Comp-sales can be a good way to measure customer satisfaction, as it often is directly related to restaurant traffic. Last quarter, Noodles increased comp-sales 4.4%, growing this metric for the 29th time in 30 quarters.
Restaurant unit growth combined with ever-increasing comp-sales bode well for this chain’s profits. These are its strengths. Yet there are some lingering concerns.
In a previous article, I pointed out that Noodles’ profit margin is significantly lower than its competitors.
Although the profit margin is significantly lower than its competitors’ margin, Noodles’ margin improved this last quarter, which may seem like good news. But management stated that the principle reason for the improved margin is lower food costs coupled with higher menu prices.
Don’t expect this benefit to be carried forward. Management stated that food costs should go up in the 2nd half of the year, and there won’t be any more price increases this year. Profit margin should therefore fall once again.
Noodles is generating a ton of revenue, as company owned restaurants rake in almost $1.2 million each per year. Even with all the new restaurants coming, if this margin issue is not addressed the profits needed to justify this valuation won’t come.
The Ugly Conclusion
A popular restaurant concept and an extremely fast expansion plan have made Noodles & Co (NASDAQ:NDLS) the talk of the town. But with a forward P/E of over 70, this chain seems to be overvalued, even after the decline from recent highs. I’ll sit one out until management comes up with a concrete plan to improve margins.
The article Do You Have a Problem with Noodles? originally appeared on Fool.com.
Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and Chipotle Mexican Grill. The Motley Fool owns shares of Buffalo Wild Wings and Chipotle Mexican Grill.
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