Image source: Noodles & Co.
One of last year's least appetizing restaurant stocks is kicking off 2016 with a tasty bang. Shares of Noodles & Co. (NDLS +1.21%) soared 14% last week, bucking the trend of a reeling market that suffered its worst initial week of trading in ages.
There was no material news out of the fast-casual chain specializing in international pasta dishes. Yes, it did put out a press release on Tuesday, detailing some of its new initiatives for 2016.
- It announced the launch of an interactive website that emphasizes the chain's customizable meal options.
- Noodles & Co. reintroduced Family Nights where kids can eat for free on Thursdays for the month of January.
- The chain also introduced a gluten-free cheese sauce, giving folks trying to steer clear of gluten a new dining option.
None of these announcements would normally drive the stock higher, and some of the items aren't exactly new. However, it can also be argued that Noodles & Co. stock was looking for any kind of excuse to rally. The shares plunged 63% last year, and with tax-loss selling pushing down the shares into the single digits for the first time last month it's entirely reasonable to see opportunistic investors step up and snap up the depressed shares.
Then again, it's also easy to see why Noodles & Co. has fallen out of favor. It has missed Wall Street's profit targets in each of its past four quarters. The surprisingly swift fall of Chipotle Mexican Grill (CMG +1.33%) from grace opens the door for a new darling in fast casual, but Noodles & Co. certainly hasn't earned that pole position.
Everyone's freaking out about Chipotle's posting its first quarter of negative comps as a public company, but that was Noodles & Co. in its most recent quarter, where systemwide comps slipped 0.9% since the prior year's third quarter.
Noodles & Co. also posted a small deficit for the period, something that Chipotle has never done. The pasta flipper is in a funk. Margins are contracting as rising labor, occupancy, and other line items are growing faster than sales.
It's still opening new locations. The chain count has grown from 430 to 488 over the past year, but one has to wonder if Noodles & Co isn't better off focusing on turning things around instead of cranking out more eateries with crumbling unit-level dynamics. All but 64 of those eateries are owned by the company, so this isn't a company that can just sit back and collect royalty checks. There's plenty riding on its day-to-day operations, and it's just not happening.
It's been a wild ride for investors. The stock went public at $18 in 2013, topping $50 in its first few days of frenzied trading. Chipotle's success played a big part in the magnetism. Wall Street loves theme, and fast casual was the flavor of the month. Things clearly haven't panned out for Noodles & Co., explaining why the stock dipped into the single digits on the final trading day of 2015.
Last week's pop was a welcome break, but Noodles & Co. is going to have to earn any upticks beyond what seems to be little more than a dead cat bounce.
