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Noodles & Co. stock surges on positive sales

The fast-casual chain said its same-store sales have turned positive after years of weakness.

Noodles & Co. said its same-store sales turned positive in March and stayed positive in April, and then the company introduced an item it believes could be a “game-changer” in zucchini noodles.

The result, along with better profits, were cheered on Wall Street: The company’s stock surged nearly 10% on Friday.

“We’ve improved our performance in nearly all key metrics,” Executive Chairman Paul Murphy said on the company’s first quarter earnings call on Thursday, noting that same-store sales, restaurant-level profit margins, turnover, guest satisfaction and employee engagement have all improved.

“I am now more confident than ever in our ability to execute on the opportunities we have to grow the Noodles brand.”

Noodles, whose same-store sales declined 1.3% in 2016 and 2.4% in 2017, said that its same-store sales declined 0.2% in the first three quarters of 2018, ending April 3. But company executives said that same-store sales suffered from a combination of bad weather in the early part of the year and the shift of Easter from March to April.

They also said that same-store sales have turned positive, and stayed there, and now expect second quarter same-store sales to rise 1% to 3%.

“We’re happy with the growth of overall comparable restaurant sales,” CEO Dave Boennighausen said. “Underlying trends did improve, and there was meaningful, sequential improvement in Q2.”

The biggest potential upside for the chain is Zoodles, introduced last week that provides the chain with a noodle-like option that satisfies people looking to cut carbohydrates.

The company has been eager for the product’s introduction, following nine months of testing. Murphy called the product “game-changing.” Executives said that the product performed well in tests and has performed well in early results from its national introduction.

“It’s too early to determine, but we’re very encouraged by the results during testing and the first several days” following its introduction, he said.

The company said that the product performed well with consumers looking to cut down on carbs who had stopped going to Noodles because of its carb-heavy menu. But executives also said that loyal customers kept coming, too.

The product enables Noodles to “maintain the heritage of the brand while eliminating the veto vote,” Boennighausen said.

And, he said, the product gives Noodles a new platform, because the company can spiralize other fruits and vegetables just as easily as it can zucchini.

Noodles’ stock surge continued a run on the stock that has lasted all year, as the chain has improved its profits and sales. The company’s shares are up more than 64% so far this year, the best performance of any restaurant chain on Wall Street.

Indeed, company executives found themselves in a position they haven’t been in during the chain’s five years as a publicly traded entity: Having to explain to analysts why their sales projections aren’t in even more positive territory.

“Certainly, we’re remaining somewhat conservative,” Murphy said. “We just frankly launched Zoodles eight days ago. It’s early to make any changes until you get a little more time under your belt, and until the things you saw in the test prove itself out on a national basis over time.”
Sales aren’t just the only reason investors are more enthusiastic about Noodles. Restaurant-level margins continue to improve.

Those margins improved 190 basis points in the first quarter to 12.9% of sales.

Executives believe that margins can improve a lot more than that, too, given the history of the brand.

“This brand has had the potential to be above 20% in the past,” Boennighausen said. “Volume has been the biggest driver of that. But supply chain is one area where we’re confident we can make tremendous improvement and get margins toward the high double-digit range.”

Noodles is also working hard on improving its takeout orders after spending years focusing on dine-in service.

The company has delivery in 15% of its 476 restaurants, which has generated “incremental sales” but comes with lower profits. But the company plans to increase delivery availability in the near future. Noodles said it is talks with other delivery partners that could bring the service available to half of its system.

The company’s rewards program is driving more online ordering, and the company has added quick-pickup shelves at all of its locations to improve the convenience of those orders.

Meanwhile, Noodles has made adjustments to improve allocation of off-premise orders to emphasize speed and accuracy.

About half of Noodles’ sales are takeout.

To be sure, the company isn’t forgetting about those dine-in customers. The company has new plateware and has added self-bussing stations that could encourage diners to bus their own tables and improve cleanliness.

Executives on the call said that part of their sales are improving because the overall industry environment is better. But they insisted that their efforts are gaining traction regardless.

“There’s a bit of a rising tide out there, we recognize that,” Murphy said. “But we really believe the work we’ve done operationally the last six to nine months on brand presentation and menu” is the reason for “the majority of movement” in the company’s sales.

“Most of it is attributable to the strategy we implemented and are executing against and will continue to execute against in 2019.”

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