Two words defined the first quarter for the restaurant industry: polar vortex. The fierce winter weather was mentioned in the earnings calls of nearly every public restaurant. Luckily, spring has sprung and the warmer weather is boosting restaurant sales. Fast-casual chains like Potbelly (NASDAQ:PBPB) and Noodles & Company (NASDAQ:NDLS) turned in mixed first-quarter results, blamed largely on weather. Could they both be due for a turnaround?
March and April sales look tasty
This survey from Black Box Intelligence tracks sales at over 100 of the largest restaurant brands. For the first time in two quarters, restaurants reported positive same-store sales for two consecutive months; 0.7% in March and 0.6% in April. As for sentiment, only 6% of restaurants expect sales to decline over the next six months, and 58% "also said they plan to spend on equipment, expansion or remodeling in the next six months." Things are looking up for the restaurant industry, but whether or not Potbelly and Noodles & Company can benefit remains to be seen.
Evaluating Q1 and beyond
Noodles & Company's and Potbelly's first-quarter results nearly mirrored each other, right down to their 2014 guidance and weather-related excuses. Potbelly's revenue increased 7.5%, but same-store sales declined 2.2%. Management noted that "significant weather" affected comparable sales. Meanwhile, Noodles & Company also saw decent revenue growth (10.1%) on new unit growth, but same-store sales declined 1.6%. Chairman and CEO Kevin Reddy had perhaps the most dramatic statement about the weather, as he stated that "The first quarter was one of the most challenging ones in recent memory due to unprecedented weather throughout the country."
Both companies reaffirmed similar guidance for 2014: Strong unit growth, between 40 and 50 restaurants at each chain, and low-single-digit same-store sales. Potbelly believes that new product offerings (flatbread sandwiches) will push same-store sales higher in the second half of 2014, and both restaurants believe that more typical weather will boost year-over-year results.
Because we heard weather cited as a reason for slow sales so often from retailers over the course of the winter, it's easy to think of it as an excuse. However, in Potbelly's case, it was founded in Chicago, and today nearly a third of its restaurants (89) are still in Illinois, so it is fair to argue that the weather affected it more than most. Also, while Noodles & Company was founded in Colorado, it boasts the lion share of its locations in the Midwest. When you take the Midwest winter into account, improving spring restaurant sales could benefit Potbelly and Noodles tremendously. Despite this positive news, I think the winter is a bit less of an excuse for Noodles than Potbelly. I mean, if you aren't going to sit down for a plate of pasta in frigid temperatures, when are you?
Noodles & Company's second-largest contingent of stores is in Colorado, while Potbelly's second-largest is in Texas. The data by Black Box shows that the West Coast grew fastest (comps of nearly 3%) in April and March, which may benefit Noodles more than Potbelly. Regardless of which performs better, both Noodles and Potbelly should have a strong second quarter.
The fly in the ointment
The fly in the ointment for both Noodles' and Potbelly's weather thesis is, of course, the Chipotle (NYSE:CMG) comparison. Chipotle overcame the rough weather, as comparable sales accelerated the past two quarters from 9.3% to a whopping 13.4% in Q1. Sales were up 24.4%, and despite having 1,600 locations, Chipotle is opening new restaurants at a faster clip than both Potbelly and Noodles & Company. Chipotle was also the only chain to raise its guidance for same-store sales, to the high single digits for 2014.
It's not that the poor weather didn't impact Chipotle, it's just that its fans were so rabid that they found a way to make it into stores. In explaining the effect, Co-CEO Monty Moran seemed more tempered with his explanation of the winter, as he said: "While sales were understandably down during days of extreme winter weather, when the weather improved our sales recovered to a higher level than before the extreme weather for a few days, before settling back into a normal sales trend."
Every restaurant seems to be compared to Chipotle lately, which isn't entirely fair. Chipotle is the exception to the rule when it comes to restaurant performance. The problem comes when you try to make an investment case for other restaurant stocks because, due to rising food costs, Chipotle's stock has pulled back and looks cheap. It now trades at a forward P/E below both of the aforementioned chains.
The fast-casual sector is growing 11%, far ahead of the restaurant industry as a whole. When you consider that growth, coupled with heavy concentrations of Midwest locations and strong spring sales numbers, you expect Noodles & Company and Potbelly to bounce back. I think both companies should have a strong second half of 2014. However, given its pullback, you should consider Chipotle's stock first.
Adem Tahiri owns shares of Potbelly Corporation. 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.