Noodles & Company Has Long-Term Growth Just Simmering

Although the softening of near-term sales trends has continued and the company is slowing unit growth, RBC Capital’s David Palmer believes Noodles & Co (NASDAQ: NDLS) is “taking the right approach to stabilize sales and improve store operations.”

Palmer maintained a Sector Perform rating on the company, while lowering the price target from $13 to $8.

Taking The Right Steps

“We expect profitability to be constrained this year and next due to significant sales deleverage, while EPS growth is expected to decline materially due to 1) soft sales; 2) higher interest; 2) increased D&A; and 3) non-cash writeoffs associated with remodels,” the analyst mentioned.

Palmer believes Noodles & Co. is taking the right operational steps to improve both labor efficiency and execution, though new cooking and preparation procedures, changes in the table busing model and streamlining the menu to simplify operational complexities.

According to the RBC Capital report, “The brand is also reinvesting in food, and shifting focus toward driving off-premise occasions.”

Palmer expects the company to witness lower margins and slower unit growth in the near term, with restaurant margins of 14 percent during 2017, as compared to 19 percent in 2015.

Management cited sales deleveraging from new store opening as a major contributor of the recent margin deceleration.

Longer-Term Growth Opportunities

However, Palmer sees opportunities for future growth despite the near-term challenges, “as the company simplifies its operations and takes a more diligent approach in new unit development, and shifts its growth strategy from onpremise alcohol occasions to in-store family occasions, and to off-premise.”

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