Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Noodles & Company (NDLS 1.70%) collapsed on Wednesday after the company missed analyst estimates for its first-quarter earnings and dramatically lowered guidance. At noon, the stock was down about 17%.
So what: Noodles reported revenue of $105.8 million, an 18.1% year-over-year increase. This was mostly driven by new restaurant openings, as systemwide comparable-store sales increased by just 0.9% during the quarter. Analysts were expecting revenue to be a few million dollars higher. Non-GAAP EPS of $0.03 per share was two cents short of analyst estimates, as well as two cents lower than the $0.05 reported for the first quarter of 2014.
While Noodles' results were only slightly off, the company's guidance was extremely disappointing. The company expects to grow its store count by between 12% and 14% for the full year, with comparable-store sales growing at a low single-digit rate. After previously guiding for double-digit EPS growth, the company has slashed its earnings guidance, now expecting flat non-GAAP EPS in 2015.
Now what: As Noodles & Company attempts to grow into a national brand, the extremely slow growth in comparable-store sales should be concerning. Comparable-store sales only include stores that have been open for at least 18 months, so it excludes the typically lower sales at new restaurants.
Even after the drop in the stock price, Noodles trades for about 48 times 2014 GAAP earnings, and with non-GAAP earnings expected to be flat in 2015 and first-quarter GAAP earnings plunging into the red, this valuation looks awfully optimistic. The market was right to punish Noodles & Company stock, and the company will need to prove that it deserves its lofty valuation going forward.