NDLS delivered a disappointing 4Q14 print and offered up a similarly disappointing outlook for 2015. While we expected both, the fundamentals of the business are worse than we’d initially thought. We reiterate our $14-16 fair value and anticipate another leg down in the stock.
No momentum heading into ’15. NDLS reported system-wide SSS of +1.3%, well short of the consensus estimate of +1.8%. As a result, revenues and EPS missed estimates by $1.5 million and $0.01, respectively. The bigger disappointment, however, is the anemic 1.1% comp growth NDLS is seeing to-date in 1Q15 – consensus is expecting +3.9% for the quarter. To put this number into context, Black Box reported January 2015 comp sales of +6.1%. An emerging, fast casual growth concept should not be lagging its peers to this extent. With little momentum so far in ’15, management guided to full-year EPS growth of 20% (below consensus at 27%) on the back of 2.5-4% comp growth. These scaled back estimates are aggressive and will put a lot of pressure on the business to perform in 2H15.
Margin deterioration will be difficult to reverse. NDLS is having a difficult time managing its P&L as it pursues its aggressive expansion agenda and, although they are scaling back new unit development slightly (from 16% to 12-13%) in ‘15, this will continue to be the case. The truth is, this company needs to see mid-single digit comps to even think about driving margin expansion. With pressure on the cost of sales (durum wheat) and labor lines (ACA, claims activity), in addition to increased marketing, ’15 could be another year of flat-to-down margins.
Expansion outside of the core will not be easy. We’ve been through this before with CHUY. Investors that expect these regional companies to rapidly, and successfully, expand outside their core markets are in for a rude awakening. It doesn’t help that NDLS, in our view, is a rather narrow concept that largely unproven outside of the Midwest (little presence in New England, the Southeast, Pacific Coast, etc.). Management appears to be finding this out the hard way and is struggling to drive brand awareness in these markets. The current media strategy is such a disaster that they decided to suspend advertising in 1H15, with plans to accelerate it in 2H15. New unit development this year will be skewed more toward new and developing markets than in ’14, with new units coming on in Oklahoma, California, upstate New York, Arizona, Florida, and Toronto, CA. A rapid growth plan is never easy to execute, particularly when venturing into new markets. We don’t see how NDLS will be able to deliver 20% EPS growth in 2015.