A lot of people like to compare Noodles & Co (NASDAQ:NDLS) to Chipotle Mexican Grill, Inc. (NYSE:CMG). Many investors have communicated disgust at Chipotle's overvalued stock price, which was partially justified. Even now, I still believe investors are still looking for the "new Chipotle." And while these two companies are both in the fast-casual dining niche of restaurants (the fastest growing area in the industry), the two stocks have some subtle differences that equate to a huge disparity in their futures. Investors don't need a substitute investment for Chipotle Mexican Grill, Inc. (NYSE:CMG), and if they did, it certainly wouldn't be Noodles & Co (NASDAQ:NDLS).
Numbers aren't useful here
In terms of financial numbers, both companies are pretty inflated relative to their earnings. Both restaurants have average growth rates, as well as struggling same stores sales growth.
But because there is lacking information and history on the numbers for Noodles & Co (NASDAQ:NDLS), we need to resort to business analysis using a bottom-up approach to get a feel for how these companies compare.
Chain vs Franchise
Both companies exhibit very different business models and management styles. In the Bloomberg documentary on Chipotle, Steve Ells (the founder of Chipotle Mexican Grill, Inc. (NYSE:CMG)) quickly shows that he's not a typical CEO.
The aspiring chef that turned business mogul puts an emphasis on quality. He regularly meets with the staff from Chipotle restaurants, ensures top-notch management, and keeps the company's menu simple and consistent.
Chipotle Mexican Grill, Inc. (NYSE:CMG) utilizes a chain business model, and does not franchise. And even with huge input costs from using high-grade ingredients, the company retains amazing operating margins using this style of chain-growth and quality assurance.
On the other hand, Noodles & Co (NASDAQ:NDLS) is moving towards a franchised business model. Sure, this model can help generate revenue growth, which is vital for the relatively new restaurant. But it doesn't help the company's bottom line - in fact, it might make things worse. In my observations, chain restaurants are generally more profitable, retain higher profit margins, and are more consistent in their quality than their franchised counterparts.
Chipotle currently has a 16.52% operating margin, towering over the 3.16% margin of Noodles & Co (NASDAQ:NDLS) And while this isn't totally fair because Noodles is a relatively new venture, it's also being very generous at the same time.
Noodles & Co (NASDAQ:NDLS) is mainly running chain operations right now, and needs to franchise in order to keep its debt at a safe level (which is already pretty high). As the company moves to even more franchised operations, operating margins probably won't grow to justify the stock price - even on a forward looking basis.
The little things add up
While the previous point might be enough to sway investors one way, these seemingly small factors might significantly sway the companies in different directions.
By now, you've probably heard of gluten-free diets. What was once a specialized diet for a small demographic is now a huge trend in America and is considered a $4.2 billion dollar industry.
A study shown by The NPD Group confirms the growing trend in American diets.
So why is this relative to the two companies we're talking about?