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NDLS > SEC Filings for NDLS > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for NOODLES & CO

Form 10-Q for NOODLES & CO


30-Apr-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2013. We operate on a 52 or 53 week fiscal year ending on the Tuesday closest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53 week year, which contains 14 operating weeks. Fiscal years 2014 and 2013 each contain 52 weeks. Cautionary Note Regarding Forward-Looking Statements In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties such as the number of restaurants we intend to open, projected capital expenditures, and estimates of our effective tax rates. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "design," "estimate," "predict," "potential," "plan" or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements including, but not limited to, those discussed in "Special Note Regarding Forward-Looking Statements" and "Risk Factors" as filed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2013. 2014 Highlights and Trends
Restaurant Development. New restaurants have contributed substantially to our revenue growth, and in the first quarter of 2014, we opened 13 company-owned restaurants and one franchise restaurant. As of April 1, 2014, we had 331 company-owned restaurants and 63 franchise restaurants in 30 states and the District of Columbia. In 2014, we anticipate opening between 42 and 50 company-owned restaurants, and between 10 and 15 franchise restaurants, including the restaurants opened through the end of our first quarter. Comparable Restaurant Sales. Comparable restaurant sales decreased by 1.4% at company-owned restaurants, 3.3% at franchise owned restaurants and 1.6% system-wide in the first quarter of 2014. The comparable restaurant sales decline in the first quarter was the result of a decrease in traffic due to abnormally severe weather in the first quarter, offset by an increase in price and mix.
Key Measures We Use to Evaluate Our Performance To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include revenue, average unit volumes ("AUVs"), comparable restaurant sales, restaurant contribution, EBITDA and adjusted EBITDA.
Revenue
Restaurant revenue represents sales of food and beverages in company-owned restaurants. Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per-restaurant sales. Franchise royalties and fees represent royalty income and initial franchise fees. While we expect that the majority of our revenue and net income growth will be driven by company-owned restaurants, our franchise restaurants remain an important part of our financial success.
Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced winter and holiday traffic and is higher in the second and third quarters. These seasonal factors could cause our quarterly and annual operating results and comparable restaurant sales to fluctuate significantly.


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Average Unit Volumes ("AUVs")
AUVs consist of the average annualized sales of all company-owned restaurants for the trailing 12 periods. AUVs are calculated by dividing restaurant revenue by the number of operating days within each time period and multiplying by 361, which is the number of operating days we have in a typical year. This measurement allows management to assess changes in consumer traffic and per-person-spending patterns at our restaurants. Comparable Restaurant Sales
Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full periods. This measure highlights performance of existing restaurants, as it excludes the impact of new restaurant openings. Comparable restaurant sales growth is generated by increases in traffic, which we calculate as the number of entrees sold, or changes in per person spend, calculated as sales divided by traffic. Per-person spend can be influenced by changes in menu prices and the mix and number of items sold per person.
Measuring our comparable restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
consumer recognition of our brand and our ability to respond to changing consumer preferences;

overall economic trends, particularly those related to consumer spending;

our ability to operate restaurants effectively and efficiently to meet consumer expectations;

pricing;

per-person spend and average check amount;

marketing and promotional efforts;

weather;

local competition;

trade area dynamics;

introduction of new and seasonal menu items and limited time offerings; and

opening of new restaurants in the vicinity of existing locations.

Since opening new company-owned and franchise restaurants is an important part of our growth strategy, and we anticipate new restaurants will be a significant component of our revenue growth, comparable restaurant sales are only one measure of how we evaluate our performance.


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Restaurant Contribution
Restaurant contribution is defined as restaurant revenue less restaurant operating costs, which consist of cost of sales, labor, occupancy and other restaurant operating costs. We expect restaurant contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth. Fluctuations in restaurant contribution margin can also be attributed to those factors discussed above for the components of restaurant operating costs.
EBITDA and Adjusted EBITDA
We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. We define adjusted EBITDA as net income before interest expense, provision for income taxes, asset disposals, closure costs and restaurant impairments, depreciation and amortization, stock-based compensation, management fees and IPO-related expenses.
EBITDA and adjusted EBITDA provide clear pictures of our operating results by eliminating certain expenses that are not reflective of the underlying business performance. We use these metrics to facilitate a comparison of our operating performance on a consistent basis from period to period and to analyze the factors and trends affecting our business.
The following table presents a reconciliation of net income to EBITDA and adjusted EBITDA:

                                                            Fiscal Quarter Ended
                                                        April 1,            April 2,
                                                          2014                2013
                                                          (in thousands, unaudited)
Net income                                          $         1,424     $           924
Depreciation and amortization                                 5,610               4,801
Interest Expense                                                 20               1,053
Provision for income taxes                                    1,012                 595
EBITDA                                              $         8,066     $         7,373
Asset disposals, closure costs and restaurant
impairment                                                      214                 201
Management fees(1)                                                -                 250
Stock-based compensation expense(2)                             140                 363
Adjusted EBITDA                                     $         8,420     $         8,187


______________________


(1) The first quarter of 2013 included $250,000 of management fee expense in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one share of our Class C common stock then outstanding. In connection with our IPO, the management services agreement expired and the one share of Class C common stock was redeemed.

(2) Includes only the non-cash portion of stock-based compensation expense.


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Restaurant Openings, Closures and Relocations The following table shows restaurants opened, closed or relocated during the periods indicated.

                                          Fiscal Quarter Ended
                                          April 1,          April 2,
                                            2014              2013
Company-Owned Restaurant Activity
Beginning of period                      318                   276
Openings                                  13                     9
Closures and relocations(1)                -                    (1 )
Restaurants at end of period             331                   284
Franchise Restaurant Activity
Beginning of period                       62                    51
Openings                                   1                     -
Restaurants at end of period              63                    51
Total restaurants                        394                   335


_____________________________


(1) Relocated restaurants are accounted for under both restaurant openings and restaurant closures and relocations. In the first quarter of 2013, we closed one restaurant at the end of its lease term.


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Results of Operations
The following table summarizes key components of our results of operations for
the periods indicated as a percentage of our total revenue, except for the
components of restaurant operating costs, which are expressed as a percentage of
restaurant revenue.
                                                           Fiscal Quarter Ended
                                                        April 1,           April 2,
                                                          2014               2013
Revenue:
Restaurant revenue                                           98.8 %              99.1 %
Franchising royalties and fees                                1.2                 0.9
Total revenue                                               100.0               100.0
Costs and Expenses:
Restaurant Operating Costs (exclusive of
depreciation and amortization shown separately
below):(1)
Cost of sales                                                27.0                26.5
Labor                                                        30.8                30.8
Occupancy                                                    11.2                10.4
Other restaurant operating costs                             13.8                13.8
General and administrative(2)                                 7.8                 8.9
Depreciation and amortization                                 6.3                 5.9
Pre-opening                                                   1.2                 1.1
Asset disposals, closure costs and restaurant
impairments                                                   0.2                 0.2
Total costs and expenses                                     97.3                96.8
Income from operations                                        2.7                 3.2
Interest expense                                                -                 1.3
Income before income taxes                                    2.7                 1.9
Provision for income taxes                                    1.1                 0.7
Net income                                                    1.6 %               1.1 %


______________________________
(1) As a percentage of restaurant revenue.

(2) The first quarter of 2013 included $250,000 of management fee expense in accordance with our management services agreement and through the Class C common stock dividend paid to the holder of the one share of our Class C common stock then outstanding. In connection with our IPO, the management services agreement expired and the one share of Class C common stock was redeemed.


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First Quarter Ended April 1, 2014 compared to First Quarter Ended April 2, 2013 Our fiscal quarters each contain thirteen weeks with the exception of the fourth quarter of a 53 week fiscal year, which contains fourteen weeks. The table below presents our unaudited operating results for the first quarters of 2014 and 2013, and the related quarter-over-quarter changes:

                                          Fiscal Quarter Ended            Increase / (Decrease)
                                         April 1,        April 2,
                                           2014            2013             $                %
                                                    (in thousands, except percentages)
Revenue:
Restaurant revenue                    $    88,448      $   80,518     $     7,930             9.8  %
Franchising royalties and fees              1,071             762             309            40.6
Total revenue                              89,519          81,280           8,239            10.1
Costs and expenses:
Restaurant operating costs
(exclusive of depreciation and
amortization shown separately
below):
Cost of sales                              23,848          21,301           2,547            12.0
Labor                                      27,198          24,830           2,368             9.5
Occupancy                                   9,865           8,359           1,506            18.0
Other restaurant operating costs           12,206          11,080           1,126            10.2
General and administrative                  7,009           7,215            (206 )          (2.9 )
Depreciation and amortization               5,610           4,801             809            16.9
Pre-opening                                 1,113             921             192            20.8
Asset disposals, closure costs and
restaurant impairments                        214             201              13             6.5
Total costs and expenses                   87,063          78,708           8,355            10.6
Income from operations                      2,456           2,572            (116 )          (4.5 )
Interest expense                               20           1,053          (1,033 )         (98.1 )
Income before income taxes                  2,436           1,519             917            60.4
Provision for income taxes                  1,012             595             417            70.1
Net income                            $     1,424      $      924     $       500            54.1  %
Company owned:
Average unit volumes                  $     1,163      $    1,180     $       (17 )          (1.4 )%
Comparable restaurant sales                  (1.4 )%          2.2 %

Revenue
Restaurant revenue increased by $7.9 million in the first quarter of 2014 compared to the same period of 2013. An increase in operating weeks resulted in $10.1 million of this increase, offset by a sales decrease in comparable restaurants of $1.1 million, or 1.4%, in the first quarter of 2014 compared to the same period in 2013. The comparable restaurant sales decline in the first quarter was the result of a decrease in traffic due to abnormally severe weather in the first quarter, offset by an increase in price and mix.
Franchise royalties and fees increased by $309,000 in the first quarter of 2014 compared to the same period of 2013 due to one new restaurant opening and an increase in operating weeks, offset by a decrease in comparable restaurant sales of 3.3% in the first quarter of 2014.
Cost of Sales
Cost of sales increased by $2.5 million in the first quarter of 2014 compared to the same period of 2013, due primarily to the increase in restaurant revenue in the first quarter of 2014. As a percentage of restaurant revenue, cost of sales increased to 27.0% in the first quarter of 2014 from 26.5% in first quarter of 2013. The increase in cost of sales was the result of increased waste associated with low volume days during bad weather, as well as increased promotional activity.


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Labor Costs
Labor costs increased by $2.4 million in the first quarter of 2014 compared to the same period of 2013, due primarily to the increase in restaurant revenue in the first quarter of 2014. As a percentage of restaurant revenue, labor costs were flat at 30.8% in both the first quarter of 2014 and the first quarter of 2013.
Occupancy Costs
Occupancy costs increased by $1.5 million in the first quarter of 2014 compared to the first quarter of 2013, due primarily to 55 net restaurant openings. As a percentage of revenue, occupancy costs increased to 11.2% in first quarter of 2014, compared to 10.4% in the first quarter of 2013. The increase was due to additional restaurants included in the non-comparable restaurant base year over year, which, on average, have higher occupancy costs as a percentage of revenue. Additionally there was an increase in common area maintenance charges as a percentage of sales due to increased snow removal in 2014 relative to 2013. Other Restaurant Operating Costs
Other restaurant operating costs increased by $1.1 million in the first quarter of 2014 compared to the first quarter of 2013, due primarily to increased restaurant revenue in the first quarter of 2014. As a percentage of restaurant revenue, other restaurant operating costs remained consistent at 13.8% in the first quarter of 2014 and the first quarter of 2013. General and Administrative Expense
General and administrative expense decreased by $0.2 million in the first quarter of 2014 compared to the first quarter of 2013. As a percentage of revenue, general and administrative expense decreased to 7.8% in the first quarter of 2014 compared to 8.9% in first quarter of 2013. This decrease was due to leverage on increased revenue, reduced incentive compensation expense and the elimination of management fees paid to Catterton Partners and Argentia Private Investments, Inc.
Depreciation and Amortization
Depreciation and amortization increased by $0.8 million in the first quarter of 2014 compared to the first quarter of 2013, due primarily to the increase in the number of restaurants. As a percentage of revenue, depreciation and amortization increased to 6.3% in the first quarter of 2014, compared to 5.9% in the first quarter of 2013, due to depreciation on new restaurants and increased capital investment related to initiatives.
Pre-Opening Costs
Pre-opening costs increased by $0.2 million in the first quarter of 2014 compared to the first quarter of 2013. As a percentage of revenue, pre-opening costs increased to 1.2% in the first quarter of 2014 compared to 1.1% in the first quarter of 2013. Both of these increases were due to an increased number of restaurant openings in the first quarter of 2014 compared to the first quarter of 2013.
Interest Expense
Interest expense decreased by $1.0 million in the first quarter of 2014 compared to the same period of 2013. The decrease was the result of lower average borrowings in the first quarter of 2014 compared to the first quarter of 2013 due to the payoff of the majority of our outstanding debt in conjunction with our IPO which we completed on July 2, 2013. Provision for Income Taxes
Provision for income taxes increased by $0.4 million in the first quarter of 2014 compared to same period of 2013 due to an increase in pre-tax net income of $0.9 million in the first quarter of 2014 compared to the first quarter of 2013. The effective tax rate for the first quarter of 2014 includes the change to a 35% federal income tax rate compared to 34% in 2013. The 2014 estimated annual effective tax rate is expected to be 41.5% compared to 41.7% for 2013.


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Liquidity and Capital Resources
Summary of Cash Flows
Our primary sources of liquidity and cash flows are operating cash flows and borrowings on our revolving line of credit. We use these cash sources to fund capital expenditures for new restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital. Our working capital position benefits from the fact that we generally achieve time-of-sales collection of cash from sales to customers, or in the case of credit or debit card transactions, we collect cash within several days of the related sale. In contrast, we typically have at least 30 days to pay our vendors.
Cash flows from operating, investing and financing activities are shown in the following table (in thousands):

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