Monday, 1 July 2013

Noodles the next fast casual powerhouse?

A quick meal in the US means fast food which tends to be cheap but unhealthy. Luckily this is beginning to change. A number of relatively new companies are taking advantage of the gap between fast food and full service restaurants. Known as fast casual restaurants they combine the quality of full service restaurants and food made fresh with the convenience and value of fast food. The food is offered at value prices because there is no tipping and you do not have to sit around for someone to take your order and pay your bill. This growth shows up in industry numbers, according to Technomic in 2011 the 150 largest fast casual concepts grew sales by 8.4% compared with 3.5% for the the 500 largest restaurant chains in the US. The speed, quality and value offered by fast casual concepts means they are likely to continue to take share from casual dining restaurants.

Fast casual=Quality +Value
The main listed proponents of this trend are Chipotle Mexican Grill (CMG) and Panera Bread (PNRA). They are both favourites of mine a typical meal in New York will consist of me having breakfast at Panera Bread and lunch at Chipotle. Both concepts cater to the tend of eating healthy and making things easier for the consumer who no longer has to wait for the bill and tip.

Source: Noodles investor roadshow
There is another
There is another fast casual concept which has just joined the group, Noodles & Company listed last Friday with shares doubling on debut much like Chipotle when it listed. Noodles is a player in the fast casual space focused on you guessed it noodles. Noodles serves pasta and noodles from around the world ranging from Japanese Pan Noodles, Wisconsin Mac and Cheese, Pad Thai and Spaghetti. They also serve soups, sandwiches and salads. Average per person spend is $8.

Noodles has one of the best outlooks for store growth in the fast casual space. They have only 7 stores in California and zero in New York. Panera and Chipotle have great long term growth outlooks just in the US not even contemplating growth overseas but Noodles has even further to go.

                                                     Source: Noodles investor roadshow

After the float the management and directors will own 8.5% of the company. The great part about management is that they are ex-Chipotle Mexican Grill. When Chipotle was owned by McDonalds management helped grow Chipotle to more than 400 restaurants between 2000 and 2005 and have since grown Noodles from 100 to 327 between 2005 and 2012.

Indigestion?
A risk is management's old employer Chipotle, they are beginning to open their own noodle concept called Shophouse Southeast Asian Kitchen. Chipotle expect to have 8 restaurants opened by  mid-2014.

Similar ingredients for long term success
Same store sales are not as great as Chipotle's double digital growth when it listed but then again not many restaurant companies have. The large store growth potential and lack of noodle options/competitors suggest Noodles has similar ingredients for long term success.

Jason

Come visit our booth at the Sydney Trading and Investment Expo on the 19th-20th of July.

Disclosure: Decisive does not have a position in Noodles stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.