RBC on Noodles

8/11/2019 RBC on Noodles

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E Q U I T Y R E S E A R C H RBC Capital Markets, LLCDavid Palmer (Analyst)

(212) [email protected] Gonzalez (Associate)(212) [email protected]

Jack Kindregan, CFA(Associate)(212) 618-7716 [email protected]

Sector PerformNASDAQ: NDLS; USD 20.05

Price Target USD 21.00 39.00WHAT'S INSIDE

Rating/Risk Change Price Target Change

In-Depth Report Est. Change

Preview News Analysis

Scenario Analysis*

DownsideScenario

15.00

25%

CurrentPrice

20.05

PriceTarget

21.00

5%

UpsideScenario

27.00

35%

*Implied Total Returns

Key StatisticsShares O/S (MM): 31.1Dividend: 0.00

Market Cap (MM): 62Yield: 0.0

Priced at 10:55 a.m. ET

RBC EstimatesFY Dec 2012A 2013A 2014E 2015ERevenue 300.4 350.9 401.1 471.2Prev. 408.3 474.EPS, Ops Diluted 0.31 0.40 0.40 0.5Prev. 0.50 0.6P/E 64.7x 50.1x 50.1x 39.3

Revenue Q1 Q2 Q3 Q42013 81.3A 89.2A 88.9A 91.5A

2014 89.5A 99.5A 103.4E 108.8EPrev. 103.4E 106.8E 108.6E2015 108.9E 119.1E 120.1E 123.0EPrev. 106.7E 121.6E 122.1E 124.0EEPS, Ops Diluted2013 0.05A 0.13A 0.11A 0.11A2014 0.05A 0.12A 0.10E 0.14Prev. 0.13E 0.16E 0.162015 0.07E 0.15E 0.15E 0.15Prev. 0.09E 0.20E 0.20E 0.18All values in USD unless otherwise noted.

August 14, 2014

Noodles & CompanyFamily troublesOur view: Our lower estimates and price target assume EPS growth will bewell below the companys long-term algorithm near term, but reboundingto 25% EPS growth in 2015.

Key points:Lowering price target and EPS estimates: Following 2Q results, we arelowering our one-year price target from $39 to $21 to reflect a moremodest growth premium for Noodles stock and a re-rating of highgrowth / fast casual (ex-Chipotle) peers. In addition, we are trimming our2014 and 2015 EPS estimates from $0.50 and $0.68 to $0.40 (+0% YOY)and $0.51 (+25% YOY), respectively. Our new estimates assume that EPSgrowth will be well below the companys long-term algorithm near term,but rebounding to 25% EPS growth in 2015. We are now forecasting flatEPS growth in 2014. However, we expect growth to accelerate through2H due to increased advertising spend and a greater contribution fromcatering. Our new $21 target equates to 41x our 2015e EPS estimate.However, we envision three scenarios (see page 2) with downside andupside scenarios equal to $15 and $27 per share, respectively.

SSS growth should reaccelerate in 2H14: The 2Q system-wide salesdecline of -0.7% (vs RBCe 0.6% and consensus 1.1%) was primarilyattributable to weakness in the mid-Atlantic region as well as slowing insales from family business(each contributing roughly 1-1.5pp of shortfall).We believe SSS growth should accelerate in 2H14 due to 1) positivemomentum out of 2Q (+1.3% QTD), 2) additional marketing spend to drivetrial, 3) the full rollout of catering at company owned stores later thismonth, and 4) new limited-time offerings coming in October. Catering isexpected to deliver an additional 1-1.5% to top line growth in 4Q14.

One of several family-oriented concepts getting squeezed: Through thefirst decade of this century, family-oriented chains like Olive Garden,Panera Bread, and McDonalds gained share. These concepts broadenedmenus to appeal to families (eliminating veto) and took pricing at orabove peer levels. These strategies created significant value as thesechains currently have some of the highest AUV's in restaurants. Withtraffic trends at these concepts negative, how much of the problem is thefood (e.g. renovation and more protein/fresh needed), pricing (e.g. newvalue tiers needed), reduced impact of TV advertising (e.g. need for digitalstrategies), or operations?

Several reasons to believe Noodles can return to 25%+ earnings growth:These include: 1) solid unit economics across a variety of geographies,trade areas, and real-estate types; 2) a track record of consistentSSS growth; 3) strong management team with experience at Chipotle,McDonalds, and Yum! Brands; 4) a highly differentiated concept; 5) lessexposure to rising proteins prices, and 6) the possibility of more than adecade of double-digit unit growth ahead.

Priced as of prior trading day's market close, EST (unless otherwise noted).For Required Conflicts Disclosures, see Page 5.


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Target/Upside/Downside Scenarios

Exhibit 1: Noodles & Company

8m

6m

4m

2m

J J A S O N2013

D J F M A M J J2014

A

UPSIDE 27.00

TARGET 21.00CURRENT 20.05

DOWNSIDE 15.00

Aug 2015

5348

43

38

33

28

23

18

59 Weeks 27JUN13 - 13AUG14

NDLS Rel. S&P 500 COMPOSITE MA 40 weeks

Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target

Target price/ base caseOur base case assumes that Noodles can return to is longterm growth algorithm (2.5-3.5% SSS growth and 25%+ EPSgrowth) in 2015, driven by increase marketing efforts, therollout of catering, easier comparisons, and the correspondingflow-through to earnings. Our price target of $21 equates to41x our 2015E EPS estimate of $0.51 (+25% YOY) and 33x our2016E EPS estimate of $0.64 (+26% YOY). Our target multipleequates to a 1.6x PE-growth ratio, which we feel would beappropriate for a 25% EPS grower following a set-back year.

Upside scenarioOur upside case calls for a sustained recovery in comp growth

as marketing begins to work and catering provide a ~2pt liftto SSS growth. As sales growth returns, so too will a multiplemore in line with a high growth restaurant concept. Our $27upside case equates to 46x 2015E EPS estimate of $0.59 (+31%YOY), and 37x 2016E EPS of $0.73 (+25% YOY).

Downside scenarioOur downside case reflect a scenario with only modestacceleration in SSS growth in 2H14 and 2015 and relatively lowflow through to earnings as a result of stepped up costs aroundmarketing and catering. Despite the acceleration in sales, webelieve the market will not award Noodles with a high multiplecompared to peers with more natural type of SSS growth. Our

$15 downside case equates to 33x our downside estimate of $0.45 (+21% YOY) and 28x 2016E EPS of $0.54 (+19% YOY).

Investment summaryNoodles & Company is a differentiated fast casual conceptuniquely positioned to appeal to a broad audience. Thecompany's solid unit economics, consistent SSS growth, andstrong management team may turn Noodles into the nextgreat growth concept. However, the company's valuationoffers limited upside, in our view.

Many reasons to expect consistent, sustainable growth : Wesee many reasons to feel confident in long-term EPS growth of ~25%. These include: 1) solid unit economics across a varietyof geographies, trade areas, and real-estate types; 2) a trackrecord of consistent SSS growth; 3) a strong managementteam with experience at Chipotle, McDonalds and Yum!Brands; 4) a highly differentiated concept; 5) a less protein-centric food basket; and 6) the possibility of more than a

decade of double-digit unit growth ahead.The upside case accelerating SSS growth as brandawareness grows : There is reason to believe that Noodles' SSSgrowth can accelerate as brand awareness grows and as in-restaurant service initiatives begin to bear fruit. We believethat Noodles' best SSS growth markets are its most heavilypenetrated Midwest markets, something that underscores theupside as consumers discover this unique brand.

Plenty of reasons to keep an eye on Noodles : Under theleadership of Kevin Reddy and Keith Kinsey, Noodles hasmade important adjustments to its concept in recent years,including: 1) simplified pricing; 2) menu boards with photosof key entrees; and 3) the addition of service stations toencourage add-ons. Unlike Chipotle, Noodles is evolving itsmenu with seasonal food celebrations, new flavors, new foodtypes, and in-restaurant service changes (e.g., beverage barsand catering).

Risks to our investment thesisThese include but not limited to: 1) high valuation; 2) foodsafety and quality; 3) highly competitive hamburger segment;3) food and labor inflation; and 4) spending pullback by thehigher-income consumer.

Noodles & Company

August 14, 2014 David Palmer (212) 905-5998; [email protected] 2


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ValuationOur Price Target of $21 equates to 41x our 2015E EPS estimate of $0.51 (+25% YOY) and 33xour 2016E EPS estimate of $0.64 (+26% YOY). Our target multiple equates to a 1.6x PE-growth

ratio, which we feel would be appropriate for a 25% EPS grower following a set-back year.

Price target impedimentsHigh valuation: Noodles current valuation is 45x that of the market. Such an elevatedvaluation increases the stocks volatility. In the case of Noodles, its stock is particularlysensitive to changes in SSS, unit growth, and investor perception surrounding the perceivedsustainability of its growth.

Food safety and quality: By many, Noodles' menu is perceived to be of higher quality relativeto traditional fast food restaurants. As such, any challenge to the perception of quality mightharm the companys reputation and value.

Food and labor inflation: While Noodles has the majority of its food costs locked in for thecurrent fiscal year, a rapid increase in the price of key commodities would affect the futureearnings growth. Similarly, wage increases, whether from statutory minimum wage increasesor voluntary, would affect store-level profitability.

Spending pullback by the higher-income consumer: Because Noodles customer mix is highlyskewed toward upper-income consumers, we believe the company is exposed to a unique setof macro factors relative to its peers. That said, higher-income consumers have proved to bethe most resilient in maintaining their level of spending during the economic downturn.

Company descriptionNoodles & Company is a high-growth, fast-casual restaurant concept offering lunch and dinnerwithin a fast-growing segment of the industry. The first Noodles & Company restaurant opened

its doors in the Cherry Creek neighborhood of Denver, Colorado. Today, the company and itsfranchisees operate almost 350 stores, which generated more than $350 million in system-wide sales in 2012.

Noodles & Company



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Noodles & Company $0.31 $0.05 $0.13 $0.11 $0.11 $0.40 $0.05 $0.12 $0.10 $0.14 $0.40 $0.07 $0.15 $0.14 $0.15 $0.51Income Statement $0.31 $0.05 $0.13 $0.11 $0.11 $0.40 $0.05 $0.12 $0.10 $0.14 $0.40 $0.07 $0.15 $0.14 $0.15 $0.51David Palmer $0.31 $0.05 $0.13 $0.11 $0.11 $0.40 $0.05 $0.12 $0.10 $0.14 $0.41 $0.07 $0.15 $0.14 $0.15 $0.51RBC Capital Markets

Full Year Full Year Full Year Full Year(in millions, except per share data) 20 12 1Q 13 2Q 13 3Q 13 4Q 13 20 13 1 Q1 4 2Q 14 E 3Q 14 E 4 Q14 E 20 14 E 1 Q1 5E 2Q1 5E 3 Q1 5E 4Q 15E 20 15E

Ma r- 13 Ju n-1 3 S ep -1 3 De c-1 3 M ar -1 4 Ju n-1 4 Sep -14 De c-1 4 M ar -15 Ju n- 15 S ep -1 5 Dec -15Income StatementRestaurant sales 297.3 8 0.5 88.4 87.9 90.4 347.1 88. 4 9 8. 2 102.1 107.6 396.4 107 .7 117 .8 118 .8 121 .6 466.0

YOY Chg. 17.3% 16.4% 18.2% 15.1% 17.4% 16.8% 9.8% 11.1% 16.2% 19.0% 14.2% 21.8% 20.0% 16.3% 13.0% 17.6%Franchising royalties and fees 3.1 0 .762 0 .877 1 .072 1 .072 3.8 1.071 1.262 1.2 1.2 4.8 1.2 1.3 1.3 1.4 5.2

YOY Chg. 21.0% 10.6% 19.0% 35.2% 15.8% 20.3% 40.6% 43.9% 13.1% 12.4% 25.6% 8.8% 1.0% 10.5% 16.9% 9.2%Total revenue 300.4 81.3 89.2 88.9 91.5 350.9 89.5 99.5 103.4 108.8 401.1 108.9 119.1 120.1 123.0 471.2

YOY Chg. 17.3% 16.3% 18.2% 15.4% 17.4% 16.8% 10.1% 1 1.5% 16.2% 18.9% 14.3% 21.6% 19.8% 16.2% 13.1% 17.5%

Cost of sales (food) 79.0 2 1.3 23.1 23.1 24.4 91.9 2 3. 8 2 6. 3 2 7. 5 28 .5 106.2 2 9.3 31.9 32.2 32.5 125.9YOY Chg. 18.9% 16.8% 15.8% 14.2% 18.4% 16.3% 12.0% 1 4.0% 18.7% 17.0% 15.5% 22.8% 21.0% 17.3% 14.0% 18.6%% of C omp an y re sta ura nt s al es 2 6. 6% 2 6. 5% 2 6. 1% 2 6. 3% 2 7. 0% 26 .5% 27 .0% 2 6. 8% 2 6. 9% 26. 5% 26 .8% 27 .2 % 27 .0 % 27. 1% 2 6. 7% 2 7. 0%Margin change 37bp 11bp -54bp -21bp 2 4bp -10bp 51bp 67bp 57bp -45bp 31bp 22bp 22bp 23bp 23bp 23bp

Gross profit 218.3 59.2 65.3 64.7 66.0 255.2 64.6 71.9 74.7 79.1 290.2 78.4 86.0 86.6 89.1 340.1YOY Chg. 16.7% 16.2% 19.1% 15.5% 17.0% 16.9% 9.1% 10.1% 15.4% 19.8% 13.7% 21.4% 19.6% 15.9% 12.7% 17.2%% of C omp an y re sta ura nt s al es 7 3. 4% 7 3. 5% 7 3. 9% 7 3. 7% 7 3. 0% 73 .5% 73 .0% 7 3. 2% 7 3. 1% 73. 5% 73 .2% 72 .8 % 73 .0 % 72. 9% 7 3. 3% 7 3. 0%Margin change -37bp -11bp 54bp 21bp -24bp 10bp -51bp -67bp -57bp 4 5bp -31bp -22bp -22bp -23bp -23bp -23bp

Labor 89.4 2 4.8 26.3 26.3 26.6 104.0 27. 2 2 9. 3 3 0. 5 31 .3 118.3 3 2.8 34.9 35.3 35.4 138.3YOY Chg. 18.5% 19.6% 18.5% 14.2% 13.4% 16.3% 9.5% 11.6% 15.7% 17.8% 13.7% 20.6% 18.8% 15.7% 13.0% 16.9%% of C omp an y re sta ura nt s al es 3 0. 1% 3 0. 8% 2 9. 8% 3 0. 0% 2 9. 4% 30 .0% 30 .8% 2 9. 9% 2 9. 8% 29. 1% 29 .8% 30 .4 % 29 .6 % 29. 7% 2 9. 1% 2 9. 7%Margin change 31bp 85bp 8bp -24bp -103bp - 12bp -9bp 12bp -15bp -30bp -12bp -30bp -29bp -15bp 0bp -17bp

Operating costs 36.4 1 1.1 10.6 11.3 11.1 44.1 1 2. 2 1 2. 2 1 3. 5 13 .5 51.4 14.7 14.5 15.6 15.3 60.1YOY Chg. 5.0% 24.0% 17.0% 19.3% 24.5% 21.2% 10.2% 1 5.9% 19.2% 21.4% 16.7% 20.6% 18.8% 15.7% 13.0% 16.9%% of C omp an y re sta ura nt s al es 1 2. 2% 1 3. 8% 1 2. 0% 1 2. 9% 1 2. 3% 12 .7% 13 .8% 1 2. 5% 1 3. 2% 12. 5% 13 .0% 13 .7 % 12 .3 % 13. 1% 1 2. 5% 1 2. 9%Margin change -143bp 85bp -12bp 45bp 70bp 46bp 4bp 51bp 33bp 25bp 28bp -14bp -12bp -7bp 0bp -7bp

Occupancy costs 29.3 8.4 8.6 8.9 9.3 35.2 9.9 10.2 1 0. 6 11 .4 42.1 12.0 12.3 12.4 13.0 49.8YOY Chg. 16.3% 20.5% 18.3% 18.8% 22.1% 20.0% 18.0% 1 9.2% 19.8% 22.0% 19.8% 21.8% 20.0% 16.9% 14.2% 18.1%% of C omp an y re sta ura nt s al es 9. 9% 1 0. 4% 0. 0% 1 0. 1% 1 0. 3% 10 .1% 11 .2% 1 0. 4% 1 0. 4% 10. 6% 10 .6% 11 .2 % 10 .4 % 1 0. 5% 1 0. 7% 1 0. 7%Margin change -8bp 36bp -972bp 31bp 4 0bp 27bp 77bp 1043bp 31bp 26bp 50bp 0bp 0bp 5bp 10bp 4bp

Total restaurant costs 234.1 65.6 68.5 69.7 71.4 275.2 73.1 78.1 82.0 84.7 318.0 88.8 93.6 95.5 96.2 374.1YOY Chg. 16.1% 19.5% 17.3% 15.6% 17.9% 17.5% 11.5% 1 4.0% 17.8% 18.7% 15.6% 21.5% 19.7% 16.4% 13.5% 17.6%

Company restaurant margin 63.1 14.9 19.8 18.2 19.0 72.0 15.3 20.1 20.1 22.9 78.3 18.9 24.3 23.3 25.4 91.9YOY Chg. 22.1% 4.2% 21.3% 13.5% 15.7% 14.0% 2.6% 1.2% 10.4% 20.4% 8.9% 23.3% 21.1% 15.9% 11.2% 17.3%% of C omp an y re sta ura nt s al es 2 1. 2% 1 8. 6% 2 2. 4% 2 0. 7% 2 1. 0% 20 .7% 17 .3% 2 0. 4% 1 9. 7% 21. 2% 19 .8% 17 .5 % 20 .6 % 19. 6% 2 0. 9% 1 9. 7%Margin change 83bp -217bp 5 8bp -30bp - 31bp -51bp -123bp -200bp -105bp 24bp -96bp 22bp 19bp -7bp -34bp -4bp

General and administrative 30.9 7.5 8.4 7.3 7.7 30.9 7.2 8.2 8.3 8.8 32.6 8.5 9.4 9.0 9.7 36.5YOY Chg. 18.2% 0.5% 1 3.3% -4.8% -7.3% 0.2% -4.0% -2.0% 14.5% 14.2% 5.4% 17.0% 14.1% 7.7% 9.7% 11.9%% of Company Revenue 10.3% 9.3% 9.4% 8.2% 8.4% 8.8% 8.1% 8.3% 8.1% 8.1% 8.1% 7.8% 7.9% 7.5% 7.9% 7.7%Margin change -3bp -146bp - 41bp -173bp -224bp - 146bp -119bp -113bp -12bp -34bp -68bp -31bp -39bp - 59bp -24bp -38bp

Restau rant pre-opening costs 3.1 0.9 0.8 1.2 0.9 3.8 1.1 1.0 1.1 1.3 4.6 1.3 1.1 1.2 1.4 5.0YOY Chg. 35.2% 58.5% 30.3% 42.7% -18.3% 21.1% 20.8% 33.6% -5.6% 38.3% 19.5% 13.4% 11.8% 8.8% 6.3% 9.9%% of Company restaurant sales 1.1% 1.1% 0.9% 1.3% 1.0% 1.1% 1.3% 1.0% 1.1% 1.2% 1.1% 1.2% 1.0% 1.0% 1.1% 1.1%Margin change 14bp 30bp 8bp 26bp -45bp 4bp 11bp 18bp -25bp 17bp 5bp -9bp -7bp -7bp -7bp -7bp

Dep rec ia ti on a nd a mort iz at io n 1 6. 7 4.8 5.0 5.2 5.6 20.6 5.6 5.9 6.2 6.7 24.5 6.7 6.9 7.1 7.5 28.3YOY Chg. 15.3% 28.7% 22.8% 20.9% 21.8% 23.3% 16.9% 1 7.3% 18.9% 21.1% 18.6% 19.4% 17.7% 14.6% 11.9% 15.7%% of Company restaurant sales 5.6% 6.0% 5.7% 6.0% 6.1% 5.9% 6.3% 6.0% 6.1% 6.2% 6.2% 6.2% 5.9% 6.0% 6.2% 6.1%Margin change -10bp 57bp 22bp 28bp 22bp 32bp 38bp 32bp 14bp 11bp 23bp -12bp -12bp -9bp -6bp -10bp

Operating income 15.6 2.5 6.5 5.58 5.9 20.4 2.5 6.2 5.6 7.2 21.5 3.7 8.1 7.3 8.3 27.3YOY Chg. 36.6% - 23.9% 30.7% 38.5% 76.7% 31.2% -0.4% -5.2% 0.9% 23.5% 5.3% 48.9% 31.3% 29.6% 14.3% 27.1%EBIT margin 5.2% 3.1% 7.4% 6.4% 6.5% 5.9% 2.8% 6.3% 5.5% 6 .7% 5.4% 3.4% 6.9% 6.1% 6 .8% 5.9%Margin change 74bp -162bp 70bp 1 07bp 218bp 64bp -28bp -108bp -84bp 24bp -46bp 62bp 59bp 63bp 8bp 44bp

Interest expense -0.6 -0.1 -0.2 -0.1 0.0 -0.5 0.0 0.0 -0.2 -0.2 -0.4 -0.2 -0.2 -0.2 -0.2 -0.6% of Avg. total debt

Income before taxes 14.9 2.3 6.3 5.4 5.8 19.9 2.4 6.1 5.5 7.1 21.1 3.5 7.9 7.1 8.1 26.7Pre-tax margin 5.0% 2.9% 7.1% 6.1% 6.4% 5.7% 2.7% 6.2% 5.3% 6 .5% 5.3% 3.2% 6.7% 5.9% 6.6% 5.7%In come tax expense (b enefit) 5.9 0.9 2.4 2.1 2.3 7.7 1.0 2.5 2.2 2.8 8.5 1.4 3.2 2.9 3.3 10.9Tax rate 39.3% 39.2% 37.4% 39.2% 39.2% 38.6% 41.5% 40.3% 40.5% 40.0% 40.4% 41.0% 41.0% 41.0% 41.0% 41.0%

Net income (adjusted) 9.1 1.4 4.0 3.3 3.536 1 2.2 1.4 3.7 3.3 4.2 12.6 2.1 4.7 4.2 4.8 15.7YOY Chg. -20.8% 41.4% 40.5% 67.3% 35.0% 0.6% -7.8% -1.7% 20.0% 2.9% 44.8% 27.8% 29.4% 12.7% 25.1%

EPS $0.31 $0.05 $0.13 $0.11 $0.11 $0.40 $0.05 $0.12 $0.10 $0.14 $0.40 $0.07 $0.15 $0.14 $0.15 $0.51YOY Chg. -23.0% 37.0% 33.9% 60.5% 29.8% -2.0% -9.9% -1.7% 20.0% 1.8% 44.8% 27.8% 29.4% 12.7% 25.1%

Basic shares 29.6 29.7 29.6 29.7Diluted shares (pro-forma) 30.3 30.4 31.1 31.1 30.7 3 1. 1 3 1. 1 31.1 31.1 31.1 31.1 31.1 31.1 31.1 31.1

EBITDA 32.3 7.3 11.5 10.818 11.4 41.0 8.1 12.1 11.9 14.0 45.9 10.4 15.0 14.4 15.8 55.6Imp ai rme nt an d w ri te -o ff ch arge s 1. 27 7 0. 20 1 0. 22 0. 339 0. 135 0 .89 5 0 .21 4 0. 19 3 0. 18 8 0 .1 88 0 .78 3 0 .1 88 0 .188 0 .1 88 0. 18 8 0. 752Management fees 1 0.25 1.05 0 0 1.3 0 0 0 0 0 0 0 0 0 0Stock compensation exp en se 1.234 0.363 3.154 0.131 0.383 4.031 0.306 0.525 0.306 0.306 1.443 0.544 0.544 0.544 0.544 2.177

Source: Company documents; RBC Capital Markets estimates

Noodles & Company



5/8

Required disclosures

Conflicts disclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza,29th Floor, South Tower, Toronto, Ontario M5J 2W7.

A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities forNoodles & Company in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services fromNoodles & Company in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates expects to receive or intends to seek compensation forinvestment banking services from Noodles & Company in the next three months.

RBC Capital Markets, LLC makes a market in the securities of Noodles & Company.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Noodles & Company during the past 12 months. During this time, a member company of RBCCapital Markets or one of its affiliates provided non-securities services to Noodles & Company.

RBC Capital Markets is currently providing Noodles & Company with investment banking services.

RBC Capital Markets is currently providing Noodles & Company with non-securities services.RBC Capital Markets has provided Noodles & Company with investment banking services in the past 12 months.

RBC Capital Markets has provided Noodles & Company with non-securities services in the past 12 months.

The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.

Explanation of RBC Capital Markets Equity rating systemAn analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assignedto a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative tothe analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), andUnderperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same becauseour ratings are determined on a relative basis.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 monthswith a favorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perf orm (SP): Returns expected to be i n line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 mon ths.Risk RatingAs of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflectsa security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limitedoperating history that result in a higher expectation of financial and/or stock price volatility.

Noodles & Company

https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1


6/8

Distribution of ratingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described below).

Distribution of ratings

RBC Capital Markets, Equity Research

As of 30-Jun-2014

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 845 53.24 299 35.38

HOLD [Sector Perform] 658 41.46 159 24.16

SELL [Underperform] 84 5.29 10 11.90

References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists includea former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap(RL 7), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10),and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus Listand the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on aRecommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List.

Equity valuation and risksFor valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, pleasesee the most recent company-specific research report at https://www.rbcinsight.com or send a request to RBC Capital MarketsResearch Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.

Conflicts policyRBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.To access our current policy, clients should refer to

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https://www.rbccm.com/global/file-414164.pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, SouthTower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Dissemination of research and short-term trade ideasRBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, havingregard to local time zones in overseas jurisdictions. Subject to any applicable regulatory considerations, "eligible clients" mayinclude RBC Capital Markets institutional clients globally, the retail divisions of RBC Dominion Securities Inc. and RBC CapitalMarkets LLC, and affiliates. RBC Capital Markets' equity research is posted to our proprietary websites to ensure eligible clientsreceive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional distribution may be doneby the sales personnel via email, fax or regular mail. Clients may also receive our research via third party vendors. Please contactyour investment advisor or institutional salesperson for more information regarding RBC Capital Markets research. RBC CapitalMarkets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color andcommentary, and may also contain Short-Term Trade Ideas regarding the securities of subject companies discussed in this orother research reports. SPARC may be accessed via the following hyperlink: https://www.rbcinsight.com . A Short-Term Trade Ideareflects the research analyst's directional view regarding the price of the security of a subject company in the coming days or weeks,

based on market and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendations in ourpublished research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company,as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subjectcompany that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buying opportunityas a result of temporary selling pressure in the market; conversely, the security of a subject company that is rated a long-term'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideas are not ratings,nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes any obligation, tomaintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors andhave not been tailored to individual investor circumstances and objectives, and investors should make their own independentdecisions regarding any Short-Term Trade Ideas discussed therein.

Analyst certificationAll of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of

the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property and a service mark of MSCI Inc. (MSCI) and Standard & Poors Financial ServicesLLC (S&P) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or impliedwarranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warrantiesof originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBCCapital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, SydneyBranch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty,express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All

opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change w ithout notice andare provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investmentadvice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independentinvestment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buyany securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC CapitalMarkets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment bankingrevenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and otherinvestment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not beeligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicableindustry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report isnot, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is notlegally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor

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any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the informationcontained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets.

Additional information is available on request.

To U.S. Residents:This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which acceptsresponsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting ina broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, shouldcontact and place orders with RBC Capital Markets, LLC.To Canadian Residents:This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution inOntario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any o ther province) andthat wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBCDominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.To U.K. Residents:This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the FinancialConduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for generaldistribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.To Persons Receiving This Advice in Australia:

This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been preparedfor general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting onthis material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisitionor possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that productand consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section761G of the Corporations Act.To Hong Kong Residents:This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited and RBC Capital Markets (HongKong) Limited, licensed corporations under the Securities and Futures Ordinance or, by the Royal Bank of Canada, Hong Kong Branch, a registered institution underthe Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation,or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBCInvestment Services (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets (Hong Kong) Limited or Royal Bank of Canada, Hong KongBranch at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).To Singapore Residents:This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities grantedoffshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and doesnot take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser beforepurchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicativeof future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch or Royal Bank of Canada(Asia) Limited.To Japanese Residents:Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financialinstruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank.

. Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.Copyright RBC Capital Markets, LLC 2014 - Member SIPC

Copyright RBC Dominion Securities Inc. 2014 - Member CIPFCopyright RBC Europe Limited 2014

Copyright Royal Bank of Canada 2014All rights reserved

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