Strategic review: 40%+ upside (at $10.97/share)
This idea was shared by Mike.
NOTE: The idea was originally posted on May 28, then closed on June 26 for a 40% gain after the stock ran up without news. It was then reactivated on July 21, after the stock returned to the original write-up levels, with the thesis unchanged. Mike’s reactivation comment can be found here.
Noodles & Company is a fast-casual restaurant chain that has been running a strategic review for nine months. The company is clearly looking to sell, and given how long the process has been ongoing, an announcement might be around the corner. Five activists control over 50% of the company, while management has recently been given change-of-control retention bonuses to align incentives toward a deal. NDLS is a levered name with a history of underperformance and lengthy ongoing turnaround. A recent earnings inflection has materially de-risked the story heading into potential sale. The stock is trading at <5x EBITDA, a discount to even the cheapest comparable transactions. A sale even at one EBITDA turn higher would result in a 40% gain.
NDLS was founded over thirty years ago and IPO’d in 2013. Once a Wall Street darling, the company lost its way chasing growth at all costs, expanding too fast into too many markets with little regard for unit economics. The result has been brutal, and the stock is down 90% from its IPO highs.
In 2023, activist investor Mill Road Capital raised its ownership in NDLS to 15%, secured a board seat, and effectively took control of the operational reset. Within a year, the CEO and CFO were replaced, and the company launched a turnaround. The strategy rests on several pillars, including a full menu overhaul, strategic limited-time offers, more affordable price points, improved marketing cost management, and aggressive closure of underperforming stores.
It took some time, but the inflection has finally become visible over the last two quarters, with the company reporting very strong Q4 2025 and Q1 2026 results (see the table below). Following years of negative or low single-digit growth, same-store sales grew 7% and 9%, respectively. The initial 2026 guidance was also raised, with SSS now expected to grow 7-10% and adjusted EBITDA set to increase by 55% this year. The company currently has 320 owned and 80 franchised locations, so the majority of the business is company-operated restaurants.
The most consequential operational change, and probably the one that raises the most questions, is restaurant portfolio optimization. Since 2023, management has aggressively cut the store count and, more recently, implemented a no-development policy, pausing all new company-owned restaurant openings.
Rapidly losing stores never looks good for a restaurant chain. However, management explains that the closures are justified as NDLS is not only shutting its least profitable locations but is also seeing 30% of sales from closed locations migrate to nearby units, boosting their unit-level profitability.
In select areas, we had too much density, particularly as our off-premise sales continued to grow. We made the decision to optimize our footprint. By closing underperforming restaurants in these areas, we have seen a significant transfer of their sales to nearby restaurants, which results in a higher baseline average unit volume for those go-forward restaurants, which also further improves restaurant level margin and profitability. It also allows us to focus our resources on our strongest restaurants, improving efficiency and drive better overall company profitability.
There is a degree of trust required here, but the financial results so far complement management’s story. Only 2.5% of SSS growth in Q1 came from store closures, while the remainder was driven by other initiatives. As the CEO noted, “What gives me confidence in the sustainability of our results is that our progress is driven not by a single initiative or unlock.”
Aside from Mill Road, four other activists also own significant stakes in NDLS: Hoak & Co. (9.3%), Galloway Capital (8.6%), Headlands Capital (9.2%), and Nantahala Capital (9.6%). Most of them are sitting on significant losses on their positions, and are effectively stuck in an illiquid nano-cap. A sale of the company appears to be the cleanest option.
In September 2025, just as the turnaround began to show early signs, NDLS announced a strategic review. Two months later, the company signed retention agreements with executives that pay out only if a change of control occurs by December 2026. These retention bonuses were not in place prior to this. The earnings inflection has accelerated since then.
With operational momentum building and the retention bonus deadline approaching, the window to reach a deal is narrowing. Meanwhile, the broader restaurant sector has seen a wave of M&A activity lately.
NDLS trades at 4.8x 2026 adjusted EBITDA. Valuations in the sector vary widely, but the key drivers of transaction multiples are brand growth trajectory (i.e., whether unit count and same-store sales are expanding or contracting) and franchise mix, with asset-light franchise operations typically commanding a premium. NDLS’ stores are mainly company-owned, and the growth trajectory is complicated given the ongoing turnaround (unit count is shrinking due to strategic trimming, but same store sales have returned to high growth). Most peer multiples and industry transaction valuations are simply irrelevant to this setup. Even after accounting for all that, the stock is cheap, assuming the earnings inflection is durable.
The lowest-multiple transaction in recent years was Del Taco, which sold for 6.5x EBITDA in 2023 in what was widely seen as a distressed deal, with multiple franchisees filing for bankruptcy around the time of closing. The next most discounted was Fiesta, which was acquired at 7.3x in 2023. Fiesta was a primarily company-operated chain with a slowly shrinking unit count that posted same-store sales growth around 10% for many consecutive quarters ahead of the buyout. However, that growth was largely driven by pricing and post-Covid dynamics.
NDLS is trading at a substantial discount to these comps, leaving plenty of room for a sizable premium on the equity in a sale. Due to high leverage, a deal even at 5.5-6x 2026E adjusted EBITDA would translate to a 40-65% gain ($15-18/share).
The stock is already up 2x since February of this year, mainly due to the strong earnings results and guidance raise. But it remains cheap. The main risk is that the turnaround proves fragile and operational performance reverts, in which case the stock would probably return to the $6 zone. That said, the earnings inflection continues to track well: management has noted that Q1 momentum carried into Q2, with April system-wide sales growing 9% YoY.
More importantly, this momentum continued into the second quarter with April system-wide comp sales growth of over 9%, including over 10% for our company-operated restaurants.
Q2 2026 results are due in August, which would mark roughly a year since the strategic review was launched. I expect the situation to resolve before then.
Hello,
I don’t understand the scenario:
– current Market cap is around $66M
– Adj EBITDA for 2026 is around $30M based on the last 2 Quarters
Why is the pitch saying that “5.5-6x 2026E adjusted EBITDA would translate to a 40-65% gain ($15-18/share).” ? – it should be much more, isn’t it?
you need to include the $105MM in net debt
I think you are mixing up MCAP and Enterprise Value. MCAP as of now is $67m and EV is $172m. 2026 mid-point adj. EBITDA is $35m. Therefore, 172/35 = 4.9x adj. EBITDA multiple.
Yes, indeed, I didn’t see debt data and mixed those for a second. Thank u guys
NDLS is up almost 40% over the last few weeks, without any new developments that I am aware of. Basically, the stock now sits at Mike’s lower-end target of $15/share, and I have taken some chips off the table.
Having said that the company is still cheap at only 5.5x forward EBITDA and the outcome of the strategic review is still pending. If potential bidders (if there are any) view NDLS turnaround as sustainable, then the company is likely to fetch a far higher multiple in a sale.
Mike, thanks for sharing this one, working out really well so far.
The stock has now given back all its prior gains, while nothing has really happened, aside from an announcement on July 9 that Q2 results will come on July 24 (this Friday). It is quite possible that management will make an update on the sale process together with earnings.
The strategic review has been ongoing for 11 months already, and I still think it’s overwhelmingly likely the company will be sold. Five activists control more than 50% of the company, and management has recently been given change-of-control retention bonuses to align its incentives toward a deal. Operating performance over the last two quarters has been very strong, turning this into a successful turnaround story in the early stages. As dt noted above, if the buyers view the recent inflection as sustainable, the company could be acquired way above the current price. NDLS currently trades at 4.8x 2026 guided EBITDA, while the two cheapest peer transactions over the last several years were done at 6.5x and 7.3x. That leaves plenty of headroom on price, and management is incentivized to make a deal happen.
One could put on a tin foil hat and speculate further that the Q2 release is scheduled quite early compared to the typical timeline over the last eight years. We will see, but it could suggest that management finally has something to say about the strategic review results.
I like that this is a very short-term and binary bet now. It is not risk-free, though, and must be sized appropriately. The company is fairly levered. If Q2 results are bad plus there’s no deal, the stock could really drop.
Timeline of previous Q2 reports.
2025 August 13, 2025
2024 August 7, 2024
2023 August 9, 2023
2022 July 27, 2022
2021 August 3, 2021
2020 August 6, 2020
2019 August 7, 2019
2018 July 18, 2018
Thanks, Mike. I like it as well. Do you read anything into the stock selling off before earnings? Could there be a leak, or is it just general market anxiety?
Anyway, there was a pretty interesting expert call released in June with a former regional director of NDLS who worked there for 16 years. He also hinted that the company would be much better off private, and that management is probably leaning toward a sale.
Other highlights from my notes:
– He confirmed that the board has been controlled by several PE firms.
– 85% of the NDLS store fleet is profitable, but most aren’t super profitable. Only 35-40% hit the $1.6m AUV needed for satisfactory EBITDA levels, 20% do better than that, and 10% run below $1m AUV and are burning cash. This kind of suggests the store closures might’ve been justified.
– NDLS has a brand problem, not an operational problem. It hasn’t figured out why it’s special, and the marketing department keeps confusing its real customer base (indulgent diners) with health-conscious millennial moms, chasing healthier alternatives instead.
– Management’s decision to pause all new company owned development in 2026 seems justified by the construction inefficiencies. New unit builds were consistently running over budge, largely due to unnecessary custom equipment and millwork, or lack of standardization across stores. By halting development, the company can temporarily avoid burning capital on structurally flawed, low-ROI box designs.
great call, why do you think the review has taken this long?
The review was launched in September 2025, basically right as the turnaround started showing. Not the greatest timing to sell a levered restaurant chain. It’s quite possible the buyers wanted to wait and see whether the inflection sticks. NDLS had no reason to rush either, as I don’t think the board would have blessed a bid off the all time lows anyway. Wouldn’t be surprised if a more serious process only started at the end of the year, when the retention agreements were signed.
I’m not able to trade this. My broker has a trade restriction on it. I wonder why
Which broker? Seems fine on mine (Schwab).
Scotiabank
I checked with them, it’s got nothing to do with pending news or such. They said “It’s a volatile stock and was recently less than $10 so you can only order such stocks over the phone” lmao
And of course the stock jumped to ~$16 today. Thanks for protecting me from profits, scotiabank
Very interesting read. Thank you for posting. The main issue for me is a silly one–not based upon the rational thoughts that you presented. It’s simply this. The food is borderline inedible. I mean REALLY bad. Now I know, others might disagree. But what a psychological hurdle to overcome when you’re thinking of investing in a company!
great call, i wonder if the process taking so long means maybe there is a path to sell the restaurants to franchisee groups for cash and sign royalty deals and then go super asset light – then i guess just sell the company from there which would essentially be the royalty stream.
I sold my shares after earnings today
Masterful timing. Thanks, Mike.
Great quarter from NDLS. The turnaround is happening even faster than management anticipated, and full year guidance was raised slightly across the board. No updates on the strategic review, but it remains ongoing. The review language in the press release was tweaked a bit: they added that current debt matures in one year, so it feels like they wanted to emphasize they might be more focused on refinancing now. But that’s probably just a nitpick. Let’s see how this goes, but even with the stock now up 40% over the last several days, I’m quite comfortable holding into the strategic review results. NDLS trades at 5.4x mid-point EBITDA guidance, which is still cheap, and if the current direction continues it’s not hard to see them beating that guidance.
“On September 3, 2025, the Company announced that its Board of Directors had initiated a review of strategic alternatives in order to explore ways to maximize stockholder value. The review includes a range of potential strategic alternatives, including a refinancing of existing indebtedness that matures on July 27, 2027, refranchising or sale of all or part of the business, and/or other strategic or financial transactions. Such review remains in process.”
– System-wide SSS growth accelerated to 10.3%, with company-owned stores up 11.4%. Management called it one of the best quarters since the IPO. Still, worth noting the performance gap between owned stores and franchise sales increased. Franchises were up only 5.5% (a slowdown from +8% last quarter). Management just said it depends on the market, some franchise groups are outperforming, while overall health is good.
– Restaurant contribution margin reached the highest level in 5 years and is already at the upper end of full-year guidance.
– Adj. EBITDA was up 40% QoQ and 79% YoY.
– Full year adj. EBITDA guidance was raised to $34–38m from $32–37m.
This has been a nice one, after today’s raised I have closed my position here.
Despite the good results I believe it might be lateral now for a while until new results are beaten. The expected EBITDA is already in the price IMO, so better to explore other opportunities now.
wonder if the shelf means its a refi? with large holdings by activists and funds here to make money and board representation I have been thinking they will do something good to unlock the value.
Hard to say, but $100M is basically exactly what they need to refinance the debt. Also lines up with the latest language change in the strategic review hinting at refi. Probably points to lower odds of a sale happening anytime soon. Though maybe they’re just building in flexibility and getting things “ready to go” in case sale talks fall through. The debt matures in less than a year, on July 27 of 2027.
But could be many other reasons they filed it. A shelf is not necessary for refi. Unless maybe for negotiating leverage.