Noodles & Co. IPO Offers Growth Story In Bumpy Market

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THE BUZZ

Restaurant stocks are rocking at No. 10 on IBD's list of 197 industry groups with last year's star IPO,Chuy's ( CHUY ), scoring as one of its highest-rated stocks.

Now the fast-casual chain Noodles & Co. hopes that investors will get similarly excited, despite the recent roughness in the market.

IPO Boutique's Scott Sweet, for one, is completely sold.

"I feel that in a week that's frightening when it comes to IPOs in a very down market, this is far and away the best IPO of the week," Sweet told IBD.

Sweet especially likes the fact that much of the top management comes fromChipotle Mexican Grill ( CMG ), another fast-casual chain that met with tremendous success when it hit the stock market in 2006.

However, Francis Gaskins of IPO Desktop is much more skeptical of the deal, noting that the company's growth rates and profit margins compare unfavorably to Chipotle's.

"Growth to 2,500 restaurants in the next 15-20 years is a very dubious assumption," he wrote in his report last week, referring to management's projection in the pre-IPO roadshow. "It's easier to show percentage growth from a smaller base."

THE COMPANY

The first Noodles & Co. restaurant opened in Denver in 1995, and the current firm was incorporated in 2002.

Since that time, the number of locations has jumped from 57 to 343, spread across 26 states and the District of Columbia.

Noodles' slogan is "A world of flavors under one roof," and its menu incorporates a number of regional pasta variations, such as pad thai, Tuscan linguini, Indonesian peanut saute, and basic mac and cheese. Meats are mostly optional and chosen by the customer. In addition to the trademark pasta, the restaurants also offer a small range of soups, salads and sandwiches.

As in most fast-casual restaurants, the setup is in between fast food and sit-down dining.

Customers order and pay at the counter, with an average expenditure of $8, and either take their food to go or sit down at a table where a server brings the meal. The fact that you can get table service without paying a tip is a point Noodles' management likes to emphasize.

Noodles selects its sites in a variety of settings, from central business districts to suburbs to small towns. It usually picks freestanding or end-cap locations in malls, though it will go for an in-line location if other factors are attractive.

About 85% of the restaurants are company-owned. The rest are franchised.

RISKS/CHALLENGES

Noodles is already passing its ramp-up phase of growth, so investors shouldn't expect it to keep booming as it has in the past. Comparable sales have historically been running above 5% but on the pre-IPO roadshow, management guided long-term comp growth of 2.5% to 3%.

In the most recent quarter, comp sales rose only 2.2% and net income declined compared to a year ago. The company didn't really explain this weakness, though it did mention that the first and fourth quarters are seasonally slow, and it lost a business day to an early Easter.

Gaskins also notes that after-tax margins are generally running less than 2%, which is lower than peers, such as Chipotle (around 10%) andPanera Bread ( PNRA ) (8%).

Proceeds from the IPO will nearly all go toward paying down debt, instead of investing in growth.

THE RESULTS

Sales last year climbed 17% to $300.4 million, while net income rose 35% to $5.2 million, or 22 cents a share. In the first quarter, revenue rose 16% over the year-earlier period to $81.3 million, but net income slipped 28% to $924,000.

USE OF PROCEEDS

Noodles expects to receive $67 million from the offering of 5.4 million shares, or $77.5 million if the underwriters exercise their options. It's earmarked $66 million to repay debt and whatever remains for general corporate purposes.

Update: On Tuesday, Noodles raised its expected price range to $15-$17 a share from $13-$15. It now expects the IPO size to be $86 million.

THE MANAGEMENT

Kevin Reddy
Chief executive and chairman

Joined in 2005 and became CEO the following year. Previously, he was chief operating officer at Chipotle Mexican Grill and also held various positions atMcDonald's ( MCD ). He holds a B.S. in accounting from Duquesne University.

Keith Kinsey
President, chief operating officer and director

Joined as CFO in 2005, and became COO in 2007 and president last year. Previously, he was a regional director at Chipotle, and also held management positions at McDonald's,PepsiCo ( PEP ) and Checkers Drive-In Restaurants. He holds a B.S. in accounting from the University of Illinois.

Dave Boenninghausen
Chief financial officer

Joined in 2004 and attained his current position last year. Previously, he worked at May Department Stores. He holds an MBA from Stanford University.

Noodles & Co.

Broomfield, Colo.

(720) 214-1900

noodles.com

Lead underwriters:

Morgan Stanley and UBS

Offering price: $13-$15 (Revised Tuesday to $15-$17)

Expected date: week of June 24

Ticker: NDLS



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CHUY , CMG , MCD , PEP , PNRA

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