After a Rocky Start to 2014, Is It Time to Bet on Noodles & Co.?

Shares of Noodles & Co. took a dive after the company's latest quarterly results, hurt by its first comparable-store sales decline since 2009. Is it time for investors to buy in?

May 17, 2014 at 9:10AM

                                    Ndls

Fast-casual dining chain Noodles & Co. (NASDAQ:NDLS) has built a great concept focused on noodles -- no surprise there. It adds various assortments of vegetables and meats to them and this allows it to cross cuisine categories, hence its Category of One tag line. Like competitor Potbelly (NASDAQ:PBPB), Noodles & Co.'s fast unit growth has led to very high expectations from investors that have been hard for the company to meet, leading to.a poor stock-price performance to-date.

A case in point was the company's latest quarterly report, where it reported worse-than-expected results. This included its first comparable-store sales decline since 2009, a data point that management blamed on weather-related factors. However, after a double-digit stock price decline over the past 12 months, is Noodles & Co. finally a good bet?

What's the value?
Noodles & Co. has ridden its noodles-based menu to admirable success, as it currently operates a network of nearly 400 stores across the country. Like fast-casual segment leader Chipotle Mexican Grill, Noodles & Co. keeps its menu simple with mostly noodle bowls, soups, and sandwiches, a strategy that has led to healthy store margins of around 20%.  Consequently, the company has been able to grow at a fast pace, as evidenced by a 66% cumulative increase in its overall store base over the past four fiscal years.

In its latest fiscal year, Noodles & Co. continued to post solid growth, reporting a 16.8% top-line gain that was a function of higher per-store sales and a double-digit expansion of its store base. More important, the company's greater average store productivity led to 30% higher adjusted operating profitability. The net result for Noodles & Co. was an uptick in operating cash flow, which will help to fund further store expansion as management tries to gradually build toward its long-term goal of 2,500 stores nationwide.

The million-dollar question
Of course, the question on every investor's mind is: What is the right price to pay for Noodles & Co.'s profit stream, especially in light of its first-quarter slowdown? Investors in Potbelly are likely asking themselves the same question, as the company suffers from a similar nosebleed market valuation, as evidenced by a more than 20 times price-to-adjusted EBITDA multiple as of December 2013.

In its latest fiscal year, Potbelly delivered respectable financial results, including a 9% top-line gain that was the by-product of higher comparable-store sales and a sizable increase in its overall store base. In addition, the company took advantage of more efficient work processes to generate an uptick in its adjusted operating profitability.  Unfortunately, Potbelly's results, while positive, seem to have generally underwhelmed Mr. Market. This has led to a sharply negative performance for its stock price over the past 12 months.

A hard act to follow
The high valuations of both Noodles & Co. and Potbelly are no doubt due to the well-publicized outperformance of the fast-casual segment vis-a-vis the overall dining industry, as well as the unbridled success of fast-casual leader Chipotle. For its part, Chipotle continues to channel very strong growth, as evidenced by a 17.7% top-line gain in its latest fiscal year, which was aided by both higher comparable-store sales and another double-digit expansion of its domestic store base. More important, the company's pricing power allowed it to offset significant commodity cost inflation during the period, which led to an operating margin that hovered near a five-year high.

The bottom line
Noodles & Co., much like Potbelly, went public with sky-high investor expectations that would have been hard to meet even without the recent weather-related issues. Despite a negative stock price performance since its first-day close, Noodles & Co. still sports a healthy price to adjusted EBITDA multiple of more than 19, which is pretty high for a company that only reported 17% top-line growth in its latest fiscal year. While the company has a bright future, with a focus on both high-quality food and profitable store operations, it needs to grow into its valuation and investors would likely be better off letting this opportunity pass them by.

Robert Hanley has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers