Digital Ordering And Menu Updates Will Spur Traffic Recovery Despite Margin Risks

Key Takeaways

• Menu innovation and digital engagement are driving customer loyalty, increased average check sizes, and stronger same-store sales and revenues.
  
• Portfolio optimization and operational improvements are enhancing margins, trimming losses, and positioning remaining restaurants for profitability and long-term growth.
  
• Rising costs, negative traffic trends, aggressive competition, and store closures threaten margins, revenue stability, and sustained brand growth.

Catalysts

A restaurant concept company, develops and operates fast-casual restaurants in the United States.

• Noodles & Company is addressing evolving consumer demand for value and convenience with the launch of new value platforms (e.g., Delicious Duos starting at $9.95) and expanded menu innovation (e.g., Chili Garlic Ramen LTO), which is expected to drive traffic recovery and support future same-store sales and revenues.
  
• Enhanced digital engagement and rewards program participation (own digital web/app traffic up 2% YoY; rewards member check-ins up 4% YoY, now 27% of transactions) leverages the ongoing shift to digital ordering and customer loyalty, supporting repeat business and increasing average check size, with positive implications for revenue and profitability.
  
• Company actions to optimize its restaurant portfolio by closing underperforming locations have removed negative cash flow units and increased sales/profits at remaining sites, positioning the brand for improved operating margins and net earnings as it refocuses on more profitable restaurants.
  
• Investment in operational improvements-such as revamped training, operations excellence coaching, and simplified menu execution-is expected to drive higher restaurant-level margins in the medium term by reducing COGS, controlling labor costs, and enhancing guest satisfaction, supporting improved EBITDA.
  
• Continued emphasis on comfort-food menu innovation with globally inspired and health-conscious offerings, aligned with consumer interest in diverse and customizable meal options, creates incremental revenue opportunities and helps sustain long-term traffic growth, broadly supporting top-line expansion.

Noodles Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Noodles's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts are not forecasting that Noodles will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Noodles's profit margin will increase from -8.7% to the average US Hospitality industry of 8.0% in 3 years.
• If Noodles's profit margin were to converge on the industry average, you could expect earnings to reach $39.2 million (and earnings per share of $0.83) by about August 2028, up from $-43.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.3x on those 2028 earnings, up from -0.8x today. This future PE is lower than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Noodles Future Earnings Per Share Growth

Risks

• Increasing labor costs, including wage inflation (2.7% in Q2) and costs associated with operational changes (e.g., new menu rollout and additional training), threaten to compress restaurant-level margins, impacting long-term profitability and net earnings.
  
• Sustained negative traffic trends (comp traffic -2.5% in Q2) and reliance on higher average checks from price increases expose the company to ongoing consumer sensitivities regarding value and affordability, posing a risk to revenue stability and future same-store sales growth.
  
• Heightened competitive discounting and aggressive value promotions industry-wide could force Noodles to intensify price competition or discounting efforts, further pressuring margins and limiting the company's ability to protect earnings and net margin.
  
• The closure of a significant number of underperforming restaurants, while removing negative cash flow locations, also signals ongoing portfolio instability and future revenue base contraction, potentially impeding top-line growth and long-term brand expansion.
  
• Ongoing food cost inflation (2% in Q2) and recipe adjustments to offset higher ingredient costs highlight vulnerability to input price volatility, raising persistent risks to cost of goods sold, gross margins, and ultimately overall profitability.

Valuation

• The analysts have a consensus price target of $2.5 for Noodles based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $487.5 million, earnings will come to $39.2 million, and it would be trading on a PE ratio of 4.3x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $0.72, the analyst price target of $2.5 is 71.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.