Noodles & Co. Restaurant Future Looks Tasty After IPO

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Investors have had a hearty appetite for a piece of recent IPONoodles & Co. ( NDLS )

The restaurant operator went public priced at 18. The stock opened at 32 on its first trading day, June 28. It's now near 45, about 150% above its offering price.

Noodles & Co. operates a fast-casual restaurant chain that serves classic noodle and pasta dishes from around the globe -- from pad thai to mac 'n' cheese. The fast-casual segment, which includes eateries such as Chipotle Mexican Grill ( CMG ) andPanera Bread Co. ( PNRA ), is the industry's fastest-growing sector in sales, traffic, units and same-store sales.

Noodles & Co., which serves up quality food at an average price of $8 per person, offers growth opportunities in that segment that have whetted investor tastebuds.

"We believe the valuation at which Noodles trades signifies a very positive reception by the investment community for the exciting growth prospects the concept holds," said Robert Derrington, restaurant industry analyst at Wunderlich Securities.

Pasta Possibilities

The market appears starved for good growth stories, according to Derrington, especially within the restaurant space, where he says there's been a relative dearth of compelling new growth concepts.

"We believe Chipotle, and thenChuy's ( CHUY ), and now Noodles, all seem to offer the kind of positive growth attributes the market highly values -- good store-level economics and very capable management teams, together yielding very favorable growth prospects," he said.

With the tag line "Your World Kitchen," Noodles & Co. cooks noodle dishes to order with options and serves soups, salads and sandwiches. As of July 2, it had 295 owned restaurants and 53 franchises in 26 states and the District of Columbia.

Fast-casual is the fastest-growing restaurant segment, with sales up 10% last year -- above restaurant industry growth of 4%, says Darren Tristano, executive vice president at restaurant industry consultancy Technomic. He sees the segment growing another 10% this year.

Fast-casual chains grew units 9% last year. A "heavy" amount of the sales growth came from new restaurants that opened last year or will be opening in 2013, Tristano says.

Noodles & Co.'s growth prospects aren't tied only to its fast-casual nature, according to Tristano, who says the chain is "very differentiated" from most in this space.

"Where success has been in Asian with Panda (Express), Mexican with Chipotle and bakery-cafe with Panera, this category is noodles, which covers American, Mediterranean and Asian," he said. "The brand isn't big, so it has a lot of runway for expansion and growth and they're very family and Millennial-oriented in terms of price points, menu and the overall experience."

All of Noodles & Co.'s growth metrics are in line with how growth restaurants perform, adds Wedbush Securities analyst Nick Setyan. That includes its restaurant-level profitability. He says the company can open in places others can't because it can do so at a lower volume and get the same profitability. Each of its restaurants averages about $1 million in sales and roughly 20% profitability.

Pasta is high-margin, he notes.

Noodles & Co. says it can grow to 2,500 restaurants in the U.S. over 15 to 20 years with its "scalable infrastructure, broad appeal, and flexible and portable real estate model."

It develops most company restaurants in shopping centers -- leased locations, Derrington notes, reducing the cash needed to open new stores compared to owning.

Checking The Stock

Setyan says the run-up in the company's stock since the IPO has to do with "the dearth of growth names both within restaurants and the consumer universe in general."

Noodles & Co.'s private equity sponsors own a good portion of its shares. Catterton Partners owns about 36.7% and Argentia Private Investments 36.3%.

"Thus, there is a lack of supply in shares for a company that is only one of a handful of companies that can boast of the type of growth metrics Noodles does have," Setyan said. And "there are a very large number of 'growth' investment funds that have to own the name because of its growth characteristics. The lockup expires in December, and that could address the share supply constraint to some extent."

As Noodles expands it will be competing with a lot of other eateries vying for limited consumer spending on dining out.

The market is "a bloodbath of competition" between categories fighting for relevance in a "very, very difficult consumer spending environment," Derrington said, but Noodles is "positioned well."

The company served savory results in the second quarter, its first report after the IPO. Earnings were up 30% to 13 cents a share, 1 cent above analyst views. Sales rose 18% to $89.2 million, ahead of forecasts for $88.05 million. Same-store sales lifted 4.7% vs. a year earlier for company-owned restaurants, 2.3% for franchises and 4.4% systemwide.

The stock slipped after the Aug. 8 report, though. The reason likely had to do with its so-so guidance. Noodles & Co. forecast a full-year profit of 39 to 41 cents a share. Analysts were expecting 39 cents. In a report, Setyan noted the guidance as "below some expectations."

Analysts now expect full-year earnings to come in at 40 cents a share. They see a 38% increase in 2014 and a 25% pop in 2015.

While Noodles paid down its debt with its IPO, it has other resources to finance its expansion.



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 , NDLS , PNRA

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