What Happened?

Shares of casual restaurant chain Noodles & Company (NASDAQ: NDLS) fell 3.2% in the morning session after a disappointing earnings report from peer CAVA Group (CAVA) created negative sentiment across the fast-casual restaurant sector. The negative sentiment stemmed from peer CAVA Group, whose shares plunged 24% after its second-quarter earnings update fell short of Wall Street's expectations. CAVA reported same-restaurant sales growth of just 2.1%, significantly missing analysts' forecast of 6.1%, and subsequently trimmed its full-year sales outlook. 

CAVA’s CEO noted that the consumer is “less firm-footed” than the previous year, sparking broader concerns about the health of the fast-casual dining industry. This news created a ripple effect, dragging down several restaurant stocks, including Noodles & Company. The sector-wide anxiety was amplified by the fact that Noodles & Company was scheduled to report its own quarterly earnings after the market close, with investors already cautious due to the company's recent history of missing earnings estimates.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Noodles? Access our full analysis report here, it’s free.

What Is The Market Telling Us

Noodles’s shares are extremely volatile and have had 81 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The previous big move we wrote about was about 23 hours ago when the stock gained 6% on the news that investors cheered a government report showing that inflation remained steady in July. The steady inflation figures have fueled expectations that the Federal Reserve may soon consider an interest rate cut to stimulate the economy, a move that would likely benefit consumer discretionary spending, including dining out. The July Consumer Price Index (CPI) rose 2.7% from a year earlier, meeting the previous month's pace and coming in slightly below economists' expectations of a 2.8% increase. On a monthly basis, the CPI rose 0.2%, a slowdown from the 0.3% increase seen in June. While the cost of dining out continued to climb, rising 0.3% in July, this was offset by a 0.1% dip in grocery prices, contributing to the overall stable inflation picture. The market's positive reaction sent major stock indexes, including the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, soaring. This optimism spilled over into the restaurant sector, which has been grappling with a challenging macroeconomic environment marked by high costs and concerns over consumer traffic.

Noodles is up 79.7% since the beginning of the year, but at $1.06 per share, it is still trading 38.2% below its 52-week high of $1.71 from August 2024. Investors who bought $1,000 worth of Noodles’s shares 5 years ago would now be looking at an investment worth $125.82.

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