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Noodles stock falls 20% following disappointing earnings

But the fast-casual chain continued to generate strong sales thanks to zucchini noodles and off-premise business.
Photograph courtesy of Noodles & Co.

Noodles & Co. continued to generate sales growth thanks to its zucchini noodles and off-premise efforts, but weaker-than-expected profits sent the company’s stock plunging Wednesday.

Noodles stock fell 20% on Wednesday after the company reported earnings of 2 cents per share on net income of $1.1 million, which, though better than the loss the company reported a year ago, still fell short of investor expectations, according to the website Earnings Whispers.

Nevertheless, the Broomfield, Colo.-based company’s stock is still nearly double the value it was at the outset of the year, even with Wednesday’s decline.

That has come largely on a sales recovery that continued into the third quarter ended Oct. 2. Same-store sales in the period increased 5.5%, including 7.6% for franchisee-owned locations, despite “headwinds” due to holiday shifts.

Speaking on an earnings call Tuesday, Noodles executives said that zucchini noodles, or Zoodles, introduced last spring continued to generate sales.

“For years the company struggled with the perception that noodles and pasta are unhealthy for you,” CEO Dave Boennighausen said on the call. “The zucchini noodle has allowed us to address this concern with a platform that tastes great, affirms our authority on noodles and honors our heritage of the brand.”

He said that the company views this as a platform for healthier dishes, and the company is testing “additional healthy noodle forms.”

Noodles is also generating more off-premise sales, which now represent nearly 53% of sales at the chain, up 350 basis points from a year earlier. The company has online ordering, quick-pickup shelves and a new rewards program.

Online ordering in particular has generated results: The company said that more than 15% of sales in the quarter came from online orders, up nearly 600 basis points, Boennighausen said.

The company also has big hopes for delivery. Noodles introduced the service through DoorDash in several markets and delivery is now available in 80% of its company-owned locations.

“With my background coming up the finance ranks, delivery is something I approach with a healthy amount of cynicism,” said Boennighausen, who was the chain’s CFO before he was promoted to CEO last year. But he said the service is improving the chain’s earnings because the sales are incremental and the orders are larger. “We’re still seeing the vast majority of it as incremental business.”

Noodles operates 401 company locations while franchisees operate another 65. The company closed three of its locations in the quarter, and 10 since April, saying the locations were approaching the end of their leases.

Boennighausen said the company expects “an additional four to six closures” during the rest of the year as leases end and their trade areas have shifted. After that, he said, “we anticipate our closures to normalize to a much more normal rate.”

Noodles has largely held the line on development as it has worked to generate sales, though Boennighausen said that the class of restaurants opened last year “continues to perform better than any class in several years, giving us continued confidence in the overall unit potential of the brand.”

He said the company is “working to develop a disciplined approach to more meaningful unit growth” and expects four to eight new locations next year, mostly in the second half.

Paul Murphy, Noodles’ executive chairman, said that many of the newer units will be smaller, with fewer seats, given the chain’s growing off-premise business. “We don’t necessarily have the need for as much seating,” he said. “The ability to do that and the ability over time to have a lower investment cost is not only attractive to us, it’s attractive to franchisees.”

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