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This Restaurant Company Proves There Is Money in Pasta


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Many pasta focused Italian restaurant chains are having a tough time. Olive Garden of Darden Restaurants , Macaroni Grill of Ignite Restaurant Group , and others are seeing pullbacks in sales. Despite this tough environment, newcomer to the public scene Noodles & Company seems to have the secret sauce that is bringing guests in the doors in increasing numbers.

Noodles reported its third-quarter results on Nov. 6. Revenue jumped 15.4% to $88.9 million. Systemwide same-store sales climbed 2.1%. Adjusted net income shot up 44.6% to $3.3 million or $0.11 per share.

CEO Kevin Reddy stated that the excellent results were despite "a tepid consumer environment." He stated the company's success was due to investments in its brand. He pointed out their "long track record of strong, consistent growth."

Noodles is seeing an increase in both the number of guests who visit each restaurant and the average amount each guest spends. Reddy revealed that the fourth quarter is already showing strong early performance. The company guided for fourth quarter same-store sales growth of 3.75%-4.25% or roughly twice the pace of the third quarter.

Conference call
In the call, Noodles offered more color. It was the 16th quarter in a row of same-store sales growth. Noodles achieved this without any new marketing initiatives, discounts, or "limited time only" promotions that are common with other chains. This suggests that the brand is indeed the main driver of its success instead of gimmicks.

All of this gives management confidence that it can raise prices without sacrificing guest traffic or sales. The company began the quarter with 1.5%-2% in price increases, and it expects the total price increase for the fourth quarter to be 2.5%.

Darden Restaurants owns and operates several restaurant concepts. It had its most recent quarterly report on Sept. 20. Revenue was up 6.1% and same-store sales were up 0.5%. However, the Olive Garden concept was much weaker than the rest of Darden Restaurants. Olive Garden saw overall sales dip by 0.4% and same-store sales dived 4%.

In the Darden Restaurants conference call, the company blamed a failed promotion in July for the weak performance as well as "weaker overall industry conditions ." CEO Clarence Otis also said it was a "surprisingly weak summer."

Ignite Restaurant Group owns three restaurant concepts: Joe's Crab Shack, Brick House Tavern+ Tap, and Macaroni Grill. Joe's saw a 3.3% increase in same-store sales, while Brick House Tavern saw a 4% increase. Both of these are considered excellent in the restaurant industry these days. However, Ignite Restaurant Group's Macaroni Grill saw a 2.7% decline.

Though this was an improvement from the 7.4% decline the quarter just prior, management revealed in the conference call that October was weaker on same-store sales. When pressed in the Q&A session, President Michael Dixon described the October same-store sales as "slightly high negative single digits." That sounds like back to the 7.4% range again. CEO Ray Blanchette warns, "Macaroni Grill remains viable but it's going to take some time to bear fruit."

Foolish final thoughts
Given the struggles other pasta joints are having, Noodles seems to have figured out the perfect recipe to success. It has achieved 16 quarters in a row of same-store sales growth despite the ups and downs of the economy. Look for this company to continue to outperform. As for the stock? Perhaps it needs to cool off a bit first. Noodles may be successful at raising prices, but with a forward P/E of 70, investors may want to be a bit stingy and wait before jumping in.

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The article This Restaurant Company Proves There Is Money in Pasta originally appeared on Fool.com.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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