What the heck happened to Noodles & Co? When this company came public in 2013, it was one of the hottest IPOs of the year. Now Jim Cramer considers it one of the biggest dogs—not only for the restaurant sector, but perhaps the entire market!
When Noodles initially went public, it talked a big game. The stock almost tripled in the first few days of trading, then spent the next six months trading sideways. Once the lockup on insider selling expired, it got totally pummeled.
As the two-year anniversary of going public approaches, the stock is down some 20 percent from where it came public.
Has one of the hottest IPOs of 2013 now gone completely cold? How could investors have been so excited about a company that turned out to be nothing but a wet fish?
In Cramer's perspective, the main reason it has underperformed is pretty simple. The company just hasn't met Wall Street's expectations, both on the bottom and top line. It has completely failed to establish a positive trend for same-store- sales growth, despite management's overly optimistic guidance.
"I think you can boil down all of the problems with Noodles to one key issue, which is that management was way too optimistic and promotional during the honeymoon period after the company came public," Cramer added.
"Mad Money" spoke with Noodles CEO Kevin Reddy in August 2013, just after the IPO, and the picture he painted back then was much more positive than what the reality turned out to be. And while Cramer appreciates a CEO who believes in his company and makes big plans, that exec has to be willing to execute on the grand plans.
During that 2013 interview, Reddy told Cramer that Noodles would expand to Manhattan and operate more than 2,500 locations in the U.S. Fast forward two years, and there still are no Noodles locations in Manhattan. Based on its current expansion rate, it would take until 2029 to reach that 2,500-store target.
The final straw for investors came on May 5, when Noodles reported yet another hideous disappointment. The stock dropped to $16 from $20 in a single session and has been consistently hammered since.
The CEO tried to excuse this performance noting that if the softness in Colorado; Washington, D.C.; and Austin, Texas; were excluded, then same-store sales actually grew at 3.2 percent. There is a big flaw in this argument though, Cramer says.
Those three markets account for almost 30 percent of Noodle's territory, and Colorado is its home state! So, if consumers don't want Noodles in its most established market, that doesn't paint a pretty picture for the rest of the country.
So now that this total dog of a stock has spent some time in the dog house, has it become cheap enough to be an opportunity for investors?
Forget it.
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Cramer wouldn't touch this one with a 10-foot pole. In fact, he thinks it is still way too expensive, considering that it trades at 32 times next year's earnings estimates. That is higher than Starbucks, Panera or even Chipotle.
"Noodles is a company where the entire growth trajectory has now been called into question. I think it can still go lower, and the only reason it was so high in the first place is because management was way too confident around the time of the IPO," Cramer said.
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