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Galloway Capital Partners and affiliated companies, which have acquired 6.01% of Noodles & Company’s outstanding shares over the past year, suggested on Tuesday that the company sell approximately 200 of its company-owned restaurants.
The fast-casual noodle chain had 349 company-owned restaurants as of Sept. 30 and had 86 franchised restaurants.
“After conducting extensive analysis, we believe the company’s shares are materially undervalued and that management of the board must take decisive action to enhance shareholder value,” Galloway principal and chief investment officer Bruce Galloway said in a letter to Noodles & Company chief executive officer Joe Christina. The letter was part of a Schedule 13D filing by Galloway with the Securities & Exchange Commission.
Noodles & Company’s shares closed at 72 cents on Monday, well below the $1 minimum threshold required by the Nasdaq stock exchange. It has been out of compliance for most of the year.
Galloway said it estimated that the recommended sale would generate around $60 million and would allow Noodles to pay off “a substantial portion of its high-cost debt, which currently carries interest rates in the 9-10% range.”
That would in turn strengthen cash flow and “eliminate perceived bankruptcy risk.”
It would also reduce interest expenses and improve earnings per share, Galloway said.
“We see Noodles at a decisive turning point. Management has been proactive and transparent in reviewing all options, and the financial logic behind a balance-sheet reset and targeted store sales is clear. Our
focus is on partnering to unlock meaningful shareholder value,” he said.
In September, Noodles hired financial services firm Piper Sandler as an adviser to explore options for maximizing shareholder value, including a sale of the company.
Galloway said the approach he suggested worked for beauty salon chain Regis Corporation, in which the hedge fund had previously invested and “where the equity value improved dramatically after executing a similar deleveraging strategy attributed to our activist involvement. With the right steps, Noodles can remove bankruptcy risk, clean up its capital structure, and allow the equity to move significantly higher, as we have seen in similar situations.”
Also in the filing, Galloway said it “intends to engage the board and management” regarding share performance, operations, management, governance — including potential changes to the board of directors — conflicted party transactions, capital allocation policies, and strategy.
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