Will Noodles Get Twisted by Wall Street?

Source: Dwight Burdette | Wikipedia

The surprisingly hot IPO of Noodles & Co. Friday, with its stock doing an old-fashioned first-day pop of 100 percent, is eerily reminiscent of Chipotle.

Not only do the CEO and President and come from top posts at Chipotle from the days when it was owned by McDonald'sbut they're both June market brides, with Chipotle walking down the IPO aisle in June 2006.

The operating similarities are so great that San Diego restaurant consultant, John Gordon, wrote a piece on Seeking Alpha headlined, "Is Noodles the Next Chipotle."

Just because they went public the same month and the top executives helped put Chipotle on the map, however, doesn't necessarily mean Noodles and Chipotle are in the same league.

Notably different: Same-store sales. Chipotle's were ramping at 10.2 percent in fiscal 2005. At its IPO, Noodles were just up 5.2 percent in fiscal 2012.

Drilling down into the company's IPO prospectus, and same-store sales story is downright troublesomegrowing at a mere 2.2 percent in it most recently reported quarter, or roughly a third of that quarter's year-earlier 6.8 percent. (The good news: At 2.2 percent in the current economy, Noodle's is trending better than Chipotle, whose same-store sales a quarter ago were just 1 percent.)

Furthermore, while Noodles said its sales are split "almost equally between lunch and dinner," Gordon said the company skewed mostly toward dinner until it added sandwiches, which makes the company less distinguishable.

Adding to the challenges, he said, are something investors tend not to think much about: occupancy costs.

"The U.S. is not the same place to do business in as it was in 2004 and 2005," he said. Rents were cheaper and better locations were easier to find at good prices.

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In his Seeking Alpha piece, Gordon wrote that Noodles: "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 McDonald's and Dunkin' Brands 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."

He adds: "The imputed IPO valuation from the NDLS IPO is already $800M, or an EV/EBITDA multiple of 26.6X. That's rich. But it's just the first day. I hope the pressure cooker investment world will take a break and give them a chance to grow smartly."

And that may be the most important part of this entire story—and my take: In its quest for growth to support a stock price, Wall Street has a tendency to push restaurants and retailers to grow faster than they realistically should. (For a classic example of this, check out the early history of Restoration Hardware, whose quest for growth after its first IPO in 1998 almost pushed it into bankruptcy.)

The hotter the stock on the IPO, the bigger the potential pitfall unless managers can stand up to the Street. If Noodles management is really smart it will put a blackout on any form of financial or same-store guidance so it can grow the way it wants to—not the way Wall Street wants it to.

I know, I know: Fat chance. The real world simply doesn't work that way, which is unfortunate. The Noodles crew has built quite a business from scratch, and it may indeed go on to being the next Chipotle. Or even Panera!

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By going public it gets the capital to grow, but it does so in a glass-enclosed kitchen that everybody can see. It would be a pity to see its reputation singed for the sake of the stock.

—By CNBC's Herb Greenberg. Follow him on Twitter: @herbgreenberg and Google

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