Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Chipotle Mexican Grill, Inc. (CMG): The Practically Perfect Pasta IPO

Margins and Growth

Margins at Noodles are comparable to the sector favorites until we get to operating margins. The cost of sales, labor and occupancy are all in line with the investor-favored concepts including Chipotle Mexican Grill, Inc. (NYSE:CMG), BJ’s Restaurants, Inc. (NASDAQ:BJRI) and Panera Bread Co (NASDAQ:PNRA).

Margins

Gross #1 margins are cost of sales only

Gross #2 margins include labor.

Of the four, Noodles has the lowest operating and net margins and will need higher numbers to make them a great investment. Noodles total gross margins (food, beverage, packaging, labor) are in-line with their peers. It’s operating costs and interest expense that are killing the net and operating margins.

Operating expenses cover a lot of territory including marketing, administrative, occupancy, depreciation, pre-opening expense and a catchall called “other restaurant operating costs”. For most of these companies, occupancy  expense (largely rent) is separated from other restaurant operating costs. That allows us to see if there is a built-in advantage for any particular chain in rental expense. BJ’s Restaurants, Inc. (NASDAQ:BJRI) combines occupancy and other operating expense and occupancy percentages cannot be calculated.

Occupancy as a percentage of revenue

Occupancy costs are over 3% higher than Chipotle. Every little bit hurts their margins when comparing to the best in class.

Combined occupancy costs/other operating expense percentages:

While some of the operating costs are within a few percent of each other across these companies, high “other operating expenses” for  BJ’s. Panera Bread Co (NASDAQ:PNRA) and Noodles creates lower operating and net margins. Part of that expense is restaurant supplies that includes tableware for sit-down dining. Chipotle has no such expense and it counts the expense of its lower cost food packaging in cost of sales, making their operating costs low. Panera’s low combined expense is especially impressive since they also have higher cost  restaurant supplies for sit down dining.

Why go on and on about this? Noodles has the highest expense and the lowest margins. What we hope for if we invest is they will be forced to be competitive (to make investors happy and the stock price going up) in the fast casual space. Margins will have to expand and cutting operating expense is a place to start. It obviously can be and is done successfully at Chipotle and Panera Bread Co (NASDAQ:PNRA). With the CEO and COO backgrounds at McDonald’s and Chipotle Mexican Grill, Inc. (NYSE:CMG), they may be able to make it work.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading...