franchised locations.

Panera ended the quarter with a total of 1,800 bakery-cafes, 881 of them company-owned and 919 franchised stores. This means Panera is bigger than Chipotle in terms of store count, although Chipotle made almost 50% more in sales during the last quarter. Still, the main point is that Panera is no match to Chipotle when it comes to sales growth in the fast-casual industry.

Panera is implementing a series of initiatives under its "Panera 2.0" program to improve customer service and overall operational efficiencies. This is an area in which the company has plenty of room for progress, and better service could be a big positive for Panera in terms of sales growth. However, Panera has a long way to go before it can be measured against Chipotle in terms of growth and performance.

Delicious growth from Chipotle
Chipotle has been an undisputed growth leader in the fast-casual restaurant business over the past several years. Success attracts competition, and growth tends to slow down as companies become bigger over time. However, Chipotle continues demonstrating its uniqueness by sustaining extraordinary performance.

Revenue during the first quarter of 2014 grew by an impressive 24.4% to $904.2 million. Unlike Noodles and Panera, Chipotle benefited from both a growing store base and steeply rising same-store sales during the quarter.

Chipotle opened 40 new restaurants in the first quarter of the year, bringing the total restaurant count to 1,637 locations. At the same time, comparable-store sales increased by a whopping 13.4% during the quarter, and management highlighted increased traffic as the main reason for this remarkable performance.

The company will be raising prices to compensate for rising food costs, and this is always a risk to watch in the aggressively competitive restaurant industry. However, considering the explosive performance generated by Chipotle, it looks as if demand is strong enough to absorb a moderate price increase, so investors in Chipotle should profit from both growing sales and improved profit margins in the medium term.

Bottom line
A harsh winter and lackluster consumer spending have negatively affected many companies in the consumer sector in recent months. Noodles & Company and Panera are no exception. When it comes to Chipotle, on the other hand, the company continues firing on all cylinders in spite of challenging industry conditions, and that's a great reflection of quality and strength from the organic burrito maker.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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Related Tickers

9/1/2015 11:58 AM
CMG $710.18 Up +0.17 +0.02%
Chipotle Mexican G… CAPS Rating: ***
NDLS $12.09 Up +0.17 +1.43%
Noodles & Company CAPS Rating: **
PNRA $174.82 Down -3.48 -1.95%
Panera Bread CAPS Rating: ****