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Editor's Note: This is an excerpt from an institutional research note on Noodles & Co (NDLS) from our Restaurants analyst team. It was added as a Best Idea long on 2/19/18. Shares are up +19% since. For more information on how to access our research and analysts email sales@hedgeye.com

We Remain Long Noodles & Co | $NDLS - znood

HEDGEYE OPINION

As we stated in our February 2018 Noodles & Company (NDLS) Black Book the company’s refreshed leadership truly has been a breath of fresh air.

The beginning of the new NDLS was the decision in 1Q17 to close 55 underperforming units. This move has propelled the company to new heights, allowing management to focus on driving unit profitability and implementing operational changes.

Key drivers have been, and will continue to be, the streamlining of the menu, the implementation of the loyalty program, continued labor initiatives, and the off-premise business. Streamlining the menu, coupled with the completion of the installation of quick pick-up shelving have increased throughput and convenience for patrons. According to the management team, the loyalty program continues to grow at an impressive clip, and they see a clear correlation between activation and traffic growth (2-yr traffic trends improved by roughly 100bps in 4Q17).

Finally, NDLS is a restaurant company that understands the concept of cutting unit growth to focus on the core. After opening 15 restaurants in FY17, management is expecting to only open 1-5 new units in FY18. This aggressive reduction in unit growth will allow the company to focus on increasing efficiencies and improving margins at their current units. NDLS is taking the opportunity of slowing unit growth to focus resources on developing the future store prototype, which will be a smaller footprint catering more to the off-premise occasion. Rounding things out, NDLS guidance on the top and bottom-line came out lighter than many expected, although adjusted EBITDA at $31M to $33M, bracketed consensus estimates of $32M.

We think they may be saving some optimism in their back pocket, the road ahead looks positive for NDLS…it’s full steam ahead.

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