Noodles & Company May Be About to Take a Hard Fall -- Is This a Buying Opportunity?

In light of the weakness in Italian restaurants from Sbarro filing bankruptcy to Olive Garden of Darden Restaurants' bad news regarding the harsh winter weather, it is thrilling to see Noodles & Company doing so well. Last quarter's results marked No. 18 of a nice track record for the fast-casual restaurant chain,  but will it continue?  Its expensive valuation may need a correction before it becomes a buy, and an upcoming catalyst may indeed give it that badly needed correction.

Source:  Noodles & Company

The high-carb results
On Feb. 26, Noodles & Company reported fiscal fourth-quarter results. Revenue jumped 17.4% to $91.5 million. Systemwide same-store sales popped 3.9%, which was even higher than the 2.1% third-quarter gain. Adjusted net income soared 65.9% to $3.5 million, or $0.11 per share. It was the 18^th straight quarter of positive same-store sales increases.

In the earnings report, CEO Kevin Reddy said: 

"Our ongoing success is a testament to the hard work of our entire team to deliver our globally inspired menu with an elevated level of service at an exceptional value, which we believe has distinguished Noodles as a 'Category of One' in the restaurant industry."

Going forward in 2014, Noodles & Company plans to expand its systemwide restaurant count by as much as 20%. Same-store sales are expected to generate gains of between 2.5% and 3%. Adjusted earnings per share are forecast to leap 25%.

Source: Noodles & Company

All of this is despite the "severe winter weather" negatively affecting the first quarter. This means 2014 is expected to be another fantastic year, but it calls into question whether the first quarter will be part of that. In the earnings release, Reddy warns, 

Nearly 80% of our restaurants are located in areas severely affected by atypical weather, including the Mid-Atlantic, Upper Midwest and Rocky Mountain West. In fact, [more than] 30% of our operating days thus far have seen either measurable precipitation or temperatures at least [20] degrees below normal.

Midwestern blizzards
Bob Evans Farms quickly comes to mind and serves as a possible warning for restaurants located in the Midwest. Bob Evans Farms has its core market located in this region. The chain saw its most severe drop in same-store sales in January and February. In fact, Bob Evans Farms estimates February was affected negatively by 9% as a result of the weather, which means what would have been a 2.3% same-store sales gain actually was a 6.7% loss for the month.

The Chipotle temptation
It can be rather tempting to search for the next Chipotle Mexican Grill or at least restaurant chains in the fast-casual space that hold promise. After all, Chipotle's stock has made a dizzy return since its IPO and continues to impress every quarter. Last quarter alone, revenue climbed 21%, same-store sales rose 9%, and diluted earnings per share were lifted by 30%.

Noodles & Company trades with a nosebleed valuation. Based on analyst estimates for 2014, it has a P/E ratio of 76; and based on 2015 estimates it has a P/E of 60. This compares to Chipotle Mexican Grill's P/E in the 40s for 2014 and 30s for 2015 despite overall stronger growth expectations.

Foolish final thoughts
Noodles & Company appears to be an excellent, small chain (300-plus restaurants) with a bright future, but it may be too pricey here. Consider waiting for the first-quarter report; results should be on the weak side and possibly even break its 18 quarter-long winning streak.  This in turn may cause some panic and a needed correction in the stock price. At that point, it may represent a good value because the weak first quarter would be due to the storms and not anything to do with the brand itself. Fools who wait may get an opportunity to get a much cheaper price in a fantastic growth story.