Simply put, if Noodles & Co cannot continue to ride out this wave of popularity they will fall and they will fall hard. In their S-1 filing, they list $160 million in assets, most of which consists of leasehold improvements and equipment. These assets don’t hold much value to anyone except for Noodles & Co, and as such would not generate much money in liquidation.
Contrast this with McDonald’s. In a similar article I wrote about Chipotle on Seeking, I noted that McDonald’s, even if they declined in popularity investors would still have significant downside protection. Specifically, McDonald’s Corporation (NYSE:MCD) operates 35,000 restaurants worldwide, and they either own or have a capital lease on all these sites. They generates revenue in two ways – from the rent they charge their franchisees and from royalties on their sales. To quote from that article:
The average McDonald’s restaurant measures 4,000 square feet, multiply that by 35,000 restaurants, and we find that McDonald’s Corporation (NYSE:MCD) owns 122 million square feet of real estate. Based on this metric, McDonald’s would rank as the third largest REIT — behind Simon Property Group (SPG) and General Growth Properties (GGP), who have 242 million and 139 million sqft of real estate, respectively. Put differently, McDonald’s Corporation (NYSE:MCD) generated $5.86 billion in rent last year, using this metric, McDonald’s would rank as the largest REIT in the world.
Considering the rise of other alternative fast food joints like, Shake Shack, Potbelly Sandwiches, Pret-A-Manager, Le Pain Quotdien Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera, we need to ask — can the marketplace absorb another operator in this market? Considering the fierceness of the competition, I think we should take pause.
Conclusions
I grew up in the late 90’s early 2000’s – around that time a popular alternative fast food restaurant opened up called Cosi’s (COSI). Cosi’s went public in 2002 at a price of $30 reaching a high of $43 four years later. They had much of the same promise as Noodles & Co, today the stock sits at $2. I am not predicting that Noodles & Co (or others like it) will suffer the same fate as Cosi’s, but if you want to invest in the restaurant space, make sure that your investment can weather the good times as well as the bad.
Truthfully, the only way Noodles & Co can justify its valuation only if it aggressively moves to the franchise model, and fast. If instead of having an 80/20 split between company owned vs. franchise, they could move more to a 50/50 model, then they could start accelerating growth at a rapid pace. However, the current numbers, do not justify the stock price in the short term, and in the long term Noodles & Co (NASDAQ:NDLS) will need to continue to ride their wave of popularity, because they have no hard assets to break their fall.
The article What’s the Deal With Noodles & Company? originally appeared on Fool.com and is written by Daniel Lauchheimer.
Daniel Lauchheimer has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican (NYSE:CMG) Grill, McDonald’s, and Panera Bread Co (NASDAQ:PNRA). The Motley Fool owns shares of Chipotle Mexican Grill, Inc. (NYSE:CMG), McDonald’s Corporation (NYSE:MCD), and Panera Bread Co (NASDAQ:PNRA). Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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