Noodles & Company Faces Slow Traffic Recovery In Q2, Despite Value Pricing Initiatives, Analyst Says

Benchmark analyst Todd M. Brooks reiterated a Buy rating on Noodles & Company NDLS, lowering the price target to $6 from $8.

The analyst awaits signs of traffic improvement, as 2Q23 has shown only modest traffic recovery so far, post difficult results in April.

Brooks adds that he hoped to see a "more meaningful pickup" in customer traffic trends over the May/June timeframe as NDLS worked to return some key value pricing to the menu.

However, given the sluggishness, the analyst lowered the 2Q23 systemwide same-store sales (SSS) estimate to (3.1)% from the prior estimate of (0.3)%. 

The analyst also decreased adjusted EPS and EBITDA estimates for the quarter to $0.03 and $10.3 million, below the current consensus of $0.06 and $12.5 million, respectively.

Brooks also lowered the restaurant-level margin assumption for the quarter by 30bps to 16.3% to reflect the margin impact of the expected SSS and revenue shortfall on both the labor and occupancy expense lines during the quarter. 

The analyst thinks it may take a longer period of time to recapture this value-focused customer as Placer AI data shows only a 70bps increase in June traffic vs. May levels.

On the positive side, the analyst views the recent hire of Michael Hynes as NDLS's new CFO positively, as he was a thoughtful financial leader, notes Brooks.

Given the challenging operating environment, the analyst applauds the speed with which NDLS filled the vacant CFO role.

Price Action: NDLS shares are trading lower by 6.6% to $3.18 on the last check Wednesday.

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