Noodles & Company (NDLS) Gets Fried Again

It’s been a nightmare year for NDLS shareholders

Not long ago, Noodles & Company (NDLS) was a red-hot IPO. On its first day of trading back in mid-2013, NDLS stock shot up 104%. But since then, shareholders have had not much to be happy about.

noodles-and-company-ndls-stock-185So far this year, NDLS stock is off a grueling 36%.

Then again, as seen with the latest earnings report, the business is rapidly deteriorating. In the first quarter, NDLS posted adjusted earnings of 3 cents per share and revenues of $105.8 million. Yet the Street was looking for earnings of 5 cents and revenues of $108.7 million.

As should be no surprise, the comparable-restuarant sales were anemic with a growth rate of only 0.8 — down from 4.3% during the prior quarter.

And guidance was also grim. NDLS expects adjusted earnings to be flat for the year. It was only a couple of months ago that Noodles & Company announced guidance of 20%, which was down from the previous forecast of 20% to 25%.

So why the fall off in growth? First of all, NDLS did blame the weather. But of course, this is temporary and unfortunately, the company’s earnings forecast is weak for the whole year.

Actually, much of the weakness for NDLS stock has come from three markets: Colorado, the Washington, D.C., metro area and Austin, Texas. Excluding these markets, the comparable restaurant sales would have been 3.2%.

The interesting thing is that there is no running theme for the issues in the three markets. Rather, there are medley of factors, such as rising competition, lack of execution and ineffective marketing. But it also appears that Noodles & Company has plenty of old locations that need remodeling.

Yet such problems could turn out to spread across other locations. In the restaurant business, the buzz from customers can be powerful, especially with social media like Yelp (YELP).

Perhaps this is why Noodles & Company plans to ramp up marketing spending. In fact, it looks like the focus will be on highlighting its fresh ingredients, family atmosphere and the cooking-to-order process. But of course, other players in the fast-casual sector are also doing the same. What’s more, marketing can take time to get results.

Now, from a valuation standpoint, NDLS stock is still far from cheap. Keep in mind that the price-to-earnings multiple is 44, which compares to Chipotle Mexican Grill’s (CMG) P/E of 40 and Panera Bread’s (PNRA) P/E of 27.

Besides, the valuation of NDLS stock is definitely high in terms of the muted growth rate. For 2015, the company sees only low single-digit growth in comparable restaurant sales.

Given all this, it is tough to find much opportunity with NDLS stock. This is the second consecutive big miss on earnings. If anything, it looks like management does not have a good handle on the business.

More importantly, the plan to turn things around is far from clear — or convincing.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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