The departure of Noodles & Company chairman and CEO Kevin Reddy on Monday left analysts hopeful that change would bring new energy to the chain’s turnaround efforts.
The Broomfield, Colo.-based company’s stock price took a beating on Tuesday, dipping 22 percent, to close at $8 per share, after the company announced Reddy’s immediate resignation. Noodles & Company CFO Dave Boennighausen was appointed interim CEO, and Robert Hartnett, formerly CEO of Houlihan’s Restaurants Inc., was named chairman of the board.
For more than a year, 507-unit Noodles & Company has struggled to turn around negative same-store sales while it attempts to stay on a growth path. Last year, the company closed 16 underperforming locations, but it had projected a net addition of 50 new restaurants systemwide in 2016, including 40 to 45 company-owned units and five to 10 franchised locations.
Executives hoped a brand repositioning launched in October would mark a turning point for the fast-casual chain.
A marketing campaign centered around the phrase “Made. Different — Real Food, Real Cooking, Real Flavors” highlighted Noodles & Company’s use of healthful ingredients without artificial colors, flavors, preservatives or sweeteners. The campaign also highlighted the chain’s globally inspired dishes made fresh to order.
Noodles & Company has targeted Millennial parents in particular, a growing demographic that has embraced the brand. Last year, Noodles & Company launched a $5 customizable kids’ meal, and has also focused on growing catering, delivery and online ordering for skip-the-line pickup. In the first quarter, off-premise sales grew to 43 percent of overall sales, the company said.
Additionally, pasta concepts face the fundamental challenge of selling a product that many consumers feel they can easily prepare at home. Noodles & Company has attempted to combat that perception by offering more complex pasta dishes, like the recently introduced Korean barbecue meatballs with gochujang, and a new-and-improved pad thai.
Traffic improved in the first quarter ended March 29, despite a 0.1-percent decrease in systemwide same-store sales. But second-quarter same-store sales were expected to drop 1 percent systemwide, according to preliminary results this week.
Noodles & Company is scheduled to report earnings on Aug. 4.
Analyst David Tarantino of Baird Equity Research wrote in a report Tuesday that the change in leadership seemed to be a logical outcome, given Noodles & Company’s prolonged stretch of disappointing results.
Tarantino expressed cautious optimism that new leadership could deliver better results. But he also noted that Hartnett, a 40-year industry veteran, has helped previous companies manage through financial distress before negotiating the sales of those businesses.
Hartnett was CEO of Houlihan’s from 2001 until 2015, when he facilitated the sale of the chain to York Capital Management. Previously, he helmed what was Einstein/Noah Bagels Inc. through a bankruptcy reorganization in 2000 that resulted in the sale of the company, resulting in the creation of Einstein Noah Restaurant Group Inc.
Tarantino also noted that declining results could put Noodles & Company at risk of violating debt covenants if performance doesn’t improve.
Nicole Miller Regan, senior research analyst for Piper Jaffray & Co., agreed that the leadership transition “might be the first step in a series of changes that could help reset the brand’s operational performance.”
In a call with analysts following the release of first-quarter results in May, Reddy described Noodles & Company as one of the most unique and differentiated concepts within the fast-casual segment, and one that was showing “green shoots” of positive momentum in a difficult competitive environment.
“We are making the right investments to create long-term value and build same-store sales,” he said.