Once Again, Noodles & Co. Is No Chipotle

Noodles & Co. struggles again.

Rick Munarriz
Rick Munarriz
Apr 30, 2014 at 4:30PM
Consumer Goods

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.