Key Takeaway
NDLS delivered a dreadful 1Q15 print and a similarly disappointing outlook for 2015. Management did very little on the call to dissuade our thoughts that NDLS should not be growing – at all. Until they realize this, and scale back growth, the stock will be a short.
Painful performance. NDLS reported system-wide SSS of +0.9%, well short of the consensus estimate of +1.4%. This comp underperformance drove top and bottom line misses of $2.7 million and $0.02, respectively. To put the severity of this comp underperformance into perspective, Black Box reported 1Q15 comp sales of +3.0%. We’d typically expect and emerging fast casual concept to lead this benchmark. To wit, Potbelly delivered +5.5% same-store sales growth in the first quarter! We’d note that majority of the same-store sales disappointment stems from three problem markets: Colorado, the DC Metro Area, and Austin. Excluding these three markets, same-store sales grew +3.2% for the quarter. Management guided down full-year same-store sales guidance from 2.5-4% to low single digits and EPS growth guidance from 20% to 0%.
Established markets are a problem too. In the past, we’ve harped on Noodles’ inability to effectively enter new markets. Specifically, we question management’s restaurant expansion strategy that was more heavily weighted to newer markets than existing. New markets, and the subsequent lack of brand awareness, have consistently been the culprit for poor same-store sales performance in the past.
Now management is blaming the weakness on established markets, particularly Colorado and Austin, that are both comping negative year-to-date. Remarkably, despite being in the Colorado market for more than 20 years, the team conceded that they must bring more top of mind awareness here. With the addition of the DC Metro Area, these three markets (dubbed the problem markets) account for approximately 30% of all Noodles locations. We were previously solely concerned about new markets as opposed to existing; now we have reason to worry about both.
Initiatives underway to right the ship, but are they enough? Management believes it has the initiatives in place, both on the operational front (throughput and deployment initiatives) and marketing front (branding, marketing, and promotional work), to reaccelerate comps in 2H15. Marketing spend will ramp from 0.4% of sales in 1Q15 to 1% in the latter half of the year and should provide a little boost to sales, but this is far from a solution to the brand’s current struggles. Quite frankly, these initiatives are not the panacea the Noodles needs. If management doesn’t halt its unit growth strategy and hone in on operations, they will continue to destroy significant value.
