Noodles & Co's CEO Stepped Down. Now What?

Image source: Noodles & Company.

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On July 25, Noodles & Company (NASDAQ: NDLS) announced the departure of CEO Kevin Reddy from the company. Few details were given, but we know the company has been struggling since going public in 2013. What does the management mix-up mean, and what can the chain do to get back on track?

The big announcement

Reddy was both the CEO and the chairman of the company's board of directors. He stepped down from both positions effective the day of the announcement, and he also departed from the board of directors altogether.

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    In a brief statement accompanying the announcement, Reddy said he had decided that it was the right time in his career "to pursue new personal and financial opportunities." He continued, "I am looking forward to finding that elusive balance we all seek between personal goals and dreams and the right business opportunities that make them possible."

    Stepping in to fill his shoes as interim CEO is Dave Boennighausen, chief financial officer for Noodles since 2012. Robert Hartnett was added to the board of directors and immediately appointed chairman in Reddy's place. Hartnett has 40 years of experience in the restaurant industry, most recently as CEO of Houlihan's Restaurants. The board has begun an internal and external search for a permanent CEO.

    Putting aside an analysis of reasons for the departure, Noodles & Company has been struggling in recent years. Perhaps a shake-up at the top of the company can inject new life into the fast-casual chain.

    Trouble with the World Kitchen concept

    Noodles touts itself as a "World Kitchen," where noodle bowls can be customized any way a customer wants. Styles encompass everything from Japanese noodles to Italian fare and macaroni and cheese. In addition to its namesake noodles, the restaurant also offers soups, sandwiches, and salads. So it may sound like there's something on the menu for everyone, but the numbers suggest otherwise.

    Revenue in the first two quarters of 2016 was up 6.5% year over year, mainly driven by the opening of 70 new restaurants in 2015 -- 51 company owned and 19 franchised.Working against company efforts to expand, though, was the closure of 16 company-owned locations (and one franchised)during the last quarter of 2015.

    In addition to the handful of closing locations, same-restaurant sales have been in decline. Franchised locations have been struggling in particular, although the same problem is plaguing company-owned as well.

    Time period

    Company-Owned Same-Restaurant Sales

    Franchised Same-Restaurant Sales

    Q2 2016



    Q1 2016



    Fiscal year 2015



    Fiscal year 2014



    Chart data source: Noodles & Company quarterly earnings reports.

    The company cites a number of problems, although poor customer experience seems to be the most often mentioned. The company launched a new ad campaign last year and continues to reevaluate store operations to increase satisfaction and get traffic coming in more frequently. A new chief operations officer was also brought in to help with the efforts.

    A new direction needed

    With big management changes already announced and more to come for Noodles & Company, investors should be alert to new plans and initiatives. It's important that something change soon. The company swung to a loss of $13.8 million during 2015, compared with profit of $11.4 million in 2014. The loss is mounting as 2016 drags on, with the second-quarter loss alone totaling $14.1 million.

    One reason for the loss is narrowing restaurant contribution margins, or profit after restaurant operating expenses. In the last quarter, Noodles' restaurant contribution margin sat at 13.7% and 16.2% for the full year of 2015. That compares with margins of 21.1% and 26.1% respectively for fast-casual rivals Zoe's Kitchen (NYSE: ZOES) and Chipotle Mexican Grill (NYSE: CMG), demonstrating better margins than Noodles -- even while Zoe's is undergoing aggressive expansion and Chipotle deals with foodborne illness issues.

    Noodles won't be able to deal with these issues by simply opening new restaurants. Whether its menu changes, customer experience improves, cost cutting is implemented, or something else happens, the fact remains for now that investors are dissatisfied with the business performance. Stay tuned for a new head of business to step in and announce some ideas, but until then, the prospects for Noodles & Company don't look great.

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