Noodles Paying Down Debt Instead of Buying Growth

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

The exciting IPO is back baby! It seems like a galaxy far far away since the thrill of LinkedIn's opening day. After a string of other lackluster initial public offerings, Noodles & Company (NASDAQ: NDLS) stole the show last week by nearly tripling in price. Some bulls say Noodles is the next Chipotle Mexican Grill (NYSE: CMG). Some bears say the company is overpriced. Either way, I say the company's use of the IPO proceeds proves this company is a winner.

IPO proceeds

Noodles & Company's IPO was originally slated to make the company $75 million. High demand caused an $18/share opening -- above original IPO expectations -- netting the company $87 million. The plan was to use $66 million to pay down debt, but with the extra cash from the higher IPO price Noodles decided to pay off $86 million, leaving the company with around $14 million in outstanding debt.

This is being frowned upon by some in the investing world. From Pursuing Growth on Seeking Alpha:

"It is concerning that a large portion of the proceeds from this IPO is going towards paying off debts instead of fueling company growth."

Some see this $87 million lump sum an opportunity for Noodles & Company to turbocharge its growth story. Therefore, some have a negative view of the company's use of the proceeds. 

Really???

Many top restaurant chains have grown without buying growth. Rather than growing in the bondage of corporate debt, they have chosen to pay off debt as soon as possible, simply using earnings to fuel expansion. 

<img alt="" src="http://media.ycharts.com/charts/c1bdfece0c9d9fb56a1164461425277c.png" />

CMG Net Income TTM data by YCharts

Chipotle Mexican Grill, Buffalo Wild Wings (NASDAQ: BWLD), BJ's Restaurants (NASDAQ: BJRI), and Panera Bread (NASDAQ: PNRA) are four of the fastest growing restaurant chains around. Yet all four carry zero debt. 

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Current Restaurant Count</strong></td> <td><strong>Restaurant Growth 2012</strong></td> </tr> <tr> <td>Chipotle Mexican Grill </td> <td>1,458</td> <td>13%</td> </tr> <tr> <td>Buffalo Wild Wings</td> <td>917</td> <td>8%</td> </tr> <tr> <td>BJ's Restaurants</td> <td>134</td> <td>12%</td> </tr> <tr> <td>Panera Bread</td> <td>1,673</td> <td>7%</td> </tr> <tr> <td>Noodles & Company</td> <td>345</td> <td>15%</td> </tr> </tbody> </table>

As we can see from these top stocks, Noodles doesn't need to buy its growth. It can pay off debt and grow just like these other four companies. 

Here's some perspective. Chipotle has been growing 13%-14% per year for the past several years. Panera has been growing 6%-7%. That is some serious growth and these two players just keep growing. Chipotle opened 48 new locations last quarter alone, and expects to open close to 180 just this year. Panera opened 22 new locations in the 1st quarter, and is on track to open 115-125 this year.  

Debt-free growth is the best kind of growth because it means you are growing a profitable business. The business model works. Consumers dig the product. The company then takes the profits and grows upon its previous success, rather than growing in order to succeed.

Paying off the debt now Noodles will save $3 million a year. The maturity on the debt is 2017, so this saves around $12 million in the long run. This company's attitude towards debt reflects a long-term focus.

Shareholders first

All five of these companies are among the fastest growers and most successful in the sector, but each one goes through lean times. Buffalo Wild Wings was hit hard last year by rising chicken wing prices. Labor costs have hurt BJ's. Anytime a company with a lot of corporate debt reaches an obstacle, it must ask itself: "do we reward shareholders or do we address our debt." Spoiler alert: Debt wins every time.

During these times, dividend players must cut payouts. Growth stories slow the growth down...just in case things don't pan out. Some companies even dilute shareholder value by issuing new shares. In contrast, these debt-free companies are consistent winners in growing shareholder value. EPS can be a good metric to try and gauge this.

<img alt="" src="http://media.ycharts.com/charts/43b7935ff9591d3e5f17df748ee93721.png" />

CMG EPS Diluted TTM data by YCharts

Conclusion

Noodles & Company is positioning itself for greatness by paying off debt now. The company is following in the footsteps of many great growth companies in the restaurant sector. I discuss the company's valuation in this article; long story short, I believe it's priced a tad high right now. I'm hoping short-term speculators sell out soon so that the price comes back down to a reasonable entry point. At the right price, this one is worth buying and holding for a long time.

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Jon Quast has no position in any stocks mentioned. The Motley Fool recommends BJ's Restaurants, Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. The Motley Fool owns shares of BJ's Restaurants, Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. 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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