Shares of Noodles & Co. (NDLS) are in free fall this morning after the fast-casual eatery announced the departure of its CEO and said revenue would fall short of analyst forecasts. BMO Capital Markets analyst Andrew Strelzik writes that he is “losing confidence” in Noodles’ progress and cuts Nits shares to Market Perform from Outperform:
We are downgrading Noodles shares to Market Perform. Our downgrade reflects: 1) deteriorating confidence in the timing and trajectory of a same store sales/EPS recovery; and 2) more limited visibility into the near-term strategic direction of the company with the absence of a permanent CEO. First, while we had been optimistic that Noodles was making progress on its strategic initiatives and that its operating performance was close to turning a corner, we now believe the same store sales recovery will remain more protracted than we expected and potentially with greater volatility. Specifically, Noodles’ 2Q performance raises concerns regarding the degree to which its initiatives are resonating with customers as NDLS’s traffic recovery disappointingly appears to have slowed despite a benefit from Easter timing. In addition, the magnitude of Noodles same store sales underperformance relative to the industry reaccelerated on both a one and two- year basis. The change in CEO leadership likely implies July trends have not improved from the weaker 2Q levels and we do not believe the company would have made a change at the CEO position if it reasonably expected that improved performance was on the immediate horizon. Second, NDLS likely will continue to face meaningful margin pressure not only reflecting deleverage on mature units from tepid same store sales trends, but also as the same store sales headwinds are preventing the margin profile of an estimated 35% of its company-owned units from progressing toward normal levels. Third, we would not be surprised if Noodles’ development pace were to slow more than expected going forward based on the ongoing performance issues, lengthening the timeline to which Noodles may realign growth with its long-term algorithm. Fourth, although we would not expect a material near-term shift, the absence of a permanent CEO creates a temporary degree of uncertainty as to NDLS’ longer-term strategic direction.
On a bad day for restaurants generally–McDonald’s (MCD), Chipotle Mexican Grill (CMG), and Darden Restaurants (DRI) are all getting beaten up today–shares of Noodles & Co. are getting trashed. They’ve plunged 20% to $8.34 at 9:55 a.m. today, while McDonald’s has dropped 3.5% to $122.97 after reporting disappointing earnings, Chipotle Mexican Grill has fallen 1.6% to $434.64 after getting cut to Hold from Sell at Stifel, and Darden Restaurants is off 2.1% at $$61.82 after getting cut to Sell from Hold at Stifel.