Hungry investors flocked to the Noodles & Co. (NASDAQ:NDLS) and Potbelly (NASDAQ:PBPB) IPOs, hoping to cash in on the fast-casual segment that turned Chipotle Mexican Grill (NYSE:CMG) into a rock star. Straddling the fast-food and casual-dining markets, these chains offer the quick-service convenience of fast food but at a quality that's closer to that of sit-down eateries.
This model is clearly still working for Chipotle, which posted a jaw-dropping 13.4% spike in comps during the first three months of this year. It apparently isn't working for just about anybody else.
Potbelly reports quarterly results next Tuesday afternoon, and we'll get a great snapshot of how toasted sandwiches are working out for the rapidly expanding chain then. However, Noodles & Co. checked in with disappointing financials after yesterday's market close.
Noodles & Co. saw its revenue climb 10% to $89.5 million during the quarter. That would be admirable growth if this was a mature concept, but Noodles is still expanding quickly. It has seen the number of its company-owned restaurants climb 17% to 331 over the past year. Franchisee-owned units grew 24% to 63 locations. You don't need to be a math whiz to see the problem when expansion is outpacing sales growth at the 394-unit chain. The company posted a 1.6% decline in systemwide comps for the quarter, fueled by a roughly 4% drop in traffic that was partly offset by a 2.2% increase in prices.
Noodles & Co. blamed the weather, of course. That's been the rallying cry for operators pumping out negative same-store trends this earnings season. However, that tune gets old when you see Chipotle clock in with its store-level increase of 13.4%. There's no denying that January's rough winter storms slowed consumers down in major markets. Chipotle's regional layout of stores was more favorable than that of many chains, including Noodles & Co. with its strong northeastern focus. However, Chipotle stores are also in many markets that were snowed-in earlier in the quarter, and it didn't stop Chipotle fans from weathering the storm. Why? Chipotle is special. If one has a craving for a barbacoa burrito or a carnitas bowl, it's not an easy fix. The passion just isn't there for Noodles & Co. just yet. Its biggest seller is a bowl of mac and cheese, and that's a cheap and easy meal to make at home.
We can't entirely dismiss the weather as a factor. This was Noodles & Co.'s first quarter of negative comps since going public last summer. The rub here is that it has now posted back-to-back quarters of profitability that fell short of Wall Street expectations. You can't be a growth stock if you're disappointing analysts, and that shortcoming is magnified when you're still a rookie.
Speaking of rookies, Potbelly shares also moved lower on the news. Investors are apparently bracing for a weak report out of the sandwich maker since it has a similar concentration in markets where weather wasn't exactly kind earlier in the year. Despite last year's IPO buzz, it's pretty clear that the next Chipotle was the original one.
Rick Munarriz 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.