Outside of BurgerFi, which filed for bankruptcy, is subject to massive complaints from franchisees and was just broken up in a sale process, you’d be hard-pressed to find a publicly traded restaurant company that has had as bad a year as Noodles & Company.
Mostly, that’s because of the stock price. Noodles stock fell about 7% on Friday and is down about 80% for the year. The stock is now trading at around 62 cents, yet another in a long series of 52-week and all-time lows for the fast-casual chain.
The company’s market capitalization is under $29 million, which is what happens these days with chains that operate a bunch of their own locations. Noodles operates about 80% of its 471 restaurants.
The company’s stock performance, and its actual performance, is coming even as some of its contemporaries appear to be thriving. Wingstop and Cava both reported same-store sales in the 20%-plus range and two-year sales in the 30%-plus range, while chains such as Chipotle, Sweetgreen and even Shake Shack appear to be doing just fine. By contrast, Noodles’ same-store sales declined 3.3%.
The company’s problem this year has been relatively basic. Its sales are falling and its costs are increasing.
After the chain appeared to be recovering from the pandemic, same-store sales have slowed markedly over the past two years, falling in five of the past seven earnings periods.
Sales declines are nothing new these days, thanks to a difficult operating environment. Several chains, particularly full-service brands, can unfortunately say something similar. The problem in Noodles' case is that it has little room for error.
Noodles generated a $3.6 million profit in 2021, but it has lost money ever since, including $3.3 million in 2022 and $9.9 million in 2023.
The company appeared to be showing at least some progress late last year. It reported just a $700,000 loss in the third quarter of 2023. But its losses have been widening ever since. So far this year, the company has lost $26.5 million.
Noodles probably needs to be private, but the problem with that scenario is its valuation. The company finished the third quarter with $89 million in long-term debt. Anybody buying the chain would have to take that debt on, plus pay a premium to company shareholders on its trading price. And then those shareholders would have to be OK selling a company that has lost so much valuation.
In theory, Noodles could sell its company restaurants and use the funds to pay off debt, but that’s a slow process and it’s not entirely clear that the demand among prospective franchisees is there right now. A lot of struggling restaurant chains—like, say, MOD Pizza—have put their hopes behind refranchising in a bid to fix ailing finances.
But these brands will need to convince prospective franchisees that they have a plan in place to rebuild sales, because franchisees, and their lenders, would like to generate some form of return.
Either way, Noodles' best bet is to cut costs and find ways to get customers in the door. But that in and of itself is a problem.
Noodles been public for more than a decade now, and throughout that period the company has been unable to consistently generate sales growth. The chain would report a few quarters of same-store sales growth only to struggle with declines again.
Noodles has completed 46 earnings periods since its 2013 IPO. It has generated same-store sales growth in 25 of them, or 54%. That’s not a good rate.
Unit volumes last year were $1.3 million, 12.7% higher than they were a decade ago. But they would be 17% higher if they simply kept pace with inflation. System sales have grown 48% over that period, according to Technomic, but that has come mostly from new locations.
For comparison, by the way, Chipotle’s unit volumes are around $3 million. Cava does $2.6 million. Shake Shack $3.8 million. Takeout-heavy Wingstop does $1.8 million. Noodles’ unit volumes are even lower than the Fat Brands-owned zombie concept Fazoli’s, which averaged $1.4 million last year.
Low unit volumes and increases in labor and food costs is generally a bad combination.
Noodles’ profitability challenge has kept the company from making key investments in marketing or other initiatives that could drive organic revenue growth.
In theory, Noodles should be a no-brainer as a concept. People love noodles. The chain has some fantastic products that could work well in the social media age, such as mac and cheese. And those products should do well in a takeout-heavy market like this.
And, indeed, Noodles has relied heavily on delivery, but last quarter it started to see a “sudden and significant decline in third-party delivery sales” starting in late July.
Yet even that is a relatively common situation for the chain. In May last year, the company said it experienced a sudden, “meaningful decline” in delivery sales. At what point should these sudden declines become expected?
The company earlier this year hired former Panera executive Drew Madsen to be CEO and he is leading a menu-based turnaround effort. Noodles' stock price shows that investors have little faith in the potential of that effort, probably because they've heard it before.
Eleven years ago, Noodles was the first big beneficiary of “the next Chipotle” phenomenon, which sent its stock soaring for a time. It is long past trying to live up to that designation. Now it’s just fighting for survival.