NDLS - $12.80 - LONG

Background:

The company is a fast casual restaurant with 378 company stores and 76 franchised stores. The stock came public with a lot hype and crashed and burned due to rapid growth that was unsupported. That management is long gone and the company has a solid team that completely turned it around. They spent 2017 until the first half of ‘21 closing stores. The Covid disruption masked the marked improvements in the fundamentals. Fortunately, that’s done and over with. Now, the business has inflected and we believe it is in growth mode.

Bottomline: We think that the “cleanup” has been completed and now we’re in the 1st inning/inflection for meaningful store growth that we think can last for the next 5+ years. We speculate that NLDS can ultimately be as many as 2000 units before full saturation, so in our view, we think this company can become an opened-ended growth story.

Initially, the Company came out as “hot” IPO of the gate. At first, it was a CULT stock as NDLS came public as a potential next Chipotle-like company. Now, we think after a lot of heavy lifting, we could potentially see some high growth stock characteristics return if this team continues with solid execution.

First off, we believe an EBITDA and revenue inflection is occurring at NDLS. This former high flyer used to be a $50 stock but the prior management team grew too fast and instead the Company spent several years retrenching. I can make a credible case that this could be a $50 stock again in the future if they execute the growth plan.

Here’s where they stand at this time: NDLS is roughly 65% off-premise and they are doing this with no drive through operations. Fortunately, the food travels VERY well. Further, NLDS tech group are creating a virtual “drive thru” via a geofencing technology for customers to quickly pick up food curb-side. Essentially, as the customer (using the app) approaches the store, a runner brings out the food making it seem-less and fast for the customer and preventing a traffic logjam.

The company recently guided to strong AUV targets but 40% of their base is already above those AUV targets, so we feel that this should be very achievable.

Management:

Our opinion of the new management is that they have done a solid job here and executed a nice inflection in the business. We have been impressed with the CEO and one other person that particularly impressed our team is Stacy Pool. Here’s the link when she was hired:

https://investor.noodles.com/news-releases/news-release-details/stacey-pool-named-chief-marketing-officer-noodles-company

To us, she’s actually a big deal. She was at NKE and then later went to Vail Resorts (MTN). She was a key person that helped develop the Vail Resorts mega successful Epic pass program. Why does this matter? Noodles has a strong and cult like following with members of their loyalty program and the app has been very successful. we think she’s very focused on that area. It should be noted that the Company has 3.8M+ loyalty members, with what we believe to be Amazon Prime-like metrics (the company hasn’t disclosed these yet, they claim for competitive reasons). We think Stacy Pool (of EPIC Pass fame) could be very helpful in this regard.

Stock's potential:

So where can the stock go? First, the key question is what will the growth algorithm look like? We’re thinking as follows: Unit 7-10% growth, Comp growth of MSD, say 5% or so and some margin expansion.

If we’re right on our forecasts, then we think we are entering a 5+ year period where we should see comp and square footage growth. We are estimating we could see potentially at least 100+ stores over the next 5 years.

It’s worth watching a recent CEO/COO presentation at a conference. It’s very clear to me that management is bullish/encouraged:

https://wsw.com/webcast/clk21/register.aspx?conf=clk21&page=ndls&url=https%3A//wsw.com/webcast/clk21/ndls/1656269

To watch, simply sign up and you can watch the public webcast. 

Estimates:

When you run the math with AUVs north of $1.4M per unit, margins look compelling.

Here’s our best guess for estimates. ‘21 FCF estimates should be around the mid $30 million range. For context, the company is saying RLMs (restaurant level margins) will be 20%+ by ‘24. We believe they are being conservative.

Our estimates are as follows in terms of EBITDA as as follows:

EBITDA estimate of $58M for fiscal ‘22, EBITDA estimate of $66M for fiscal ‘23, EBITDA estimate of $83M in ‘24

If the above numbers are right, the stock should be a solid performer in our view.

Valuation:

When the stock was depressed and in deep “turnaround” mode and still closing stores, NLDS traded for 8-16x EBITDA. However, with rising franchisee income and a more obvious inflection, we think it could trade perhaps as high as 20x EBITDA, given it is a $584M market cap with no net debt and a giant NOL ($145M+). We think at this market cap, NDLS has real franchise value and take out value for one of the bigger guys.

Our thinking goes that if the market started to believe the growth algo that we think is going to happen, then this stock could trade at 20x $84M (‘24E) EBITDA or a $1.68BN EV. With only 46M s/o, that implies a $36+ stock price not including cash. One can discount that back and still generate a nice return. Additionally, since the Company has a meaningful NOL, as mentioned earlier, NDLS won’t be cash tax payer and therefore cash flow can go directly to growth and on the balance sheet.