Is Noodles the New Chipotle?

In the first restaurant initial public offering of the year, Noodles (NDLS) raised almost $100M. Its stock price more than doubled from its initial pricing at $18 to close at $36.75 on its first day. The Noodles CEO, Kevin Reddy, came from Chipotle ($CMG), at an earlier stop in life.

Is sizzling Noodles today's Chipotle? Consider this: Chipotle IPO'd in June 2006. They are both fast casual concepts, Colorado based, both early movers. And there are many fundamentals comparisons that are similar. See the table below, prepared from both the Noodles and the Chipotle SEC S-1s for their last full fiscal year before IPO, which shows the key fundamentals drivers:


Chipotle, FY 2005

Noodles, FY 2012

IPO Timing

June 2006

June 2013

Enterprise Revenue



Average Annual Sales/Unit



Restaurant Level Margin



Enterprise EBITDA % (book)



Net Income $



Number of Units



Same Store Sales



% Company owned



Lead Underwriters

Morgan Stanley, Cowen

Morgan Stanley, Cowen


McDonalds (MCD)

Catterton, Argentia/Canadian Pension

Store economics look similar? Yes, in some ways because both fast casual operators have:

  • New buildings, new food types and popularized styles
  • Average annual restaurant sales in the $1.2M to $1.4M range
  • Solid restaurant margins—Noodles now actually exceeded that of Chipotle in 2005 by 210 bpts
  • A total or at least a primarily company operated model as opposed to a pure franchised model

Noodles' success demonstrates there is investor demand for new restaurant offerings and validates fast casual investor demand. I understand NDLS was twenty times oversubscribed. Catterton, Morgan Stanley and Cowen did a nice job. The issue to keep in mind is the United States consumer space is not the same as it was in 2006. Recession, fundamental changes in population, income, eating and dining preferences, commercial real estate site characteristics, and more US restaurants in operation each year make for a more difficult 2013 and out conditions.

Noodles must deliver good quality, service, cleanliness and price/value, in a differentiated fashion, with good corporate stewardship and continue to build connections with guests, employees, investors and other stakeholders via its culture.

Mathematically, as it expands, it has to think a lot about occupancy costs. NDLS occupancy costs are now 9.9%. Chipotle's was 7.6% in 2005. Site supply is tight. Many legacy brands, the real first movers, like McDonalds (MCD) and Dunkin Brands (DNKN) got the early best U.S. sites. Restaurants economics was built on 6-8% rent, but some restaurant operations are facing 15-20% rent for some sites. Too much push for too fast expansion will test the rent leverage especially for a $1.2 million sales concept.

The imputed IPO valuation from the NDLS IPO on day 1 was $800M, or an EV/EBITDA multiple of 26.6X. It's a lot higher now. That's very rich. But it's just the first week. I hope the pressure cooker investment world will take a break and give them a chance to grow smartly.


Enterprise net income

I'm assuming net income (below and in the article) is the enterprise/franchisor's net income.

 Year 2005    Chipotle (CMG)      Noodles (NDLS)
Net Income     $30,240,000         $5,200,000

Chipotle's in 2005 was a BIG system. It's bigger now. It is interesting how both high flyers are largely company-owned chains, that is to say that Chipotle owns all their restaurants and only sixteen percent of Noodles' units are franchised.