Cost Cuts to Aid Noodles & Company's (NDLS) Q2 Earnings

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Noodles & CompanyNDLS is scheduled to report second-quarter 2018 numbers on Jul 18, after market close.

After struggling with soft consumer demand, along with declining comps in 2017 and the first quarter of 2018, the company is expected to make a comeback in the second quarter. The company's various initiatives to sustain top-line momentum and restrict costs are expected to have paid off in the second quarter.

Notably, shares of Noodles & Company have rallied a whopping 186.7% in the past year, outperforming the industry 's collective growth of 1.5%.

Let's take a look at how the company's second quarter will shape up.

Top Line to Improve on Sales-Building Efforts

Noddle's & Company's major sales-building initiatives like streamlining of menu and innovation, introduction of new cooking procedures, effective marketing strategy, increased focus on the off-premise business and investments in technology-driven initiatives like digital ordering are expected to have positively contributed to the top line in the second quarter. Despite the 5.3% decline in revenues in the first quarter, we expect its revenues to grow in the to-be-reported quarter. The Zacks Consensus Estimate for the quarter's revenues is pegged at $114.8 million, suggesting 1.8% growth from the year-ago quarter.

Meanwhile, in the first quarter, comps were affected by a shift in the timing of the Easter holiday. System-wide comps in the first quarter declined 0.2% and that of the company-owned restaurants fell 0.3%. Defying the trend of sluggish comps, the consensus estimate projects both system wide and company-owned comps to grow 2.3% in the second quarter.

Cost Cuts to Boost Earnings

While high costs from restaurant operation and increased labor expenses might have been a potential threat to Noodles & Company's earnings, the company has been undertaking the task of closing underperforming restaurants, which will in turn improve margins. In fact, the company successfully cut down operating expenses by drastically lowering pre-opening costs.

Total costs and expenses in the first quarter declined 99.2% year over year, owing to a sharp decline in pre-opening costs. Cost of sales and labor also declined 8.8% and 7.6%, respectively, from the year-ago quarter. Restaurant contribution margin was 12.9% in the first quarter of 2018 compared with 11% in the first quarter of 2017, reflecting an increase of 190 basis points. 

We expect the upside trend in margins to continue in the second quarter as well. Subsequently, the consensus estimate for second-quarter earnings is pegged at 3 cents, reflecting a 200% increase from the prior-year quarter.

Our Quantitative Model Does Not Predict a Beat

Noodles & Company does not have the right combination of two main ingredients - a positive  Earnings ESP  and a Zacks Rank #3 (Hold) or higher - for increasing the odds of an earnings beat.

Zacks ESP:  The company has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they're reported with our  Earnings ESP Filter .

Zacks Rank:  The restaurant currently has a Zacks Rank #3.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Noodles & Company Price and EPS Surprise

Noodles & Company Price and EPS Surprise | Noodles & Company Quote

Stocks to Consider

Here are some stocks from the Retail-Wholesale sector , which according to our model possess the right combination of elements to post an earnings beat.

Chipotle CMG holds a Zacks Rank #3 and has an Earnings ESP of +0.85%. The company is scheduled to report quarterly results on Jul 26. You can see  the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Cheesecake Factory CAKE has an Earnings ESP of +0.50% and holds a Zacks Rank #3. The company is slated to report quarterly results on Jul 31.

American Eagle AEO , also carrying a Zacks Rank #3, has an Earnings ESP of +6.98%. The company is likely to report quarterly results on Aug 22.

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

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: AEO , CMG , CAKE , NDLS

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