Is Noodles & Company the Next Success Story?

Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The hottest initial public offering in 2013 wasn’t a Silicon Valley tech firm or a biotechnology company from India. It was a low-end pasta joint based in Denver that went public two weeks ago. The initial public offering, the first from any restaurant this year, was a blockbuster despite a volatile market that has led several companies to cut the size of their IPOs or scrap them altogether. Shares of Noodles & Company (NASDAQ: NDLS) were up nearly 96 percent in late morning trading, and are now resting comfortably way above the $40 mark. That's a total gain of more than 120% in two weeks of trading, nothing short of phenomenal. It seems that investors are absolutely starved for a good plate of noodles.

Who are you, Noodles & Company?

Noodles is a fast-growing casual restaurant offering both lunch and dinner meals. The restaurant chain offers high quality noodle and pasta dishes with flavors coming from across the world. Most of the dishes offered could be had for less than $8. Those are highly affordable, quality meals. At the moment, the company operates 343 restaurants across 26 states, of which 52 are franchised locations. Noodles sold 5.36 million shares for $18.00 a piece, thereby raising $96.5 million in gross proceeds. All shares were offered by the company with none being offered by selling shareholders. But the real reason behind this sudden urge for noodles isn't in the dish. It's in the growth prospects. Many investors envision Noodles as the next Chipotle Mexican Grill (NYSE: CMG) or the next Dunkin' Donuts (NASDAQ: DNKN). Below are two similar aspects to ponder.

Similarity #1: The "Godfather effect"

Neither of these three companies stands by itself. Each and every one had a sponsoring guiding parent to lead it through the intricacies of the fast food market. In Dunkin's case, for example, the "Godfathers" were private equity firms Carlyle, Bain and Lee Partners, which bought the company for $2.425 billion from Pernod Ricard S.A. in December 2005. Following the buyout, the firms focused increasingly on beverages like coffee, which drive customer frequency.

Sales grew from $460 million back in 2010 to $537 million in 2012. Net income jumped from $26.8 million in 2010 to $108 million in 2012. That's a whopping 315% growth in the bottom-line in only three years. All three firms tripled their profit on Dunkin'; it was really a huge success. Chipotle isn't alone either. Originally a spinoff from its parent company, McDonald's, Chipotle's management is comprised of highly seasoned veterans in the fast food industry that served as officers at McDonald's. And they certainly did a great job. Sales have doubled the last five years and earnings have risen 270%. The number of restaurants is up 30% in the last three years.

And Noodles is well positioned in that aspect. Private equity firm Catterton Partners now holds about 36.7% of Noodles after the IPO. It's only a matter of time before the firm shares its knowledge and experience with Noodles, which will add value to the company. In addition, Noodles is headed by Kevin Reddy, former COO of Chipotle. Between 2008 and 2012, years in which top-line growth was hard to come by for consumer-facing companies, Noodles saw revenue practically double, from $170 million to $300 million, while operating income rose eight-fold, from $2 million to $16 million. 

Similarity #2: Super growth sectors

Investors aren't salivating for nothing. They want growth, and they want it now. All three companies operate in the extremely high growth sector of casual fast food, which is growing faster than the overall industry. According to research firm Technomic, in Noodle's S1-Filing, the segment saw an 8.4% increase in revenues by 2011, totaling $21.5 billion in the whole of the U.S. And it shows. Currently, Chipotle is calling for opening 165-180 locations in fiscal 2013. In the first quarter, Chipotle opened 48 new restaurants. In the first quarter, revenue grew 13.4% to $726.8 million. Net income increased 22.2% to $76.6 million. That's a remarkable growth. In 2012, Noodles alone opened 45 new outlets and it expects that 50 new Noodles & Co. restaurants will open this year. And the restaurants that are open are reporting healthy same-store growth: 4.8 percent in 2011, and 5.4 percent in 2012.  

Dunkin' does have a bit of a problem on that front. Its core product happens to be in the sugary dessert category. This specific sector is currently being heavily targeted by regulators and various health organizations alike. But the company compensates for that shortfall very elegantly by introducing high-margin consumer products like coffee, tea, and beverages. They more than make up for this hurdle. 

The Fool looks back...and ahead

Whether Noodles will be able to replicate the success of Dunkin' and Chipotle still remains to be seen. But it's definitely set on the right track. With seasoned management, a grooming private equity firm, and a sector flush with growth, Noodles seems like a dish full of opportunity.  

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Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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