Noodles (NASDAQ:NDLS) Surprises With Q3 Sales

Kayode Omotosho /
2023/11/07 4:18 pm EST

Casual restaurant chain Noodles & Company (NASDAQ:NDLS) reported Q3 FY2023 results beating Wall Street analysts' expectations, with revenue down 1.2% year on year to $127.9 million. On the other hand, its full-year revenue guidance of $504 million at the midpoint came in slightly below analysts' estimates. Turning to EPS, Noodles's non-GAAP profit of $0.04 per share was flat year on year.

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Noodles (NDLS) Q3 FY2023 Highlights:

  • Revenue: $127.9 million vs analyst estimates of $126.1 million (1.4% beat)
  • EPS (non-GAAP): $0.04 vs analyst estimates of -$0.01 ($0.05 beat)
  • The company reconfirmed its revenue guidance for the full year of $504 million at the midpoint
  • Gross Margin (GAAP): 18.1%, up from 16.2% in the same quarter last year
  • Same-Store Sales were down 3.7% year on year (beat vs. expectations of down 4.1% year on year)
  • Store Locations: 468 at quarter end, increasing by 18 over the last 12 months

“Noodles & Company made meaningful traction during the third quarter, evidenced by 200 bps of restaurant contribution margin expansion to 16.4% and nearly 20% growth in Adjusted EBITDA relative to the third quarter of the prior year,” said Dave Boennighausen, Chief Executive Officer of Noodles & Company.

Offering pasta, mac and cheese, pad thai, and more, Noodles & Company (NASDAQ:NDLS) is a casual restaurant chain that serves all manner of noodles from around the world.

Modern Fast Food

Modern fast food is a relatively newer category representing a middle ground between traditional fast food and sit-down restaurants. These establishments feature an expanded menu selection priced above traditional fast food options, often incorporating fresher and cleaner ingredients to serve customers prioritizing quality. These eateries are capitalizing on the perception that your drive-through burger and fries joint is detrimental to your health because of inferior ingredients.

Sales Growth

Noodles is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.

As you can see below, the company's annualized revenue growth rate of 2.8% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre as its restaurant footprint remained unchanged, implying that growth was driven by more sales at existing, established dining locations.

Noodles Total Revenue

This quarter, Noodles's revenue fell 1.2% year on year to $127.9 million but beat Wall Street's estimates by 1.4%. Looking ahead, the analysts covering the company expect sales to grow 2.3% over the next 12 months.

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Number of Stores

A restaurant chain's total number of dining locations often determines how much revenue it can generate.

When a chain like Noodles doesn't open many new restaurants, it usually means there's stable demand for its meals and it's focused on improving operational efficiency to increase profitability. Noodles has picked up the pace over the last 12 months, however, opening 18 new restaurants (4% annual growth) to reach 468 total locations in the most recently reported quarter.

Noodles Operating Retail Locations

Taking a step back, Noodles has kept its locations more or less flat over the last two years compared to other restaurant businesses. A flat restaurant base means Noodles needs to boost foot traffic and turn tables faster at existing restaurants or raise prices to generate revenue growth.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its restaurants that have been open for at least a year, give or take. This is a key performance indicator because it measures organic growth and demand.

Noodles's demand within its existing restaurants has generally risen over the last two years but lagged behind the broader sector. On average, the company's same-store sales have grown by 5.4% year on year. Given its flat restaurant base over the same period, this performance stems from increased foot traffic or larger order sizes per customer at existing locations.

Noodles Year On Year Same Store Sales Growth

In the latest quarter, Noodles's same-store sales fell 3.7% year on year. This decline was a reversal from the 2.1% year-on-year increase it posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.

Key Takeaways from Noodles's Q3 Results

We were impressed by the fact that Noodles beat on same store sales, revenue, and EPS this quarter. Full year guidance was tweaked, but there were no significant changes. For example, full year revenue guidance was reduced by just $1mm at the midpoint (on ~$500 million of total revenue), same store sales were maintained, and margins were raised slightly. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 3.9% after reporting and currently trades at $2.29 per share.

So should you invest in Noodles right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.