Stop buying overpriced Noodles (& Company)

A rough and tumble food sector stock Noodles and Company ($NDLS) has been posting share value losses of over 80% since 2013, and still can’t keep it together. A fast casual chain focused on noodle based dishes, the stock seems to be all over the place. The stock has a 52-week trading range of $3.50 to $13.30, and while it has sales of $450 million, still manages to lose $7.6 million.

This being said, there is a small bright spot, as the company has a 73% gross margin, but still posts a -4% profit margin. Noodles and pasta based dishes are among the highest margin items in the food and beverage sector, (looking at you $DRI and Olive Garden), but this chain still seems determined to lose money making them.

They are trying but it isn’t enough

Noodles and Company has been closing sluggish and underperforming stores in an effort to help the bottom line, but it hasn’t done enough to help. Revenues still declined 6.4% in 2017, but even worse, company owned stores saw revenue fall 2.7%. Franchise stores were no stranger to loss either, as franchise store comps were down 0.5%. Not a good thing at all.

How you make money

This stock is coming out of the Wall Street kitchen lukewarm, and it’s time to send it back with an Overvalued rating. If you can’t seem to keep basic management together, it’s time to look at new things, not continuing to do what you do. Introducing “zoodles” didn’t seem to be enough (if you aren’t familiar, that stands for zuchinni noodles), so focus on the business at hand.

Shorting stock seems to be the best idea, as using a 5 YR DCF model puts the stock in a range of $2.42-$3.61, with our best guess being solidly in the $2.91 based on how the chain has been growing. This represents an almost 75% downside for this over valued, and over hyped stock.

Overall outlook

This stock is a lesson on being too niche in a changing wave on consumer sentiment. Processed food that is carb heavy is not among the hot consumer trends, and lacking a dish that someone would drive miles across town for, NDLS will have a hard time bringing consumers back.

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