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Einstein Noah Restaurant Group Reports First Quarter 2010 Financial Results

2010-05-10

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Einstein Noah Restaurant Group System-wide comparable store sales improve sequentially and year to year, Total gross margin improves 230 basis points to 18.7%, Redeemed $13.2 million of Series Z Preferred Stock

Einstein Noah Restaurant Group, Inc. (NASDAQ: BAGL), the quick-casual segment of the restaurant industry operating under the Einstein Bros.® Bagels, Noah's New York Bagels®, and Manhattan Bagel® brands, reported financial results for the first quarter ended March 30, 2010.

Selected Highlights for the First Quarter 2010 Compared to the First Quarter 2009:

Total revenues rose slightly to $100.8 million from $100.4 million.
Total gross margin improved 230 basis points to 18.7% due to strong cost controls as well as a substantial improvement in manufacturing and commissary profitability.
Adjusted EBITDA improved to $8.7 million from $7.1 million.*
Adjusted net income and adjusted EPS on a dilutive basis improved to $1.5 million and $0.09, respectively, from $1.2 million and $0.07, respectively.*
Net income was $0.6 million and diluted EPS was $0.03 for the first quarter of 2010.
Redeemed $13.2 million in Series Z Preferred Stock.

Jeff O’Neill, Chief Executive Officer and President of Einstein Noah, stated, “Our first quarter performance underscores our successful execution of key sales and cost control strategies, and builds on our strong foundation of long-term growth opportunities. For the quarter, product innovation and creative promotions drove improvement in system-wide comparable sales and transactions, and we were pleased that consumers responded positively to our check building efforts despite intensifying competition in the breakfast daypart. We also improved our gross margins through our supply chain initiatives, and realized efficiencies in our manufacturing and store-level operations, which together facilitated 25.9% growth in adjusted net income for the period.”

O’Neill continued, “Our cash flow generation is enabling us to meet or exceed our financial obligations, and is a major contributor to a strong and flexible capital structure. We intend to stay focused on this metric as we move toward a more asset light business model, characterized by accelerated franchise and licensing development and limited Company expansion. We believe this strategy is the surest means to maximize shareholder value over time.”

First Quarter 2010 Financial Results

For the first quarter ended March 30, 2010, system-wide comparable store sales, turned positive to +0.1% for the first time in five quarters. Total revenues rose slightly to $100.8 million vs. $100.4 million in the first quarter of 2009. Company-owned restaurant sales similarly grew modestly, as the Company benefitted from a net increase of five additional company-owned restaurants since March 31, 2009. Company-owned comparable store sales were down slightly at -0.2%, but showed a sequential improvement from the -1.7% decrease in the fourth quarter of 2009.

Marketing initiatives increased $1.5 million compared to the prior-year period, as the Company launched its marketing investments last year in mid-February, whereas in the first quarter of 2010, increased marketing efforts were incurred over the entire three-month period. Company-owned restaurant gross profit was $15.3 million, or 16.9% of restaurant sales in the first quarter of 2010, compared to $13.5 million, or 14.9% of restaurant sales, in the first quarter of 2009.

As a percentage of company-owned restaurant sales, cost of goods sold was favorable by 200 basis points in the first quarter of 2010 compared to last year. Labor costs, as a percentage of company-owned restaurant sales, were favorable by 110 basis points in the first quarter of 2010 compared to the first quarter of 2009 due largely to savings from labor initiatives and decreased health benefit costs.

New Units and Development

Restaurant openings during the first quarter of 2010 consisted of 10 outlets, including three Einstein Bros. company-owned restaurants, one Manhattan Bagel and one Einstein Bros. franchise restaurants, and five Einstein Bros. licensed restaurants. One company-owned restaurant and one licensed restaurant were also closed during the period.

The Company benefitted from a net increase of eight additional franchise restaurants and 25 license restaurants since March 31, 2009. The effect of the new locations helped drive franchise and license related revenues up 16.7% to $2.2 million in the first quarter of 2010 from $1.8 million in the first quarter of 2009.

Other Operating Items

Manufacturing and commissary revenues fell modestly to $8.0 million in the first quarter of 2010 vs. $8.1 million, while gross profit grew 18.7% to $1.3 million, compared to $1.1 million in the first quarter of 2009. The substantial improvement in gross profit was attributed to lower raw ingredient costs as well as production and labor efficiencies at the Company’s bagel manufacturing facility.

Adjusted EBITDA increased $1.6 million to $8.7 million in the first quarter of 2010, compared to $7.1 million in the first quarter of 2009. The 22.3% increase in adjusted EBITDA is attributable to the improvements previously mentioned.

Adjusted net income increased to $1.5 million, or $0.09 in adjusted EPS on a dilutive basis, in the first quarter of 2010, compared to $1.2 million, or $0.07 in adjusted EPS on a dilutive basis, in the first quarter of 2009.

The Company currently estimates a 2010 annual tax rate of 43.6%, excluding the impact of the modification of the Series Z. As previously disclosed, the 2009 annual tax rate of 41.3% excluded all changes in the valuation allowance. Most of the recorded tax expense represents the benefit realized from the Company’s NOL carryforwards and the Company will continue to only pay minimal cash-taxes for the next several years.

* A reconciliation of all non-GAAP measures (Adjusted EBITDA, adjusted net income and adjusted earnings per share on a dilutive basis) to GAAP measures presented can be found in the accompanying tables below.

During the first quarter of 2010, the Company extended the redemption date for its Series Z Preferred stock held by Halpern Denny III, L.P. and committed to redeem all remaining outstanding shares, inclusive of the accrued additional redemption price, on or before June 30, 2011. The Company redeemed $13.2 million plus additional redemption in the first quarter of 2010 and expects $12 million to $15 million of the Series Z Preferred stock to be outstanding on June 30, 2010. The previous redemption date was June 30, 2010. The amended agreement had an impact of $0.9 million during the quarter resulting in net income of $0.6 million and diluted EPS of $0.03. (See the accompanying tables below).

		13 weeks ended
		March 31,			March 30,
		2009			2010
		(in thousands, except earnings per share and related share information)
Net income available to common stockholders		$	1,850		$	570
	Adjustments for:
	Change in tax valuation allowance		(659	)		-
	Adjustment for Series Z modification		-			929
Adjusted net income		$	1,191		$	1,499

Weighted average number of common shares outstanding:
Basic			16,025,935			16,467,072
Diluted			16,216,152			16,765,609

Net income per common share – Basic		$	0.12		$	0.03
	Adjustments for:
	Change in tax valuation allowance	$	(0.05	)	$	-
	Adjustment for Series Z modification	$	-		$	0.06
Adjusted net income per common share – Basic		$	0.07		$	0.09

Net income per common share – Diluted		$	0.11		$	0.03
	Adjustments for:
	Change in tax valuation allowance	$	(0.04	)	$	-
	Adjustment for Series Z modification	$	-		$	0.06
Adjusted net income per common share – Diluted		$	0.07		$	0.09


		13 weeks ended
		March 31,			March 30,
		2009			2010
		(in thousands)
Net income		$	1,850		$	620
Adjustments to net income:
	Interest expense, net		1,190			1,751
	Provision for income taxes		77			1,158
	Depreciation and amortization		4,033			4,266
	Adjustment for Series Z modification		-			929
	Other operating expenses		(1	)		19
Earnings before interest, taxes, depreciation,
	amortization and other (Adjusted EBITDA)	$	7,149		$	8,743

EINSTEIN NOAH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share and related share information)
(unaudited)

		13 weeks ended						Increase/
		(dollars in thousands)						(Decrease)
		March 31,			March 30,			2010
		2009			2010			vs. 2009
Revenues:
	Company-owned restaurant sales	$	90,454		$	90,691		0.3	%
	Manufacturing and commissary revenues		8,127			7,971		(1.9	%)
	Franchise and license related revenues		1,842			2,150		16.7	%
Total revenues			100,423			100,812		0.4	%

Cost of sales:
	Company-owned restaurant costs
	Cost of goods sold		27,419			25,706		(6.2	%)
	Labor costs		28,645			27,780		(3.0	%)
	Other operating costs		9,574			8,997		(6.0	%)
	Rent and related, and marketing costs		11,359			12,884		13.4	%
	Total company-owned restaurant costs		76,997			75,367		(2.1	%)

	Manufacturing and commissary costs		6,997			6,630		(5.2	%)
Total cost of sales			83,994			81,997		(2.4	%)

Gross profit:
	Company-owned restaurant		13,457			15,324		13.9	%
	Manufacturing and commissary		1,130			1,341		18.7	%
	Franchise and license		1,842			2,150		16.7	%
Total gross profit			16,429			18,815		14.5	%

Operating expenses:
	General and administrative expenses		9,280			10,072		8.5	%
	Depreciation and amortization		4,033			4,266		5.8	%
	Other operating expenses		(1	)		19		**
Income from operations			3,117			4,458		43.0	%

Interest expense, net			1,190			1,751		47.1	%
Adjustment for Series Z modification			-			929		**

Income before income taxes			1,927			1,778		(7.7	%)
	Provision for income taxes		77			1,158		1403.9	%
Net income		$	1,850		$	620		(66.5	%)

Net income		$	1,850		$	620		(66.5	%)
Less: Additional redemption on mezzanine equity			-			(50	)	**
Net income available to common stockholders		$	1,850		$	570		(69.2	%)


	** not meaningful

EINSTEIN NOAH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERCENTAGE RELATIONSHIP TO TOTAL REVENUES
(unaudited)

		13 weeks ended
		(percent of total revenue)
		March 31,		March 30,
		2009		2010
Revenues:
	Company-owned restaurant sales	90.1	%	90.0	%
	Manufacturing and commissary revenues	8.1	%	7.9	%
	Franchise and license related revenues	1.8	%	2.1	%
Total revenues		100.0	%	100.0	%

Cost of sales:
	Company-owned restaurant costs (1)
	Cost of goods sold	30.3	%	28.3	%
	Labor costs	31.7	%	30.6	%
	Other operating costs	10.6	%	9.9	%
	Rent and related, and marketing costs	12.6	%	14.2	%
	Total company-owned restaurant costs	85.1	%	83.1	%

	Manufacturing and commissary costs (2)	86.1	%	83.2	%
Total cost of sales		83.6	%	81.3	%

Gross margin:
	Company-owned restaurant (1)	14.9	%	16.9	%
	Manufacturing and commissary (2)	13.9	%	16.8	%
	Franchise and license	100.0	%	100.0	%
Total gross margin		16.4	%	18.7	%

Operating expenses:
	General and administrative expenses	9.2	%	10.0	%
	Depreciation and amortization	4.0	%	4.2	%
	Other operating expenses (income)	0.0	%	0.0	%
Income from operations		3.1	%	4.4	%

Interest expense, net		1.2	%	1.7	%
Adjustment for Series Z modification		0.0	%	0.9	%

Income before income taxes		1.9	%	1.8	%
	Provision for income taxes	0.1	%	1.1	%
Net income		1.8	%	0.6	%

Net income		1.8	%	0.6	%
Less: Additional redemption on mezzanine equity		0.0	%	(0.0	%)
Net income available to common stockholders		1.8	%	0.6	%


	(1) As a percentage of company-owned restaurant sales
	(2) As a percentage of manufacturing and commissary revenues
	* not applicable
	** not meaningful

EINSTEIN NOAH RESTAURANT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)

	December 29,			March 30,
	2009			2010
ASSETS
Current assets:
Cash and cash equivalents	$	9,885		$	10,766
Restricted cash		508			547
Accounts receivable		5,629			5,674
Inventories		5,513			5,003
Current deferred income tax assets		7,184			7,029
Prepaid expenses		5,682			6,903
Other current assets		73			73
Total current assets		34,474			35,995

Property, plant and equipment, net		58,682			58,616
Trademarks and other intangibles, net		63,831			63,831
Goodwill		4,981			4,981
Long-term deferred income tax assets		46,206			45,209
Debt issuance costs and other assets, net		3,047			2,900

Total assets	$	211,221		$	211,532

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,147		$	6,138
Accrued expenses and other current liabilities		20,633			23,170
Current portion of long-term debt		5,234			11,900
Current portion of obligations under capital leases		22			20
Mandatorily redeemable, Series Z Preferred Stock, $.001 par
value, $1,000 per share liquidation value; 57,000 shares
authorized; 32,194 and 9,495 shares outstanding		32,194			9,351

Total current liabilities		62,230			50,579

Long-term debt		74,553			74,328
Long-term obligations under capital leases		19			15
Other liabilities		12,133			12,328

Total liabilities		148,935			137,250

Commitments and contingencies

Series Z Preferred Stock, $.001 par value, $1,000 per share
liquidation value; 9,494 shares outstanding		-			10,567

Stockholders’ equity:
Series A junior participating preferred stock, 700,000 shares
authorized; no shares issued and outstanding		-			-
Common stock, $.001 par value; 25,000,000 shares authorized;
16,461,123 and 16,470,719 shares issued and outstanding		16			16
Additional paid-in capital		266,928			267,293
Accumulated other comprehensive loss, net of income tax		(1,277	)		(833	)
Accumulated deficit		(203,381	)		(202,761	)
Total stockholders’ equity		62,286			63,715

Total liabilities and stockholders’ equity	$	211,221		$	211,532

EINSTEIN NOAH RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

	13 weeks ended
	March 31,			March 30,
	2009			2010
OPERATING ACTIVITIES:
Net income	$	1,850		$	620
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		4,033			4,266
Deferred income tax expense		-			1,152
Stock-based compensation expense		255			383
Loss (gain) on disposal of assets		(1	)		19
Adjustment for Series Z modification		-			929
Additional redemption on mezzanine equity		-			(50	)
Provision for losses on accounts receivable		47			35
Amortization of debt issuance and debt discount costs		144			145
Changes in operating assets and liabilities:
Restricted cash		54			(39	)
Accounts receivable		(49	)		(80	)
Accounts payable and accrued expenses		2,023			5,293
Other assets and liabilities		146			(514	)

Net cash provided by operating activities		8,502			12,159

INVESTING ACTIVITIES:
Purchase of property and equipment		(3,699	)		(4,540	)

Net cash used in investing activities		(3,699	)		(4,540	)

FINANCING ACTIVITIES:
Payments under capital lease obligations		(22	)		(6	)
Repayments under the term loan		(7,638	)		(4,559	)
Proceeds from line of credit		-			11,000
Redemptions under Series Z
Preferred Stock		-			(13,205	)
Proceeds upon stock option exercises		-			32

Net cash used in financing activities		(7,660	)		(6,738	)

Net (decrease) increase in cash and cash equivalents		(2,857	)		881
Cash and cash equivalents, beginning of period		24,216			9,885
Cash and cash equivalents, end of period	$	21,359		$	10,766