Thursday was not such a great day to own shares of Noodles & Company (NASDAQ:NDLS), a quick casual restaurant that serves noodles, pasta, sandwiches, and more, due to the company's substantial share price decline. This decline stems for an earnings release that the company announced yesterday that showed Mr. Market's expectations for it are harder to live up to than some might have wished, resulting in a nearly 10% share price decline.
High expectations left unmet
While Mr. Market expected the company to report earnings per share of $0.11 on revenue of around $91 million, the company came up short on the latter. Despite earning the $0.11 per share that analysts expected, the company saw its revenue rise by only 15.4% to $88.9 million, a miss of nearly 3.5%. This represents a far cry from the $572.5 million brought in by Panera Bread Company (NASDAQ:PNRA.DL) and the even more impressive $826.9 million reported for Chipotle Mexican Grill (NYSE:CMG) that the company is supposed to live up to.
You see, as companies like Chipotle and Panera have grown rapidly over the past few years at the loss of more established chains like McDonald's and Darden Restaurants, new entrants into the industry of quick casual dining have had to live up to exceedingly high expectations. The reason behind this high degree of demand for positive results is that the rewards are well worth it. For instance, Chipotle, which went public at $22 per share in 2006, has seen its revenue increase by 231.7% from $822.9 million to $2.73 billion and its net income rise by an even more impressive 571.2% from $41.42 million to $278 million. As a result of its rapid growth, the company has seen its share price skyrocket to over $528 per share as of today.
Earlier this year, with the market optimistic about companies that offer the quick casual value proposition, shares of Noodles & Company more than doubled from their IPO price of $18 per share to close at $36.75 on their first day of trading. What we have seen in this recent earnings report is that the market may be getting a bit ahead of itself by expecting so much from this very small fish in a very big ocean.
Growth... is it worth it?
The underlying logic here comes down to one thing; cost. Growth is always welcomed in any enterprise, but there is such a thing as paying too much for it. As an example of this, when you have a company that is trading at, say, 194 times last year's earnings, such as is the case with Noodles & Company even at its current price, there are a lot of things that can go wrong. This is especially true when you can acquire shares of stronger competitors like Panera at 28.5 times last year's earnings or even shares of Chipotle at a pricier 60.5 times last year's earnings.
Though it is true that neither of these companies are necessarily "cheap", they are still growing rapidly and have significantly greater resources and market strength than a company like Noodles & Company, not to mention less downside in the event that things don't go according to plan. Perhaps no better example of this last point can be made than by looking at Chipotle's most recent earnings release. After reporting that it failed to meet analyst expectations for its third quarter earnings per share by 4.3%, shares of the company rose (you read that right! ROSE) by more than 16% because of its still phenomenal growth.
However, none of this should mean gloom and doom for investors who own shares or who want to own shares in Noodles & Company. Irrespective of their failure to live up to Mr. Market's expectations, the company still was capable of growing at a good clip. This was, in part, due to the addition of 20 locations (15 of which are company-owned), bringing their restaurant count up to 368, as well as due to a 2.4% increase in comparable-store sales.
Based on the data presented above, it can be reasonably concluded that Mr. Market got a little carried away with the vision of Noodles & Company's potential future. However, the Foolish investor would be wise to take into consideration that, while the company was unable to grow at the rate investors desired, it is still growing rapidly and is still in its infancy. Additionally, with a long-term debt/equity ratio of 0.01, the company is far from insolvent. Because of these promising factors, I do not think it is out of the question that the business can grow further, but the big question for you to ask yourself before investing or deciding to maintain any current investment of yours, is whether you are comfortable paying such a steep price for the growth and value you are receiving.