Restaurant stocks are rocking at No. 10 on IBD's list of 197
industry groups with last year's star IPO,Chuy's (
), 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 (
), 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 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
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 (
Proceeds from the IPO will nearly all go toward paying down
debt, instead of investing in growth.
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
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 (
). He holds a B.S. in accounting from Duquesne University.
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 (
) and Checkers Drive-In Restaurants. He holds a B.S. in
accounting from the University of Illinois.
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.
Morgan Stanley and UBS
Offering price: $13-$15 (Revised Tuesday to $15-$17)
Expected date: week of June 24