UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 20232, 2024
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35987
NOODLES & COMPANY
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 84-1303469 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | |
520 Zang Street, Suite D | | |
Broomfield, CO | | 80021 |
(Address of principal executive offices) | | (Zip Code) |
(720) 214-1900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act.
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock, $0.01 par value per share | NDLS | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | | Accelerated filer | ☒ |
| | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☒ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | | | | |
Class | | Outstanding at May 5, 20236, 2024 |
Class A Common Stock, $0.01 par value per share | | 46,357,83045,346,349 shares |
TABLE OF CONTENTS
PART I
Item 1. Financial Statements
Noodles & Company
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
| | April 4, 2023 | | January 3, 2023 |
| | April 2, 2024 | | | | April 2, 2024 | | January 2, 2024 |
| | | (unaudited) | | | | | (unaudited) | | |
Assets | Assets | | | | | Assets | | |
Current assets: | Current assets: | | | | | Current assets: | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 2,064 | | | $ | 1,523 | |
Accounts receivable | Accounts receivable | | 4,762 | | | 6,443 | |
Inventories | Inventories | | 9,936 | | | 10,044 | |
Prepaid expenses and other assets | Prepaid expenses and other assets | | 4,138 | | | 3,450 | |
Income tax receivable | Income tax receivable | | 186 | | | 176 | |
Total current assets | Total current assets | | 21,086 | | | 21,636 | |
Property and equipment, net | Property and equipment, net | | 134,715 | | | 129,386 | |
Operating lease assets, net | Operating lease assets, net | | 183,795 | | | 183,392 | |
Goodwill | Goodwill | | 7,154 | | | 7,154 | |
Intangibles, net | Intangibles, net | | 597 | | | 608 | |
Other assets, net | Other assets, net | | 1,697 | | | 1,667 | |
Total long-term assets | Total long-term assets | | 327,958 | | | 322,207 | |
Total assets | Total assets | | $ | 349,044 | | | $ | 343,843 | |
Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | | | | Liabilities and Stockholders’ Equity | | |
Current liabilities: | Current liabilities: | | | | | Current liabilities: | | |
Accounts payable | Accounts payable | | $ | 15,524 | | | $ | 15,308 | |
Accrued payroll and benefits | Accrued payroll and benefits | | 12,631 | | | 9,219 | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | | 11,230 | | | 11,005 | |
Current operating lease liabilities | Current operating lease liabilities | | 28,581 | | | 28,581 | |
| Total current liabilities | Total current liabilities | | 67,966 | | | 64,113 | |
Total current liabilities | |
Total current liabilities | |
Long-term debt, net | Long-term debt, net | | 51,216 | | | 46,051 | |
Long-term operating lease liabilities, net | Long-term operating lease liabilities, net | | 186,594 | | | 187,320 | |
Deferred tax liabilities, net | Deferred tax liabilities, net | | 156 | | | 229 | |
Other long-term liabilities | Other long-term liabilities | | 7,181 | | | 7,766 | |
Total liabilities | Total liabilities | | 313,113 | | | 305,479 | |
| Stockholders’ equity: | Stockholders’ equity: | | | | |
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of April 4, 2023 and January 3, 2023; no shares issued or outstanding | | — | | | — | |
Common stock—$0.01 par value, 180,000,000 shares authorized as of April 4, 2023 and January 3, 2023; 48,781,701 issued and 46,357,830 outstanding as of April 4, 2023 and 48,464,298 issued and 46,040,427 outstanding as of January 3, 2023 | | 488 | | | 485 | |
Treasury stock, at cost, 2,423,871 shares as of April 4, 2023 and January 3, 2023 | | (35,000) | | | (35,000) | |
Stockholders’ equity: | |
Stockholders’ equity: | | | |
Preferred stock—$0.01 par value, 1,000,000 shares authorized and undesignated as of April 2, 2024 and January 2, 2024; no shares issued or outstanding | |
Common stock—$0.01 par value, 180,000,000 shares authorized as of April 2, 2024 and January 2, 2024; 47,770,220 issued and 45,346,349 outstanding as of April 2, 2024 and 47,413,585 issued and 44,989,714 outstanding as of January 2, 2024 | |
Treasury stock, at cost, 2,423,871 shares as of April 2, 2024 and January 2, 2024 | |
Additional paid-in capital | Additional paid-in capital | | 211,946 | | | 211,267 | |
Accumulated deficit | Accumulated deficit | | (141,503) | | | (138,388) | |
Total stockholders’ equity | Total stockholders’ equity | | 35,931 | | | 38,364 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | | $ | 349,044 | | | $ | 343,843 | |
See accompanying notes to condensed consolidated financial statements.
Noodles & Company
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data, unaudited)
| | |
| |
| |
| | | | Fiscal Quarter Ended | |
| | | April 4, 2023 | | March 29, 2022 | |
Revenue: | Revenue: | | | | | |
Revenue: | |
Revenue: | |
Restaurant revenue | |
Restaurant revenue | |
Restaurant revenue | Restaurant revenue | | $ | 123,227 | | | $ | 109,961 | | |
Franchising royalties and fees, and other | Franchising royalties and fees, and other | | 2,850 | | | 2,601 | | |
Franchising royalties and fees, and other | |
Franchising royalties and fees, and other | |
Total revenue | |
Total revenue | |
Total revenue | Total revenue | | 126,077 | | | 112,562 | | |
Costs and expenses: | Costs and expenses: | | | | | |
Costs and expenses: | |
Costs and expenses: | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | |
Cost of sales | Cost of sales | | 31,025 | | | 30,771 | | |
Cost of sales | |
Cost of sales | |
Labor | |
Labor | |
Labor | Labor | | 39,830 | | | 35,493 | | |
Occupancy | Occupancy | | 11,486 | | | 11,149 | | |
Occupancy | |
Occupancy | |
Other restaurant operating costs | |
Other restaurant operating costs | |
Other restaurant operating costs | Other restaurant operating costs | | 24,011 | | | 21,866 | | |
General and administrative | General and administrative | | 13,641 | | | 11,840 | | |
General and administrative | |
General and administrative | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | Depreciation and amortization | | 6,250 | | | 5,721 | | |
Pre-opening | Pre-opening | | 492 | | | 408 | | |
Pre-opening | |
Pre-opening | |
Restaurant impairments, closure costs and asset disposals | |
Restaurant impairments, closure costs and asset disposals | |
Restaurant impairments, closure costs and asset disposals | Restaurant impairments, closure costs and asset disposals | | 1,569 | | | 1,389 | | |
Total costs and expenses | Total costs and expenses | | 128,304 | | | 118,637 | | |
Total costs and expenses | |
Total costs and expenses | |
Loss from operations | |
Loss from operations | |
Loss from operations | Loss from operations | | (2,227) | | | (6,075) | | |
| Interest expense, net | Interest expense, net | | 961 | | | 437 | | |
| Interest expense, net | |
| Interest expense, net | |
Loss before taxes | Loss before taxes | | (3,188) | | | (6,512) | | |
Benefit from income taxes | | (73) | | | (83) | | |
Loss before taxes | |
Loss before taxes | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
Net loss | |
Net loss | |
Net loss | Net loss | | $ | (3,115) | | | $ | (6,429) | | |
Loss per Class A and Class B common stock, combined | Loss per Class A and Class B common stock, combined | | | | | |
Loss per Class A and Class B common stock, combined | |
Loss per Class A and Class B common stock, combined | |
Basic | |
Basic | |
Basic | Basic | | $ | (0.07) | | | $ | (0.14) | | |
Diluted | Diluted | | $ | (0.07) | | | $ | (0.14) | | |
Diluted | |
Diluted | |
Weighted average shares of Class A and Class B common stock outstanding, combined: | |
Weighted average shares of Class A and Class B common stock outstanding, combined: | |
Weighted average shares of Class A and Class B common stock outstanding, combined: | Weighted average shares of Class A and Class B common stock outstanding, combined: | | | | | |
Basic | Basic | | 46,115,506 | | | 45,726,500 | | |
Basic | |
Basic | |
Diluted | Diluted | | 46,115,506 | | | 45,726,500 | | |
Diluted | |
Diluted | |
See accompanying notes to condensed consolidated financial statements.
Noodles & Company
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data, unaudited)
| | | Fiscal Quarter Ended | | | | Fiscal Quarter Ended |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock(1) | | Treasury | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
| | Fiscal Quarter Ended |
Balance—January 2, 2024 | |
Balance—January 2, 2024 | |
Balance—January 2, 2024 | |
Stock plan transactions and other | |
| | | Common Stock(1) | | Treasury | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
Stock-based compensation expense | |
Stock-based compensation expense | |
Stock-based compensation expense | |
Net loss | |
Balance—April 2, 2024 | |
| | | Shares | | Amount | | Shares | | Amount | | Additional Paid-In Capital | | Accumulated Deficit | | Total Stockholders’ Equity |
Balance—January 3, 2023 | |
Balance—January 3, 2023 | |
Balance—January 3, 2023 | Balance—January 3, 2023 | | 48,464,298 | | | $ | 485 | | | 2,423,871 | | | $ | (35,000) | | | $ | 211,267 | | | $ | (138,388) | | | $ | 38,364 | |
Stock plan transactions and other | Stock plan transactions and other | | 317,403 | | | 3 | | | — | | | — | | | (644) | | | — | | | (641) | |
Stock-based compensation expense | Stock-based compensation expense | | — | | | — | | | — | | | — | | | 1,323 | | | — | | | 1,323 | |
Net loss | Net loss | | — | | | — | | | — | | | — | | | — | | | (3,115) | | | (3,115) | |
Balance—April 4, 2023 | Balance—April 4, 2023 | | 48,781,701 | | | $ | 488 | | | 2,423,871 | | | $ | (35,000) | | | $ | 211,946 | | | $ | (141,503) | | | $ | 35,931 | |
| Balance—December 28, 2021 | | 48,125,151 | | | $ | 481 | | | 2,423,871 | | | $ | (35,000) | | | $ | 207,226 | | | $ | (135,074) | | | $ | 37,633 | |
Stock plan transactions and other | | 133,443 | | | 2 | | | — | | | — | | | (301) | | | — | | | (299) | |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | 1,140 | | | — | | | 1,140 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (6,429) | | | (6,429) | |
Balance—March 29, 2022 | | 48,258,594 | | | $ | 483 | | | 2,423,871 | | | $ | (35,000) | | | $ | 208,065 | | | $ | (141,503) | | | $ | 32,045 | |
| | | | |
_____________
(1)Unless otherwise noted, activity relates to Class A common stock.
See accompanying notes to condensed consolidated financial statements.
Noodles & Company
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
| | | | Fiscal Quarter Ended | | | Fiscal Quarter Ended |
| | | April 4, 2023 | | March 29, 2022 | | | April 2, 2024 | | April 4, 2023 |
Operating activities | Operating activities | | | | | Operating activities | | |
Net loss | Net loss | | $ | (3,115) | | | $ | (6,429) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | Adjustments to reconcile net loss to net cash provided by operating activities: | | |
Depreciation and amortization | Depreciation and amortization | | 6,250 | | | 5,721 | |
Deferred income taxes | Deferred income taxes | | (73) | | | (84) | |
Restaurant impairments, closure costs and asset disposals | Restaurant impairments, closure costs and asset disposals | | 398 | | | 496 | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | | 90 | | | 112 | |
Amortization of debt issuance costs | |
Amortization of debt issuance costs | |
Stock-based compensation | Stock-based compensation | | 1,302 | | | 1,120 | |
| Changes in operating assets and liabilities: | |
Changes in operating assets and liabilities: | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | Accounts receivable | | 1,606 | | | (513) | |
Inventories | Inventories | | 77 | | | (315) | |
Prepaid expenses and other assets | Prepaid expenses and other assets | | (749) | | | 1,378 | |
Accounts payable | Accounts payable | | (996) | | | (716) | |
Income taxes | Income taxes | | (10) | | | 1 | |
Operating lease assets and liabilities | Operating lease assets and liabilities | | (640) | | | (826) | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | | 3,082 | | | (6,005) | |
Net cash provided by (used in) operating activities | | 7,222 | | | (6,060) | |
Net cash provided by operating activities | |
Investing activities | Investing activities | | | | | Investing activities | | |
Purchases of property and equipment | Purchases of property and equipment | | (10,436) | | | (8,412) | |
| Proceeds from restaurant divestitures | | — | | | 1,577 | |
| Net cash used in investing activities | |
| Net cash used in investing activities | |
| Net cash used in investing activities | Net cash used in investing activities | | (10,436) | | | (6,835) | |
Financing activities | Financing activities | | | | | Financing activities | | |
Net borrowings from swing line loan | | 575 | | | 3,195 | |
Net (payments) borrowings from swing line loan | |
Proceeds from borrowings on long-term debt | Proceeds from borrowings on long-term debt | | 4,500 | | | 10,600 | |
Payments on long-term debt | | — | | | (750) | |
| Payments on finance leases | |
Payments on finance leases | |
Payments on finance leases | Payments on finance leases | | (679) | | | (505) | |
| | Stock plan transactions and tax withholding on share-based compensation awards | Stock plan transactions and tax withholding on share-based compensation awards | | (641) | | | (299) | |
Net cash provided by financing activities | | 3,755 | | | 12,241 | |
Net increase (decrease) in cash and cash equivalents | | 541 | | | (654) | |
| Stock plan transactions and tax withholding on share-based compensation awards | |
| Stock plan transactions and tax withholding on share-based compensation awards | |
Net cash (used in) provided by financing activities | |
Net (decrease) increase in cash and cash equivalents | |
Cash and cash equivalents | Cash and cash equivalents | | | | | Cash and cash equivalents | | |
Beginning of period | Beginning of period | | 1,523 | | | 2,255 | |
End of period | End of period | | $ | 2,064 | | | $ | 1,601 | |
See accompanying notes to condensed consolidated financial statements.
NOODLES & COMPANY
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business Summary and Basis of Presentation
Business
Noodles & Company (the “Company”), a Delaware corporation, develops and operates fast casual restaurants that serve globally inspired noodle and pasta dishes, soups, salads and appetizers. As of April 4, 2023,2, 2024, the Company had 461469 restaurants system-wide in 31 states, comprised of 369380 company-owned restaurants and 9289 franchise restaurants. The Company operates its business as one operating and reportable segment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Noodles & Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements on Form 10-K have been condensed or omitted. The condensed consolidated balance sheet as of January 3, 20232, 2024 was derived from audited financial statements. These financial statements should be read in conjunction with the audited financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2023.2, 2024.
Fiscal Year
The Company operates on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. The Company’s fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal year 2024, which ends on December 31, 2024, and fiscal year 2023, which endsended on January 2, 2024, containseach contain 52 weeks and fiscal year 2022, which ended on January 3, 2023, contained 53 weeks. The Company’s fiscal quarter that ended April 2, 2024 is referred to as the first quarter of 2024, and the fiscal quarter ended April 4, 2023 is referred to as the first quarter of 2023, and the fiscal quarter ended March 29, 2022 is referred to as the first quarter of 2022.2023.
Recently Issued Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure.” The ASU updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. The ASU is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company does not expect this to have a significant impact on its consolidated financial statements or related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied either prospectively or retrospectively. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.
2. Supplemental Financial Information
Accounts receivable consist of the following (in thousands):
| | | | | | | | | | | | | | |
| | April 4, 2023 | | January 3, 2023 |
Delivery program receivables | | $ | 1,716 | | | $ | 2,027 | |
Vendor rebate receivables | | 548 | | | 801 | |
Franchise receivables | | 1,767 | | | 2,050 | |
Other receivables | | 731 | | | 1,565 | |
Accounts receivable | | $ | 4,762 | | | $ | 6,443 | |
| | | | | | | | | | | | | | |
| | April 2, 2024 | | January 2, 2024 |
Delivery program receivables | | $ | 1,825 | | | $ | 1,869 | |
Vendor rebate receivables | | 712 | | | 779 | |
Franchise receivables | | 1,010 | | | 1,043 | |
Other receivables | | 785 | | | 1,453 | |
Accounts receivable | | $ | 4,332 | | | $ | 5,144 | |
Prepaid expenses and other assets consist of the following (in thousands):
| | April 4, 2023 | | January 3, 2023 |
| | April 2, 2024 | | | | April 2, 2024 | | January 2, 2024 |
Prepaid insurance | Prepaid insurance | | $ | 675 | | | $ | 882 | |
Prepaid occupancy related costs | Prepaid occupancy related costs | | 728 | | | 711 | |
| Assets held for sale | |
Prepaid expenses | Prepaid expenses | | 2,687 | | | 1,802 | |
Other current assets | Other current assets | | 48 | | | 55 | |
Prepaid expenses and other assets | Prepaid expenses and other assets | | $ | 4,138 | | | $ | 3,450 | |
Property and equipment, net, consists of the following (in thousands):
| | April 4, 2023 | | January 3, 2023 |
| | April 2, 2024 | | | | April 2, 2024 | | January 2, 2024 |
Leasehold improvements | Leasehold improvements | | $ | 215,960 | | | $ | 212,319 | |
Furniture, fixtures and equipment | Furniture, fixtures and equipment | | 154,573 | | | 152,786 | |
Construction in progress | Construction in progress | | 12,006 | | | 6,738 | |
| 382,539 | | | 371,843 | |
| | 415,023 | |
Accumulated depreciation and amortization | Accumulated depreciation and amortization | | (247,824) | | | (242,457) | |
Property and equipment, net | Property and equipment, net | | $ | 134,715 | | | $ | 129,386 | |
Accrued payroll and benefits consist of the following (in thousands):
| | April 4, 2023 | | January 3, 2023 |
| | April 2, 2024 | | | | April 2, 2024 | | January 2, 2024 |
Accrued payroll and related liabilities | Accrued payroll and related liabilities | | $ | 8,531 | | | $ | 5,004 | |
Accrued bonus | Accrued bonus | | 2,437 | | | 2,007 | |
Insurance liabilities | Insurance liabilities | | 1,663 | | | 2,208 | |
Accrued payroll and benefits | Accrued payroll and benefits | | $ | 12,631 | | | $ | 9,219 | |
Accrued expenses and other current liabilities consist of the following (in thousands):
| | April 4, 2023 | | January 3, 2023 |
| | April 2, 2024 | | | | April 2, 2024 | | January 2, 2024 |
Gift card liability | Gift card liability | | $ | 2,073 | | | $ | 2,430 | |
Occupancy related | Occupancy related | | 1,441 | | | 1,001 | |
Utilities | Utilities | | 1,252 | | | 1,612 | |
Current portion of finance lease liability | Current portion of finance lease liability | | 2,236 | | | 2,210 | |
| Accrued interest | | 120 | | | 70 | |
Insurance liabilities | | 380 | | | 415 | |
Other restaurant expense accruals | |
Other restaurant expense accruals | |
Other restaurant expense accruals | Other restaurant expense accruals | | 1,180 | | | 1,128 | |
Other corporate expense accruals | Other corporate expense accruals | | 2,548 | | | 2,139 | |
Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | | $ | 11,230 | | | $ | 11,005 | |
3. Long-Term Debt
On May 9, 2018, the Company entered into a credit facility with U.S. Bank National Association (the “2018 Credit Facility”). The 2018 Credit Facility was subsequently amended on November 20, 2019 and then again on June 16, 2020, (as amended, the “Second Amended Credit Facility”).
Assets Held for Sale
In April 2024, the Company entered into a definitive agreement to sell six restaurants to a new franchisee (“DND Noodles, Inc.”). The assets associated with the sale have been recorded in “Prepaid expenses and other assets” on the Condense Consolidated Balance Sheets as of April 2, 2024. Based on the sales price, there was no write down of assets related to this transaction during the quarter ended April 2, 2024 and a gain on sale will be recorded in the second quarter of 2024. The following table presents the carrying amounts of the major classes of assets classified as held for sale (in thousands):
| | | | | | | | |
| | April 2, 2024 |
Assets | | |
Current assets, total | | $ | 1,534 | |
Operating lease assets | | 43 | |
Current assets held for sale | | $ | 1,577 | |
| | |
| | |
| | |
3. Long-Term Debt
On July 27, 2022, the Company amendedentered into the Amended and restated its Second Amended Credit Facility by entering into the Third Amendment to theRestated Credit Agreement (as further amended, restated, extended, supplemented, modified and restated,otherwise in effect from time to time, the “Third Amended“A&R Credit Facility”Agreement”) which, with each other Loan Party (as defined in the A&R Credit Agreement) party thereto, each lender from time to time party thereto, and U.S. Bank National Association, as Administrative Agent, L/C Issuer and Swing Line Lender (each as defined in the A&R Credit Agreement). The A&R Credit Agreement matures on July 27, 2027. Among other things, the Third AmendedA&R Credit Facility:Agreement: (i) increased the credit facility from $100.0 million to $125.0 million; (ii) eliminated the term loan and principal amortization components of the credit facility; (iii) removed the Company’s capital expenditure covenant; (iv) enhanced flexibility for certain covenants and restrictions; and (v) lowered the spread of the Company’s cost of borrowing and transitioned from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (“SOFR”) plus a margin of 1.50% to 2.50% per annum, based upon the consolidated total lease-adjusted leverage ratio. In connection with the entry into the A&R Credit Agreement, the Company wrote off a portion of the unamortized debt issuance costs related to the Credit Agreement in the amount of $0.3 million in 2022. The A&R Credit Agreement is secured by a pledge of stock of substantially all of the Company’s subsidiaries and a lien on substantially all of the personal property assets of the Company and its subsidiaries.
On December 21, 2023, the Company amended its A&R Credit Agreement by entering into that certain First Amendment to Amended and Restated Credit Agreement (the “Amendment”). Among the modifications, the Amendment: (i) increased applicable rate ranges (A) with respect to SOFR loans, from 1.50% - 2.50% per annum to 1.75% - 3.00% per annum and (B) with respect to base rate loans, from 0.50% - 1.50% per annum to 0.75% - 2.00% per annum, in each case as determined by the Consolidated Total Lease Adjusted Leverage Ratio (as defined in the A&R Credit Agreement), (ii) amended the Consolidated Fixed Charge Coverage Ratio (as defined in the A&R Credit Agreement) in order to limit the deduction of capital expenditures to “Non-Growth Capital Expenditures”, (iii) added a defined term for “Non-Growth Capital Expenditures” (along with certain related definitions), (iv) added a new capital expenditures covenant governing entry into new lease agreements and (v) increased the Consolidated Total Lease Adjusted Leverage Ratio (as defined in the A&R Credit Agreement) to be no greater than (x) 4.50 to 1.00 for the period beginning on the last day of the fiscal quarter ending January 2, 2024 until and including the last day of the fiscal quarter ending December 30, 2025 and (y) 4.25 to 1.00 for the period beginning on the last day of the fiscal quarter ending March 31, 2026 until and including the last day of the fiscal quarter ending September 29, 2026.
As of April 4, 2023,2, 2024, the Company had $52.8$83.0 million of indebtedness (excluding $1.6$1.8 million of unamortized debt issuance costs) and $3.0 million of letters of credit outstanding under the Third AmendedA&R Credit Facility.Agreement. As of April 4, 2023,2, 2024, the Company had cash on hand of $2.1$1.3 million.
The Company’s revolver, which had a balance of $47.4$81.4 million as of April 4, 20232, 2024, bore interest at rates between 6.63%8.42% and 7.2%.10.50% during the first quarter of 2024. The Company’s swingline, which had a balance of $5.4$1.6 million as of April 4, 20232, 2024, bore interest at rates between 8.75% and 9.25%.10.50% in the first quarter of 2024.
The Company also maintains outstanding letters of credit to secure obligations under its workers’ compensation program and certain lease obligations. The Company was in compliance with all of its debt covenants as of April 4, 20232, 2024.
4. Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current liabilities approximate their fair values due to their short-term nature. The carrying amounts of borrowings approximate fair value as the line of credit, swingline and borrowings vary with market interest rates and negotiated terms and conditions are consistent with current market rates. The fair value of the Company’s line of credit and borrowings are measured using Level 2 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets recognized or disclosed at fair value in the condensed consolidated financial statements on a non-recurring basis include items such as leasehold improvements, property and equipment, operating lease assets, goodwill and other intangible assets. These assets are measured at fair value if determined to be impaired.
Adjustments to the fair value of assets measured at fair value on a non-recurring basis as of April 2, 2024 and April 4, 2023 and March 29, 2022 are discussed in Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.
5. Income Taxes
The following table presents the Company’s provision for income taxes (in thousands):
| | Fiscal Quarter Ended | |
| April 4, 2023 | | March 29, 2022 | |
Benefit from income taxes | | $ | (73) | | | $ | (83) | | |
| | Fiscal Quarter Ended | |
| | Fiscal Quarter Ended | |
| | Fiscal Quarter Ended | |
| | April 2, 2024 | |
| | April 2, 2024 | |
| | April 2, 2024 | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
Effective tax rate | Effective tax rate | | 2.3 | % | | 1.3 | % | |
Effective tax rate | |
Effective tax rate | |
The effective tax rate for the first quarter of 2024 and 2023, and the first quarter of 2022 reflectsrespectively, reflects the impact of the previously recorded valuation allowance. For the remainder of fiscal 2023,2024, the Company does not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. The Company will maintain the valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.
6. Stock-Based Compensation
TheIn May of 2023, the Company’s Board of Directors adopted the 2023 Stock Incentive Plan, which was approved at the annual meeting of stockholders on May 16, 2023 (the “Plan”“2023 Plan”), as amended and restated in May of 2013,. The 2023 Plan authorizes the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance share units and incentive bonuses to employees, officers, non-employee directors and other service providers.providers, as applicable. The Company’s 2013 Stock Incentive Plan, as amended and restated in May of 2013 was terminated. As of April 4, 2023,2, 2024, approximately 0.23.1 million share-based awards were available to be granted under the 2023 Plan.
The following table shows total stock-based compensation expense (in thousands):
| | Fiscal Quarter Ended | |
| April 4, 2023 | | March 29, 2022 | |
| Fiscal Quarter Ended | |
| Fiscal Quarter Ended | |
| Fiscal Quarter Ended | |
| April 2, 2024 | |
| April 2, 2024 | |
| April 2, 2024 | |
Stock-based compensation expense | |
Stock-based compensation expense | |
Stock-based compensation expense | Stock-based compensation expense | $ | 1,391 | | | $ | 1,169 | | |
Capitalized stock-based compensation expense | Capitalized stock-based compensation expense | $ | 22 | | | $ | 20 | | |
Capitalized stock-based compensation expense | |
Capitalized stock-based compensation expense | |
7. Restaurant Impairments, Closure Costs and Asset Disposals
The following table presents restaurant impairments, closure costs and asset disposals (in thousands):
| | Fiscal Quarter Ended | |
| April 4, 2023 | | March 29, 2022 | |
| Fiscal Quarter Ended | |
| Fiscal Quarter Ended | |
| Fiscal Quarter Ended | |
| April 2, 2024 | |
| April 2, 2024 | |
| April 2, 2024 | |
Restaurant impairments (1) | |
Restaurant impairments (1) | |
Restaurant impairments (1) | Restaurant impairments (1) | $ | 86 | | | $ | 106 | | |
Closure costs (1) | Closure costs (1) | 558 | | | 389 | | |
Closure costs (1) | |
Closure costs (1) | |
Loss on disposal of assets and other | Loss on disposal of assets and other | 925 | | | 894 | | |
| $ | 1,569 | | | $ | 1,389 | | |
Loss on disposal of assets and other | |
Loss on disposal of assets and other | |
| $ | |
| $ | |
| $ | |
_____________________________
(1)Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed. Closure costs in the first quarter of 2024 include the impact of lease remeasurements related to held for sale accounting for the six Oregon restaurants sold to a franchisee in April of 2024.
There were no restaurant impairments in both first quarters of 2023 and 2022. ImpairmentImpairment is based on management’s current assessment of the expected future cash flows of a restaurant based on recent results and other specific market factors. Impairment expense is a Level 3 fair value measure and is determined by comparing the carrying value of restaurant assets to the estimated fair value of the restaurant assets at resale value and the right-of-use asset based on a discounted cash flow analysis utilizing marketmarket lease rates.
Closure costsThere were no impairment charges for fixed assets in the first quarters of 2024 and 2023. In the first quarter of 2023 consisted of2024, the Company wrote down lease related assets for one restaurant. All periods include ongoing equipment costs related tofor restaurants previously impaired.
The Company closed two restaurants closed induring both the first quarterquarters of 2023 as well as costs related to2024 and 2023. Both periods included ongoing expenses from restaurant closures in prior years. ClosureThese closure costs also include two earlywere offset by gains from lease termination settlements, oneremeasurement of which closed during$0.4 million in the first quarter of 2023,2024 and one of which closed during$0.3 million in the secondfirst quarter of 2023.
Loss on disposal of assets and other during the first quarters of 2023 and 2022 includesBoth periods include asset disposals in the normal course of business and leasesublease expense related costs and expensesto leases for which the Company remains obligated in connection with the divestiture of company-owned restaurants in 2022 and 2020.previous years.
8. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted EPS is calculated using net income (loss) available to common stockholders divided by diluted weighted-average shares of common stock outstanding during each period. Potentially dilutive securities include shares of common stock underlying stock options, warrants and RSUs. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.
The following table sets forth the computations of basic and diluted EPS (in thousands, except share and per share data):
| | |
| |
| |
| | | | Fiscal Quarter Ended | |
| | | April 4, 2023 | | March 29, 2022 | |
Net loss | Net loss | | $ | (3,115) | | | $ | (6,429) | | |
Net loss | |
Net loss | |
Shares: | |
Shares: | |
Shares: | Shares: | | | | | |
Basic weighted average shares outstanding | Basic weighted average shares outstanding | | 46,115,506 | | | 45,726,500 | | |
Basic weighted average shares outstanding | |
Basic weighted average shares outstanding | |
Effect of dilutive securities | |
Effect of dilutive securities | |
Effect of dilutive securities | Effect of dilutive securities | | — | | | — | | |
Diluted weighted average shares outstanding | Diluted weighted average shares outstanding | | 46,115,506 | | | 45,726,500 | | |
Diluted weighted average shares outstanding | |
Diluted weighted average shares outstanding | |
Loss per share: | |
Loss per share: | |
Loss per share: | Loss per share: | | | | | |
Basic loss per share | Basic loss per share | | $ | (0.07) | | | $ | (0.14) | | |
Basic loss per share | |
Basic loss per share | |
Diluted loss per share | Diluted loss per share | | $ | (0.07) | | | $ | (0.14) | | |
Diluted loss per share | |
Diluted loss per share | |
The Company computes the effect of dilutive securities using the treasury stock method and average market prices during the period. Potential common shares are excluded from the computation of diluted loss per share when the effect would be anti-dilutive. The shares issuable on the vesting or exercise of share-based awards that were excluded from the calculation of diluted earnings per share because the effect of their inclusion would have been anti-dilutive totaled 3,100,9633,317,111 and 1,018,9623,100,963 for the first quarters of 20232024 and 2022,2023, respectively.
9. Leases
Supplemental balance sheet information related to leases is as follows (in thousands):
| Classification | Classification | | April 4, 2023 | | January 3, 2023 | Classification | | April 2, 2024 | | January 2, 2024 |
Assets | Assets | | | | | |
Operating | |
Operating | |
Operating | Operating | Operating lease assets, net | | $ | 183,795 | | | $ | 183,392 | |
Finance | Finance | Property and equipment | | 4,813 | | | 5,258 | |
Total leased assets | Total leased assets | | $ | 188,608 | | | $ | 188,650 | |
Liabilities | Liabilities | | | | |
Current lease liabilities | Current lease liabilities | |
Current lease liabilities | |
Current lease liabilities | |
Operating | |
Operating | |
Operating | Operating | Current operating lease liabilities | | $ | 28,581 | | | $ | 28,581 | |
Finance | Finance | Accrued expenses and other current liabilities | | 2,236 | | | 2,210 | |
Long-term lease liabilities | Long-term lease liabilities | |
Operating | Operating | Long-term operating lease liabilities | | 186,594 | | | 187,320 | |
Operating | |
Operating | |
Finance | Finance | Other long-term liabilities | | 2,957 | | | 3,520 | |
Total lease liabilities | Total lease liabilities | | $ | 220,368 | | | $ | 221,631 | |
Sublease income recognized in the Condensed Consolidated Statements of Operations was $0.7 million and $0.8 million for both of the first quarters of 2024 and 2023, and 2022.respectively.
Supplemental disclosures of cash flow information related to leases are as follows (in thousands):
| | Fiscal Quarter Ended | |
| April 4, 2023 | | March 29, 2022 | |
| | Fiscal Quarter Ended | |
| | Fiscal Quarter Ended | |
| | Fiscal Quarter Ended | |
| | April 2, 2024 | |
| | April 2, 2024 | |
| | April 2, 2024 | |
Cash paid for lease liabilities: | |
Cash paid for lease liabilities: | |
Cash paid for lease liabilities: | Cash paid for lease liabilities: | | | | | |
Operating leases | Operating leases | | $ | 10,522 | | | $ | 10,444 | | |
Operating leases | |
Operating leases | |
Finance leases | Finance leases | | 764 | | | 614 | | |
| $ | 11,286 | | | $ | 11,058 | | |
Finance leases | |
Finance leases | |
| | $ | |
| | $ | |
| | $ | |
Right-of-use assets obtained in exchange for lease liabilities: | |
Right-of-use assets obtained in exchange for lease liabilities: | |
Right-of-use assets obtained in exchange for lease liabilities: | Right-of-use assets obtained in exchange for lease liabilities: | | | | | |
Operating leases | Operating leases | | $ | 7,015 | | | $ | 3,832 | | |
Operating leases | |
Operating leases | |
Finance leases | Finance leases | | 142 | | | 722 | | |
| $ | 7,157 | | | $ | 4,554 | | |
Finance leases | |
Finance leases | |
| | $ | |
| | $ | |
| | $ | |
10. Supplemental Disclosures to Condensed Consolidated Statements of Cash Flows
The following table presents the supplemental disclosures to the Condensed Consolidated Statements of Cash Flows for the first quarter ended April 2, 2024 and April 4, 2023 and March 29, 2022 (in thousands):
| | April 4, 2023 | | March 29, 2022 |
| | April 2, 2024 | | | | April 2, 2024 | | April 4, 2023 |
Interest paid (net of amounts capitalized) | Interest paid (net of amounts capitalized) | | $ | 738 | | | $ | 245 | |
Income taxes paid | Income taxes paid | | 10 | | | 1 | |
Purchases of property and equipment accrued in accounts payable | Purchases of property and equipment accrued in accounts payable | | 6,873 | | | 5,820 | |
11. Revenue Recognition
Revenue
Revenue consists of sales from restaurant operations, franchise royalties and fees, and sublease income. Revenue from the operation of company-owned restaurants is recognized when sales occur. The Company reports revenue net of sales tax collected from customers and remitted to governmental taxing authorities.
Gift Cards
The Company sells gift cards which do not have an expiration date, and it does not deduct non-usage fees from outstanding gift card balances. The Company recognizes revenue from gift cards when the gift card is redeemed by the customer or the Company determines the likelihood of the gift card being redeemed by the customer is remote (“gift card breakage”). The determination of the gift card breakage rate is based upon Company-specific historical redemption patterns. The Company has determined that approximately 13%14% of gift cards will not be redeemed and recognizes gift card breakage ratably over the estimated redemption period of the gift card, which is approximately 24 months. Gift card liability balances are typically highest at the end of each calendar year following increased gift card purchases during the holiday season.
As of April 4, 20232, 2024 and January 3, 2023,2, 2024, the current portion of the gift card liability, $2.1 million and $2.4$2.2 million, respectively, was included in accrued expenses and other current liabilities, and the long-term portion amountingamounting to $0.8 million $0.7and $1.0 million, respectively at each quarter end,, was included in other long-term liabilities in the Condensed Consolidated Balance Sheets.
Revenue recognized in the Condensed Consolidated Statements of Operations for the redemption of gift cards was $0.9 million and $1.0 million for both of the first quarters of 2024 and 2023, and 2022.
Franchise Fees
Royalties from franchise restaurants are based on a percentage of restaurant revenues and are recognized in the period the related franchised restaurants’ sales occur. Development fees and franchise fees, portions of which are collected in advance, are nonrefundable and are recognized in income ratably over the term of the related franchise agreement or recognized upon the termination of the agreement between the Company and the franchisee. The Company has determined that the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement and should be treated as a single performance obligation; therefore, initial fees received from franchisees are recognized as revenue over the term of each respective franchise agreement, which is typically 20 years.
Loyalty Program
The Company operates the Noodles Rewards program, which is primarily a spend-based loyalty program. With each purchase, Noodles Rewards members earn loyalty points that can be redeemed for rewards, including free products. Using an estimate of the value of reward redemptions, we defer revenue associated with points earned, net of estimated points that will not be redeemed based upon the Company’s historical redemption patterns. Points generally expire after six months. Revenue is recognized in a future period when the reward points are redeemed. As of April 4, 20232, 2024 and January 3, 2023,2, 2024, the deferred revenue related to the rewards waws $0.5as $0.8 million and $0.3$0.9 million, respectively and is included in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.
12. Commitments and Contingencies
In the normal course of business, the Company is subject to other proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of April 4, 2023.2, 2024. These matters could affect the operating results of any one financial reporting period when resolved in future periods. The Company believes that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to its consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than the Company currently anticipates, could materially and adversely affect its business, financial condition, results of operations or cash flows.
NOODLES & COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Noodles & Company is a Delaware corporation that was organized in 2002. Noodles & Company and its subsidiaries are sometimes referred to as “we,” “us,” “our” and the “Company” in this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended January 3, 2023.2, 2024. We operate on a 52- or 53-week fiscal year ending on the Tuesday closest to December 31. Our fiscal quarters each contain 13 operating weeks, with the exception of the fourth quarter of a 53-week fiscal year, which contains 14 operating weeks. Fiscal yearyears 2024 and 2023 containscontain 52 weeks and fiscal year 2022 contains 53 weeks.
Cautionary Note Regarding Forward-Looking Statements
In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties such as the number of restaurants we intend to open, projected capital expenditures and estimates of our effective tax rates. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on currently available operating, financial and competitive information. Examples of forward-looking statements include all matters that are not historical facts, such as statements regarding expectations with respect to unit growth and planned restaurant openings and projected capital expenditures and potential volatility through 2023 due to the current high inflationary environment and economic uncertainties, including the affects on consumer sentiment and behavior.. Our actual results may differ materially from those anticipated in these forward-looking statements due to reasons including, but not limited to, our ability to sustain our overall growth, including, our digital sales growth; our ability to open new restaurants on schedule and cause those newly opened restaurants to be successful; our ability to achieve and maintain increases in comparable restaurant sales and to successfully execute our business strategy, including new restaurant initiatives and operational strategies to improve the performance of our restaurant portfolio; the success of our marketing efforts, including our ability to introduce new products; current economic conditions including any impact from inflation, an economic recession or a risingcontinued elevated interest rate environment; price and availability of commodities and other supply chain challenges; our ability to adequately staff our restaurants; changes in labor costs; other conditions beyond our control such as global conflicts, wars, terrorist activity, weather, natural disasters, disease outbreaks, epidemics or pandemics impacting our customer or food supplies; and consumer reaction to industry related public health issues and health pandemics, including perceptions of food safety and those discussed in “Special Note Regarding Forward-Looking Statements” and “Risk Factors” as filed in our Annual Report on Form 10-K for our fiscal year ended January 3, 2023.2, 2024.
Recent Trends, Risks and Uncertainties
The COVID-19 Pandemic has adversely affected our historical operationsRevenue. During 2023 and financial results. However, throughout 2022 and during the first quarter of 2023, the impacts2024, we saw a decline in restaurant level traffic, and correspondingly in total revenue, that we believe was at least partially due to consumer response to our operations, financial performance and cash flowspast price increases. We have diminished materially. Iftaken actions to address this response including moderating the COVID-19 Pandemic were to become more widespread or another pandemic were to occur, our business could be similarly impacted in the future, including business disruption, employee absences and changes in the availability or costlevel of labor.
Revenue. During 2022 and into the first quarter of 2023, we implemented greater menu price increases relative to historical years as a result of ongoing inflation in our cost of food, wages and general restaurant expenses. In addition, our third-party delivery channel remains at a pricing premium to our owned channels. Our revenueother initiatives, but there is highly dependent on our customers’ future willingness to order from restaurants given consumer inflationary pressures and recessionary market dynamics. Revenue has been favorably impacted by recent restaurant openings not in the Company’s comparable restaurant base, many of which offer order ahead drive-thru pickup windows.no guarantee these actions will ultimately be successful.
Cost of Sales. We haveIn recent years, we incurred incremental costs of sales driven by historical and ongoing volatility in the commodity and food ingredients markets, particularly with our chicken products, in addition to an increase in packaging costs and distribution. DuringHowever, in 2023, the first quarter of 2023, we saw improvement incommodity markets underlying our cost of food relativeimproved substantially, particularly related to 2022 driven by favorable commodity costs
across our entire food basket, particularly the price of chicken. Throughout these periods of volatility, we have continued to work with our suppliers for ongoing supply chain efficiencies, including managing food waste and adding additional suppliers as necessary, and engage in fixed pricing contracts when advantageous. To date, there has been minimal disruption in maintaining adequate food supply, packaging and other ingredients to our restaurants, though it is possible that more significant disruptions could occur if volatility in the labor and commodity markets continue.necessary.
Labor Costs. Similar to much of the restaurant industry, our base labor costs have risen in recent years driven in part by high competitionyears. In 2023, wage inflation decelerated as we progressed throughout the year. However, we continue to see a highly competitive environment for restaurant workers in many jurisdictions in which we operate. During the first quarter of 2023, we saw modest deceleration in wage inflation growth although total wage inflation remains above historical averages.workers. We werehave been able to partially mitigate the impact of these market factors through a continued focus on our hiring process and retaining existing employees, in addition to maximizing efficiencies of labor hour usage per restaurant.Significant government-imposed wage increases and continued market factors could materially affect our labor costs.
Other Restaurant Operating Costs. We have incurred and expect to continue to incur third-party delivery fees resulting from significant usage of third-party delivery services.
Restaurant Development. We continued to experience select new restaurant development delays, including utility installations, permitting and inspection, and construction and labor challenges in 2023. While we anticipate these challenges will persist further into 2023, we have developed a pipeline to support an annual unit system-wide growth rate of approximately 7.5% in 2023, and expect to develop a pipeline with 7% to 10% unit growth thereafter.
In the first quarter of 2023,2024, we opened threetwo new company-owned restaurants. As of April 4, 2023,2, 2024, we had 369380 company-owned restaurants and 9289 franchise restaurants in 31 states. In 2024, we plan to open 10-12 new company-owned restaurants which is a reduced number of openings relative to recent years and could be reduced further in 2025 as we focus on improvements to our operating model and reducing the cost of new store development.
Certain Restaurant Closures. We permanently closed two company-owned restaurants in the first quarter of 2023.2024. We currently do not anticipate a significant number of permanent restaurant closureshad two franchise restaurants close in the foreseeable future; however, wefirst quarter of 2024. We may from time to time permanently close certain restaurants, including permanent closures at, or near, the expiration of the leases for these restaurants.
Key Measures We Use to Evaluate Our Performance
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include revenue, comparable restaurant sales, average unit volumes (“AUVs”), comparable restaurant sales, restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA. Restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA are non-GAAP financial measures.
Revenue
Revenue includes both restaurant revenue and franchise royalties and fees. Restaurant revenue represents sales of food and beverages in company-owned restaurants. Several factors affect our restaurant revenue in any period, including the number of restaurants in operation and per-restaurant sales. Franchise royalties and fees represent royalty income and initial franchise fees. While we expect that the majority of our revenue and net income growth will be driven by company-owned restaurants, our franchise restaurants remain an important factor impacting our revenue and financial performance.
Seasonal factors cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters, due to reduced winter and holiday traffic, and is typically higher in the second and third quarters. As a result of these factors, our quarterly operating results and comparable restaurant sales may fluctuate significantly.
Comparable Restaurant Sales
Comparable restaurant sales refer to year-over-year sales comparisons for the comparable restaurant base. We define the comparable restaurant base to include restaurants open for at least 18 full periods. This measure highlights the performance of existing restaurants, as the impact of new restaurant openings is excluded. Changes in comparable restaurant sales are generated by changes in traffic, which we calculate as the number of entrées sold, and changes in per-person spend, calculated as sales divided by traffic. Per-person spend can be influenced by changes in menu prices and the mix and number of items sold per person. Restaurants that were temporarily closed or operating at reduced hours remained in comparable restaurant sales.
Measuring our comparable restaurant sales allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
•consumer recognition of our brand and our ability to respond to changing consumer preferences;
•overall economic trends, particularly those related to consumer spending;
•our ability to operate restaurants effectively and efficiently to meet consumer expectations;
•pricing;
•the number of restaurant transactions, per-person spend and average check amount;
•marketing and promotional efforts;
•abnormal weather patterns;
•food safety and foodborne illness concerns;
•the impact of health pandemics;
•local competition;
•trade area dynamics;
•introduction of new and seasonal menu items and limited time offerings; and
•opening new restaurants in the vicinity of existing locations.
Consistent with common industry practice, we present comparable restaurant sales on a calendar-adjusted basis that aligns current year sales weeks with comparable periods in the prior year, regardless of whether they belong to the same fiscal period or not. Since opening new company-owned and franchise restaurants is a part of our long-term growth strategy and we anticipate new restaurants will be a component of our long-term revenue growth, comparable restaurant sales is only one measure of how we evaluate our performance.
Average Unit Volumes
AUVs consist of the average annualized sales of all company-owned restaurants for a given time period. AUVs are calculated by dividing restaurant revenue by the number of operating days within each time period and multiplying by the number of operating days we have in a typical year. Based on this calculation, temporarily closed restaurants are excluded from the definition of AUV, however, restaurants with temporarily reduced operating hours are included. This measurement allows management to assess changes in consumer traffic and per person spending patterns at our restaurants. In addition to the factors that impact comparable restaurant sales, AUVs can be further impacted by effective real estate site selection and maturity and trends within new markets.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution represents restaurant revenue less restaurant operating costs which are cost of sales, labor, occupancy and other restaurant operating costs. Restaurant contribution margin represents restaurant contribution as a percentage of restaurant revenue. We expect restaurant contribution to increase in proportion to the number of new restaurants we open, our comparable restaurant sales growth and cost reduction initiatives.
We believe that restaurant contribution and restaurant contribution margin are important tools for investors and other interested parties because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. We also use restaurant contribution and restaurant contribution margin as metrics to evaluate the profitability of incremental sales at our restaurants, restaurant performance across periods and restaurant financial performance compared with competitors. Restaurant contribution and restaurant contribution margin are supplemental measures of the operating performance of our restaurants and are not reflective of the underlying performance of our business because corporate-level expenses are excluded from these measures.
EBITDA and Adjusted EBITDA
We define EBITDA as net income (loss) before interest expense, net, provision (benefit) for income taxes and depreciation and amortization. We define adjusted EBITDA as net income (loss) before interest expense, net, provision (benefit) for income taxes, depreciation and amortization, restaurant impairments, closureloss on disposal of assets, net lease exit costs (benefits), loss on sale of restaurants, severance and asset disposals,executive transition costs related to corporate matters and stock-based compensation.
We believe that EBITDA and adjusted EBITDA provide clear pictures of our operating results by eliminating certain non-recurring and non-cash expenses that may vary widely from period to period and are not reflective of the underlying business performance.
The presentation of restaurant contribution, restaurant contribution margin, EBITDA and adjusted EBITDA, which may not be comparable to similarly titled financial measures used by other companies, is not intended to be considered in isolation or as a substitute for, or to be superior to, the financial information prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information to management and investors about operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making.
Results of Operations
The following table presents a reconciliation of net loss to EBITDA and adjusted EBITDA:
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| |
| |
| |
| |
| | | | Fiscal Quarter Ended | |
| | | April 4, 2023 | | March 29, 2022 | |
| | | (in thousands, unaudited) | | (in thousands, unaudited) |
Net loss | Net loss | | $ | (3,115) | | | $ | (6,429) | | |
Depreciation and amortization | Depreciation and amortization | | 6,250 | | | 5,721 | | |
Depreciation and amortization | |
Depreciation and amortization | |
Interest expense, net | Interest expense, net | | 961 | | | 437 | | |
Benefit from income taxes | | (73) | | | (83) | | |
Interest expense, net | |
Interest expense, net | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
EBITDA | EBITDA | | $ | 4,023 | | | $ | (354) | | |
Restaurant impairments, closure costs and asset disposals (1) | | 1,569 | | | 1,389 | | |
EBITDA | |
EBITDA | |
Restaurant impairments(2) | |
Restaurant impairments(2) | |
Restaurant impairments(2) | |
Loss on disposal of assets | |
Loss on disposal of assets | |
Loss on disposal of assets | |
Lease exit (benefits) costs, net | |
Lease exit (benefits) costs, net | |
Lease exit (benefits) costs, net | |
Severance and executive transition costs | |
Severance and executive transition costs | |
Severance and executive transition costs | |
Stock-based compensation expense | Stock-based compensation expense | | 1,391 | | | 1,169 | | |
| Costs related to corporate matters | | 30 | | | — | | |
Stock-based compensation expense | |
Stock-based compensation expense | |
Adjusted EBITDA | Adjusted EBITDA | | $ | 7,013 | | | $ | 2,204 | | |
Adjusted EBITDA | |
Adjusted EBITDA | |
_____________________
(1)Amounts for the fiscal quarter ended April 4, 2023 include modifications to the adjusted EBITDA calculation to remove adjustments for non-cash rent expense related to sub-leases, certain costs associated with closed restaurants and costs related to corporate matters to conform to the current year presentation.
(2)Restaurant impairments and closure costs in all periods presented above include amounts related to restaurants previously impaired or closed.impaired. See Note 7, Restaurant Impairments, Closure Costs and Asset Disposals.
The following table presents a reconciliation of loss from operations to restaurant contribution:
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| |
| |
| | | | Fiscal Quarter Ended | |
| | | April 4, 2023 | | March 29, 2022 | |
Loss from operations | Loss from operations | | $ | (2,227) | | | $ | (6,075) | | |
Loss from operations | |
Loss from operations | |
Less: Franchising royalties and fees, and other | |
Less: Franchising royalties and fees, and other | |
Less: Franchising royalties and fees, and other | Less: Franchising royalties and fees, and other | | 2,850 | | | 2,601 | | |
Plus: General and administrative | Plus: General and administrative | | 13,641 | | | 11,840 | | |
Plus: General and administrative | |
Plus: General and administrative | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | Depreciation and amortization | | 6,250 | | | 5,721 | | |
Pre-opening | Pre-opening | | 492 | | | 408 | | |
Pre-opening | |
Pre-opening | |
Restaurant impairments, closure costs and asset disposals | Restaurant impairments, closure costs and asset disposals | | 1,569 | | | 1,389 | | |
Restaurant impairments, closure costs and asset disposals | |
Restaurant impairments, closure costs and asset disposals | |
Restaurant contribution | |
Restaurant contribution | |
Restaurant contribution | Restaurant contribution | | $ | 16,875 | | | $ | 10,682 | | |
| Restaurant contribution margin | Restaurant contribution margin | | 13.7 | % | | 9.7 | % | |
| Restaurant contribution margin | |
| Restaurant contribution margin | |
Restaurant Openings, Closures and Relocations
The following table shows restaurants opened or closed during the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | Fiscal Quarter Ended | | |
| | April 4, 2023 | | March 29, 2022 | | | | |
Company-Owned Restaurant Activity | | | | | | | | |
Beginning of period | | 368 | | | 372 | | | | | |
Openings | | 3 | | | 5 | | | | | |
Closures | | (2) | | | (2) | | | | | |
Divestitures (1) | | — | | | (15) | | | | | |
Restaurants at end of period | | 369 | | | 360 | | | | | |
Franchise Restaurant Activity | | | | | | | | |
Beginning of period | | 93 | | | 76 | | | | | |
Openings | | — | | | 2 | | | | | |
Acquisitions (1) | | — | | | 15 | | | | | |
Closures | | (1) | | | — | | | | | |
Restaurants at end of period | | 92 | | | 93 | | | | | |
Total restaurants | | 461 | | | 453 | | | | | |
_____________________________ | | | | | | | | | | | | | | | | | | |
| | Fiscal Quarter Ended | | |
| | April 2, 2024 | | April 4, 2023 | | | | |
Company-Owned Restaurant Activity | | | | | | | | |
Beginning of period | | 380 | | | 368 | | | | | |
Openings | | 2 | | | 3 | | | | | |
Closures | | (2) | | | (2) | | | | | |
| | | | | | | | |
Restaurants at end of period | | 380 | | | 369 | | | | | |
Franchise Restaurant Activity | | | | | | | | |
Beginning of period | | 90 | | | 93 | | | | | |
Openings | | 1 | | | — | | | | | |
| | | | | | | | |
Closures | | (2) | | | (1) | | | | | |
Restaurants at end of period | | 89 | | | 92 | | | | | |
Total restaurants | | 469 | | | 461 | | | | | |
(1)Represents fifteen company-owned restaurants sold to a franchisee in 2022.
Statement of Operations as a Percentage of Revenue
The following table summarizes key components of our results of operations for the periods indicated as a percentage of our total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant revenue.
| | | | Fiscal Quarter Ended | |
| | | April 4, 2023 | | March 29, 2022 | |
| | (unaudited) |
| |
| |
| |
| | (unaudited) | |
| | (unaudited) | |
| | (unaudited) | |
Revenue: | Revenue: | | | | | |
Restaurant revenue | Restaurant revenue | | 97.7 | % | | 97.7 | % | |
Restaurant revenue | |
Restaurant revenue | |
Franchising royalties and fees, and other | |
Franchising royalties and fees, and other | |
Franchising royalties and fees, and other | Franchising royalties and fees, and other | | 2.3 | % | | 2.3 | % | |
Total revenue | Total revenue | | 100.0 | % | | 100.0 | % | |
Total revenue | |
Total revenue | |
Costs and expenses: | |
Costs and expenses: | |
Costs and expenses: | Costs and expenses: | | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | |
Cost of sales | |
Cost of sales | |
Cost of sales | Cost of sales | | 25.2 | % | | 28.0 | % | |
Labor | Labor | | 32.3 | % | | 32.3 | % | |
Labor | |
Labor | |
Occupancy | |
Occupancy | |
Occupancy | Occupancy | | 9.3 | % | | 10.1 | % | |
Other restaurant operating costs | Other restaurant operating costs | | 19.5 | % | | 19.9 | % | |
Other restaurant operating costs | |
Other restaurant operating costs | |
General and administrative | |
General and administrative | |
General and administrative | General and administrative | | 10.8 | % | | 10.5 | % | |
Depreciation and amortization | Depreciation and amortization | | 5.0 | % | | 5.1 | % | |
Depreciation and amortization | |
Depreciation and amortization | |
Pre-opening | |
Pre-opening | |
Pre-opening | Pre-opening | | 0.4 | % | | 0.4 | % | |
Restaurant impairments, closure costs and asset disposals | Restaurant impairments, closure costs and asset disposals | | 1.2 | % | | 1.2 | % | |
Restaurant impairments, closure costs and asset disposals | |
Restaurant impairments, closure costs and asset disposals | |
Total costs and expenses | Total costs and expenses | | 101.8 | % | | 105.4 | % | |
Total costs and expenses | |
Total costs and expenses | |
Loss from operations | |
Loss from operations | |
Loss from operations | Loss from operations | | (1.8) | % | | (5.4) | % | |
| Interest expense, net | Interest expense, net | | 0.8 | % | | 0.4 | % | |
| Interest expense, net | |
| Interest expense, net | |
Loss before taxes | Loss before taxes | | (2.5) | % | | (5.8) | % | |
Benefit from income taxes | | — | % | | (0.1) | % | |
Loss before taxes | |
Loss before taxes | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
Provision for (benefit from) income taxes | |
Net loss | Net loss | | (2.5) | % | | (5.7) | % | |
Net loss | |
Net loss | |
First Quarter Ended April 4, 20232, 2024 Compared to First Quarter Ended March 29, 2022April 4, 2023
The table below presents our unaudited operating results for the first quarters of 20232024 and 2022,2023, and the related quarter-over-quarter changes.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Quarter Ended | | Increase / (Decrease) |
| | April 4, 2023 | | March 29, 2022 | | $ | | % |
| | | |
| | (in thousands, unaudited) |
Revenue: | | | | | | | | |
Restaurant revenue | | $ | 123,227 | | | $ | 109,961 | | | $ | 13,266 | | | 12.1 | % |
Franchising royalties and fees, and other | | 2,850 | | | 2,601 | | | 249 | | | 9.6 | % |
Total revenue | | 126,077 | | | 112,562 | | | 13,515 | | | 12.0 | % |
Costs and expenses: | | | | | | | | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | |
Cost of sales | | 31,025 | | | 30,771 | | | 254 | | | 0.8 | % |
Labor | | 39,830 | | | 35,493 | | | 4,337 | | | 12.2 | % |
Occupancy | | 11,486 | | | 11,149 | | | 337 | | | 3.0 | % |
Other restaurant operating costs | | 24,011 | | | 21,866 | | | 2,145 | | | 9.8 | % |
General and administrative | | 13,641 | | | 11,840 | | | 1,801 | | | 15.2 | % |
Depreciation and amortization | | 6,250 | | | 5,721 | | | 529 | | | 9.2 | % |
Pre-opening | | 492 | | | 408 | | | 84 | | | 20.6 | % |
Restaurant impairments, closure costs and asset disposals | | 1,569 | | | 1,389 | | | 180 | | | 13.0 | % |
Total costs and expenses | | 128,304 | | | 118,637 | | | 9,667 | | | 8.1 | % |
Loss from operations | | (2,227) | | | (6,075) | | | 3,848 | | | (63.3) | % |
| | | | | | | | |
Interest expense, net | | 961 | | | 437 | | | 524 | | | 119.9 | % |
Loss before taxes | | (3,188) | | | (6,512) | | | 3,324 | | | (51.0) | % |
Benefit from income taxes | | (73) | | | (83) | | | 10 | | | (12.0) | % |
Net loss | | $ | (3,115) | | | $ | (6,429) | | | $ | 3,314 | | | (51.5) | % |
Company-owned: | | | | | | | | |
Average unit volume | | $ | 1,343 | | | $ | 1,249 | | | $ | 94 | | | 7.5 | % |
Comparable restaurant sales | | 6.9 | % | | 5.3 | % | | | | |
________________ | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Quarter Ended | | Increase / (Decrease) |
| | April 2, 2024 | | April 4, 2023 | | $ | | % |
| | | |
| | (in thousands, unaudited) |
Revenue: | | | | | | | | |
Restaurant revenue | | $ | 119,003 | | | $ | 123,227 | | | $ | (4,224) | | | (3.4) | % |
Franchising royalties and fees, and other | | 2,392 | | | 2,850 | | | (458) | | | (16.1) | % |
Total revenue | | 121,395 | | | 126,077 | | | (4,682) | | | (3.7) | % |
Costs and expenses: | | | | | | | | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | | | | |
Cost of sales | | 29,701 | | | 31,025 | | | (1,324) | | | (4.3) | % |
Labor | | 38,417 | | | 39,830 | | | (1,413) | | | (3.5) | % |
Occupancy | | 11,829 | | | 11,486 | | | 343 | | | 3.0 | % |
Other restaurant operating costs | | 23,464 | | | 24,011 | | | (547) | | | (2.3) | % |
General and administrative | | 13,044 | | | 13,641 | | | (597) | | | (4.4) | % |
Depreciation and amortization | | 7,370 | | | 6,250 | | | 1,120 | | | 17.9 | % |
Pre-opening | | 437 | | | 492 | | | (55) | | | (11.2) | % |
Restaurant impairments, closure costs and asset disposals | | 1,229 | | | 1,569 | | | (340) | | | (21.7) | % |
Total costs and expenses | | 125,491 | | | 128,304 | | | (2,813) | | | (2.2) | % |
Loss from operations | | (4,096) | | | (2,227) | | | (1,869) | | | 83.9 | % |
| | | | | | | | |
Interest expense, net | | 1,979 | | | 961 | | | 1,018 | | | 105.9 | % |
Loss before taxes | | (6,075) | | | (3,188) | | | (2,887) | | | 90.6 | % |
Provision for (benefit from) income taxes | | 65 | | | (73) | | | 138 | | | (189.0) | % |
Net loss | | $ | (6,140) | | | $ | (3,115) | | | $ | (3,025) | | | 97.1 | % |
Company-owned: | | | | | | | | |
Average unit volume | | $ | 1,253 | | | $ | 1,343 | | | $ | (90) | | | (6.7) | % |
Comparable restaurant sales | | (5.7) | % | | 6.9 | % | | | | |
*Not meaningful.
Revenue
Total revenue increased $13.5decreased $4.7 million in the first quarter of 2023,2024, or 12.0%3.7%, to $121.4 million, compared to $126.1 million compared to $112.6 million in the first quarter of 2022. This increase was primarily due to sales growth in the comparable restaurant base, in addition to a benefit from open restaurants that were temporarily closed during a portion of the first quarter of 2022 due to the Omicron variant. Revenue was also benefited by an incremental $4.3 million from new restaurant openings since the beginning of the first quarter of 2022, partially offset by a decline of $1.4 million due to restaurants closed or refranchised since the first quarter of 2022. System-wide comparable restaurant sales increased 6.4% in the first quarter of 20232023. This decrease was primarily due to a decline in comparable restaurant sales due to lower guest traffic, partially offset by growth in new restaurant openings. System-wide comparable restaurant sales decreased 5.4% in the first quarter of 2024 compared to the same period of 2022,2023, comprised of a 6.9% increase5.7% decrease at company-owned restaurants and a 4.1% increase4.5% decrease at franchise-owned restaurants. The comparable restaurant sales increase in the first quarter of 2023 reflects momentum in our in-person channels, in addition to price increases in our core menu.
Cost of Sales
Cost of sales increaseddecreased by $0.3$1.3 million, or 0.8%4.3%, in the first quarter of 20232024 compared to the same period of 2022,2023, primarily due to the increasedecrease in commodity costs and restaurant revenue. As a percentage of restaurant revenue, cost of sales decreased to 25.2%25.0% in the first quarter of 20232024 compared to 28.0%25.2% in first quarter of 20222023 primarily due to overall lower food and ingredient commodity pricing, particularly with our protein costs, partially offset by higher promotional discounts.menu price leverage.
Labor Costs
Labor costs decreased by $1.4 million, or 3.5%, in the first quarter of 2024 compared to the same period of 2023, due primarily to lower restaurant revenue. As a percentage of restaurant revenue, labor cost was flat at 32.3% in the first quarter of 2024
Labor Costs
Labor costs increased by $4.3 million, or 12.2%, incompared to the first quarter of 2023 compared to the same period of 2022, due primarily to the increase in restaurant revenue as well as wage inflation. As a percentage of restaurant revenue, labor costs remained flat at 32.3% in the first quarter of 2023 and the first quarter of 2022 due to labor efficienciesefficiency and lower health insurance, which werebenefits costs, offset by wage inflation.inflation and the impact of sales deleverage.
Occupancy Costs
Occupancy costs increased by $0.3 million, or 3.0%, in the first quarter of 20232024 compared to the first quarter of 2022,2023, primarily due to 12 new restaurants opened net of closures since the beginning of the first quarter of 2022.2023. As a percentage of revenue, occupancy costs decreasedincreased to 9.9% in the first quarter of 2024, compared to 9.3% in the first quarter of 2023 compareddue primarily to 10.1%a decrease in the first quarter of 2022 as a result of sales leverage.restaurant revenue.
Other Restaurant Operating Costs
Other restaurantrestaurant operating costs increaseddecreased by $2.1$0.5 million, or 9.8%2.3%, in the first quarter of 20232024 compared to the first quarter of 2022, due to the increase in restaurant revenue.2023. As a percentage of restaurant revenue, other restaurant operating costs decreasedincreased to 19.7% in the first quarter of 2024 compared to 19.5% in the first quarter of 2023 compared to 19.9% in the first quarter of 2022primarily due to sales leverage. Third-partya decrease in restaurant revenue and an increase in third-party delivery fees were 6.1% and 6.2% of total revenue for the first quarter of 2023 and 2022, respectively.fees.
General and Administrative Expense
General and administrative expense increaseddecreased by $1.8$0.6 million, or 15.2%4.4%, in the first quarter of 20232024 compared to the first quarter of 2022,2023, due primarily to an increasea decrease in employee related costs, including incentive-related costs.costs, partially offset by an increase in marketing spend. As a percentage of revenue, general and administrative expense increaseddecreased to 10.7% in the first quarter of 2024 from 10.8% in the first quarter of 2023 from 10.5% in the first quarter of 2022.
Depreciation and Amortization
Depreciation and amortization increased by $0.5$1.1 million, or 9.2%17.9%, in the first quarter of 20232024 compared to the first quarter of 2022,2023, due primarily to new asset additions for restaurants opened, partially offset by restaurant closures since the first quarter of 2022.2023.
Restaurant Impairments, Closure Costs and Asset Disposals
Restaurant impairments, closure costs and asset disposals increased $0.2decreased $0.3 million in the first quarter of 20232024 compared to the first quarter of 20222023 due primarily to earlya decrease in write downs of lease termination settlements. Both quarters include disposals of assetsrelated assets. No restaurants were impaired in the normal coursefirst quarter of business.2024 or 2023.
Interest Expense, Net
Interest expense, net increased $0.5$1.0 million in the first quarter of 20232024 compared to the first quarter of 2022,2023, due primarily to higher interest rates and higher debt balances in the first quarter of 20232024 as compared to the first quarter of 2022 driven primarily by higher capital costs due to new store openings since the first quarter of 2022.2023.
Provision for Income Taxes
The effective tax rate for the first quarter of 20232024 and for the first quarter of 20222023 reflect the impact of the previously recorded valuation allowance.allowance. For the remainder of fiscal 2023,2024, we do not anticipate material income tax expense or benefit as a result of the valuation allowance recorded. We will maintain a valuation allowance against deferred tax assets until there is sufficient evidence to support a full or partial reversal. The reversal of a previously recorded valuation allowance will generally result in a benefit from income tax.
Liquidity and Capital Resources
Summary of Cash Flows
We have historically used cash and our revolving credit facility to fund capital expenditures for new restaurant openings, reinvest in our existing restaurants, invest in infrastructure and information technology and maintain working capital. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have up to 30 days to pay our vendors.
We believe that we will be in compliance with our debt covenants and have sufficient sources of cash to meet our liquidity needs and capital resource requirements for at least the next twelve months, through currently available cash and cash equivalents, availability under our revolving credit facility and cash flows from operations.
Cash flows from operating, investing and financing activities are shown in the following table (in thousands):
| | | | | | | | | | | | | | |
| | Fiscal Quarter Ended |
| | April 4, 2023 | | March 29, 2022 |
Net cash provided by (used in) operating activities | | $ | 7,222 | | | $ | (6,060) | |
Net cash used in investing activities | | (10,436) | | | (6,835) | |
Net cash provided by financing activities | | 3,755 | | | 12,241 | |
Net increase (decrease) in cash and cash equivalents | | $ | 541 | | | $ | (654) | |
| | | | | | | | | | | | | | |
| | Fiscal Quarter Ended |
| | April 2, 2024 | | April 4, 2023 |
Net cash provided by operating activities | | $ | 7,005 | | | $ | 7,222 | |
Net cash used in investing activities | | (8,647) | | | (10,436) | |
Net cash (used in) provided by financing activities | | (37) | | | 3,755 | |
Net (decrease) increase in cash and cash equivalents | | $ | (1,679) | | | $ | 541 | |
Operating Activities
Net cash provided by operating activities was $7.0 million in the first quarter of 2024 compared to net cash provided by operating activities of $7.2 million in the first quarter of 2023 compared to net cash used in operating activities of $6.1 million in the first quarter of 2022.2023. The increase slight decrease in operating cash flow resulted primarily from higherlower cash flows from a reducedan increased net loss adjusted for non cashnon-cash items, as well asoffset by changes in working capital changes during the first quarter of 2023 compared to the prior period of 2022. Working capital variance includes source of cash related to payroll timing and accrued expense and other liabilities.capital.
Investing Activities
Net cash used in investing activities increased $3.6decreased $1.8 million to $8.6 million in the first quarter of 2024 from $10.4 million in the first quarter of 2023 from $6.8 million in the first quarter of 2022.2023. This increasedecrease was primarily due to higher investments indecreased spend for new restaurants and restaurant openings, as well as digital menu board technology in the first quarter of 2023 compared to the first quarter of 2022.technology.
Financing Activities
Net cash provided byused in financing activities was $37,000 in the first quarter of 2024, compared to net cash provided of $3.8 million in the first quarter of 2023, compared to $12.2 million in the first quarter of 2022.2023. The decrease from the first quarter of 20222023 was largely due to lowera reduction in net borrowings on our revolving credit facility and swingline due to improved financial performance.fund capital spending.
Capital Resources
Material Cash Requirements. Our short-term obligations consist primarily of certain lease and other contractual commitments related to our operations, normal recurring operating expenses, working capital needs, new store development, capital improvements and maintenance of our restaurants, regular interest payments on our debt obligations and certain non-recurring expenditures.
Our long-term obligations consist primarily of certain lease and other contractual commitments related to our operations and payment of our outstanding debt obligations. We are obligated under non-cancelable leases for our restaurants, administrative offices and equipment. In addition, our growthour target for new store development will require capital each year which is expected to be funded by currently available cash and cash equivalents, cash flows from operations and our revolving credit facility. Our capital expenditure requirements are primarily dependent upon the pace of our real estate development program and resulting new restaurant openings, costs for maintenance and remodeling of our existing restaurants as well as information technology expenses and other general corporate capital expenditures.
We estimate capital expenditures will be approximately $53.0approximately $28.0 million to $58.0$32.0 million for fiscal year 2023,fiscal year 2024, including $42.6$19.0 million to $47.6$23.0 million for the remainder of the year, prpriimarilymarily for the opening of company-owned restaurants before any reductions for landlord reimbursements, reinvestment in existing restaurants and investments in technology. We expect such capital expenditures to be funded by currently available cash and cash equivalents, cash flows from operations and if necessary, undrawn capacity under our revolving credit line.
Current Resources. Our operations have not historically required significant working capital and, like many restaurant companies, we operate with negative working capital. Restaurant sales are primarily paid for in cash or by credit or debit card, and restaurant operations do not require significant inventories or receivables. In addition, we receive trade credit for the purchase of food, beverages and supplies, therefore reducing the need for incremental working capital to support growth.
Liquidity. As of April 4, 20232, 2024, we had a cash balance of $2.1$1.3 million compared to $1.5$3.0 million as of January 3, 2023.2, 2024. The amount available for future borrowings under our Third AmendedA&R Credit FacilityAgreement (defined below) was $69.3$39.0 million as of April 4, 2023.2,
2024. We believe that our current cash and cash equivalents, the expected cash flows from company-owned restaurant operations, the expected franchise fees and royalties and available borrowings under the credit facility will be sufficient to fund our cash requirements for working capital needs, new restaurant openings, and capital improvements and maintenance of existing restaurants for at least the next twelve months.
Credit Facility
On May 9, 2018, we entered into a credit facility with U.S. Bank National Association (the “2018 Credit Facility”). The 2018 Credit Facility was subsequently amended on November 20, 2019 (as amended, the First Amended Credit Facility) and June 16, 2020, (as amended, the “Second Amended Credit Facility”).
On July 27, 2022, we entered into the Amended and Restated Credit Agreement as further amended, restated, extended, supplemented, modified and restated our Second Amendedotherwise in effect from time to time, the (“A&R Credit Facility by entering intoAgreement”), with each other Loan Party (as defined in the Third AmendmentA&R Credit Agreement) party thereto, each lender from time to time party thereto, and U.S. Bank National Association, as Administrative Agent, L/C Issuer and Swing Line Lender (each as defined in the Credit Agreement (as amended and restated, the “Third AmendedA&R Credit Facility”) whichAgreement). The A&R Credit Agreement matures on July 27, 2027. Among other things, the Third AmendedA&R Credit Facility:Agreement: (i) increased the credit facility from $100.0 million to $125.0 million; (ii) eliminated the term loan and principal amortization components of the credit facility; (iii) removed the our capital expenditure covenant; (iv) enhanced flexibility for certain covenants and restrictions; and (v) lowered the spread of our cost of borrowing and transitioned from LIBOR to the Secured Overnight Financing RateSOFR plus a margin of 1.50% to 2.50% per annum, based upon the consolidated total lease-adjusted leverage ratio. Our Third AmendedThe A&R Credit FacilityAgreement is secured by a pledge of stock of substantially all of our subsidiaries and a lien on substantially all of our and our subsidiaries’ personal property assets.
On December 21, 2023, we amended our A&R Credit Agreement by entering into that certain First Amendment to Amended and Restated Credit Agreement (the “Amendment”). Among the modifications, the Amendment: (i) increased applicable rate ranges (A) with respect to SOFR loans, from 1.50% - 2.50% per annum to 1.75% - 3.00% per annum and (B) with respect to base rate loans, from 0.50% - 1.50% per annum to 0.75% - 2.00% per annum, in each case as determined by the Consolidated Total Lease Adjusted Leverage Ratio (as defined in the A&R Credit Agreement), (ii) amended the Consolidated Fixed Charge Coverage Ratio (as defined in the A&R Credit Agreement) in order to limit the deduction of capital expenditures to “Non-Growth Capital Expenditures”, (iii) added a defined term for “Non-Growth Capital Expenditures” (along with certain related definitions), (iv) added a new capital expenditures covenant governing entry into new lease agreements and (v) increased the Consolidated Total Lease Adjusted Leverage Ratio (as defined in the A&R Credit Agreement) to be no greater than (x) 4.50 to 1.00 for the period beginning on the last day of the fiscal quarter ending January 2, 2024 until and including the last day of the fiscal quarter ending December 30, 2025 and (y) 4.25 to 1.00 for the period beginning on the last day of the fiscal quarter ending March 31, 2026 until and including the last day of the fiscal quarter ending September 29, 2026.
As of April 4, 2023,2, 2024, we had $52.8$83.0 million of indebtedness (excluding $1.6$1.8 million of unamortized debt issuance costs) and $3.0 million of letters of credit outstanding under the Third Amendedour A&R Credit Facility.Agreement.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or obligations as of April 4, 2023.2, 2024.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended January 3, 2023.2, 2024. Critical accounting estimates are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. While we apply our judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions. Our critical accounting estimates are identified and described in our annual consolidated financial statements and the related notes included in our Annual Report on Form 10-K for our fiscal year ended January 3, 2023.2, 2024.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk from changes in interest rates on outstanding debt. Our exposure to interest rate fluctuations is limited to our outstanding bank debt, which bears interest at variable rates. As of April 4, 2023,2, 2024, we had $52.8$83.0 million of outstanding borrowings under our A&R Credit Agreement, with an average interest rate during the first quarter of 2024 of 8.85%, compared to 4.09% during the first quarter of 2023, driven by an increase in market base rates. An increase or decrease
borrowings under our credit facility with an average interest rate during the first quarter of 2023 of 7.74%, compared to 3.22% during the first quarter of 2022, driven by an increase in market base rates. An increase or decrease of 1.0% in the effective interest rate applied on these loans would have resulted in a pre-tax interest expense fluctuation of approximately $0.5$0.8 million on an annualized basis.
Commodity Price Risk
We purchase certain products that are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors whichthat are not considered predictable or within our control. Although these products are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements contain risk management techniques designed to minimize price volatility. However, during 2022, duevolatility. We use these types of purchasing techniques to the volatility in severalcontrol costs as an alternative to directly managing financial instruments to hedge commodity markets and driven by vendor availability,prices. In many of our contracts were shorter duration than typical and, in some cases, were based on floating rate prices rather than fixed rate. As a result, we saw higher cost of food in 2022 than in prior years. Despite these increases, we believe we havemay be able to address material pricing power with our guests that allows us to adjustcommodity cost increases by adjusting our menu pricing, or change our product delivery strategy without impact to the demand for our brand.but multiple price increases over a short period of time may negatively affect customer behavior, as we observed in 2023. In the latter part of 2022 and throughout first quarter of 2023, the commodity markets underlying our cost of food began to improve materially, particularly in regardregarding to the price of chicken. HowHowevever,er, increases in commodity prices, without adjustments to our menu prices, have and could continue to increase restaurant operating costs as a percentage of restaurant revenue.
Inflation
The primary inflationary factors affecting our operations are food costs, labor costs, energy costs and materials and labor used in the construction of new restaurants. Increases in the minimum wage requirements directly affect our labor costs. ManyAdditionally, many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. Finally, the cost of constructing our restaurants is subject to inflationary increases in the costs of labor and material. Inflation has more significantly impacted our operating results during 2022 and inDuring the first quarter of 2024, the degree of inflation moderated compared to 2023 particularly in our commodity and construction markets, in addition to increased wagealthough total inflation that affected our results from 2017 through the first quarter of 2023.remains above historical averages. We expectanticipate inflation may continue to affect our results in the near future.
Item 4. Controls and Procedures
Our management carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectivenesseffectiveness of the design and operation of our disclosure controls and procedures as of April 4, 2023,2, 2024, pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclosedisclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
We are currently not a party to any material legal proceedings. From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity, reputational harm and other factors, and there can be no assurances that favorable outcomes will be obtained.
Item 1A. Risk Factors
A description of the risk factors associated with our business is contained in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended January 3, 2023.2, 2024. There have been no material changes to our Risk Factors as previously reported in our Annual Report on Form 10-K for our fiscal year ended January 3, 2023.2, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Director and Executive Officer Trading
During the quarter ended April 2, 2024, no director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements (as defined in Item 408 of Regulation S-K).
Item 6. Exhibit Index
| | | | | | | | |
Exhibit Number | | Description of Exhibit |
10.1 10.1* | | | |
10.2 | | | |
10.3 | | | |
10.2* | | |
10.3* | | |
10.4* | | |
10.5* | | |
31.1 | | | |
31.2 | | | |
32.1 | | | |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104.0 | | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
NOODLES & COMPANY |
By: | /s/ CARL LUKACHMIKE HYNES |
| Carl LukachMike Hynes
Chief Financial Officer (principal financial officer and duly authorized signatory for the registrant) |
Date | May 11, 20239, 2024 |