Investors have had a hearty appetite for a piece of recent
IPONoodles & Co. (
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 (
) andPanera Bread Co. (
), 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
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
"We believe Chipotle, and thenChuy's (
), 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
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%
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
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
While Noodles paid down its debt with its IPO, it has other
resources to finance its expansion.