What happened

Troubles continued today for Noodles & Co. (NASDAQ:NDLS) as the fast-casual pasta chain's shares tumbled after its third-quarter earnings report came out. While comparable sales growth was strong and the overall results were solid, the stock fell, as high expectations were already in place after the stock has surged this year. As a result, the stock was down 22% as of 1:58 p.m. EDT.

A collection of bowls of noodles from Noodles & Co.

Image source: Noodles.

So what

Comparable sales in the quarter increased 5.5%, strong growth at a time when a number of fast food chains are struggling to improve same-store sales. The company's new zoodles (zucchini noodles) menu as well as delivery seemed to drive the uptick in comps. However, overall revenue only grew 2.2% to $116.7 million, as the company had closed nine net restaurants in the last year. That figure was ahead of expectations at $115 million.

Other metrics showed improvement in the underlying business, as restaurant-level operating margin was up 80 basis points to 16.4%, and adjusted earnings per share doubled from $0.02 a year ago to $0.04. CEO Dave Boennighausen said: "We are extremely pleased with our third-quarter results as we continued to gain momentum with our second consecutive quarter of over 5% comparable sales growth. Our results continued to benefit from the successful launch of our zucchini noodle offering in May, as well as from investments in our off-premise business and in the continued improvement in operational execution by our talented team members."

Now what  

Building on the momentum from the quarter, management raised its guidance for the full year. The company now sees revenue of $457 to $460 million, up from $450 to $455 million; comparable sales of 3.5% to 4% compared to prior guidance of 2.5% to 3.5%; and adjusted EPS of $0.01 to $0.04, better than its previous forecast of flat to $0.03.

While the company is clearly executing and the above results and guidance are all strong signs, the sell-off indicates that the stock had become overheated, as shares had nearly tripled over the last year. Noodles & Co. is on the right track, but the company still has a lot of work to build a sustainably profitable business that can deliver for investors, as it has stopped opening new restaurants, and it's only barely profitable now in a highly competitive restaurant market. Given that atmosphere, the sell-off isn't such a surprise.

 

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.