Einstein Noah Restaurant Group Reports Second Quarter 2010 Financial Results

Jeff O’Neill, Chief Executive Officer and President of Einstein Noah, stated “Despite intensifying competition in the breakfast daypart, we invested in temporary price incentives in an effort to build traffic. Similar to prior quarters, we focused on various marketing initiatives, and promotional activity to expand our customer base through the launch of healthy innovation, fresh baked goodness and a strong line-up of new products. In addition, we continued to successfully execute on our cost control strategies at both the store-level and in our manufacturing business. This focus on driving traffic and, top-line momentum in a disciplined cost environment, is a key tenet of our strategy, and is intended to deliver consistent and reliable earnings growth over the long run”.

O’Neill continued, “As part of our ‘asset-light’ business strategy, we intend to maximize shareholder value through significant cash flow generation, and are therefore particularly pleased to have increased our free cash flow by $2.7 million compared to the year-ago quarter. We are also strengthening our capital structure by meeting or exceeding all of our financial obligations, including the disciplined redemption of Series Z Preferred Stock. Finally, we are focused on unit expansion with our ‘franchise first’ model, and we look forward to surpassing 700+ stores across the portfolio this year.”

Second Quarter 2010 Financial Results

For the second quarter ended June 29, 2010, system-wide comparable store sales were down 1.1%, reflecting an investment in average check relative to prior year. Total revenues fell slightly to $103.5 million compared to $104.4 million in the second quarter of 2009. Company-owned restaurant sales similarly decreased modestly to $94.2 million from $95.1 million, although the Company benefitted from a net increase of six additional company-owned restaurants since June 30, 2009. Company-owned comparable store sales were negative 2.2%.

As a percentage of company-owned restaurant sales, cost of goods sold were 28.5% favorable by 50 basis points, labor costs were 29.1% favorable by 130 basis points, while other operating costs were even in the second quarter of 2010 compared to last year. The Company continued to invest in marketing initiatives and coupon-related discounts to build traffic and drive awareness of its brands during a period of heavy competitive discounting.

Total gross margin of 20.0% remained flat to the second quarter of 2009. Company-owned restaurant gross profit was $17.4 million, or 18.5% of restaurant sales in the second quarter of 2010, compared to $18.2 million, or 19.2% of restaurant sales, in the second quarter of 2009.

New Units and Development

Restaurant openings during the second quarter of 2010 consisted of nine Einstein Bros. units, including one company-owned restaurant, four franchise restaurants, and four license restaurants. One company-owned restaurant and two license restaurants were also closed during the period.

In the trailing twelve months, the Company has benefitted from a net increase of eleven additional franchise restaurants and twenty-one license restaurants since June 29, 2009. The effect of the new locations helped increase franchise and license related revenues by 17.0% to $2.0 million in the second quarter of 2010 from $1.7 million in the second quarter of 2009.

Other Operating Items

Manufacturing and commissary gross profit grew 25.3% to $1.2 million, compared to $1.0 million in the second quarter of 2009. The substantial improvement in gross profit, despite the lower revenue base, was attributed to lower raw ingredient costs, primarily wheat, as well as production and labor efficiencies at the Company’s bagel commissary facilities.

Adjusted EBITDA decreased to $11.7 million in the second quarter of 2010, compared to $11.9 million in the second quarter of 2009.

Adjusted net income slightly decreased to $3.1 million, or $0.19 in adjusted dilutive EPS, in the second quarter of 2010, compared to $4.0 million, or $0.24 in adjusted dilutive EPS, in the second quarter of 2009.

As of June 30, 2010, $14.0 million of the Series Z Preferred stock and accrued additional redemption amount held by Halpern Denny III, L.P. was outstanding, and the Company intends to redeem all remaining outstanding shares, inclusive of the accrued additional redemption price, on or before June 30, 2011, subject to Halpern Denny’s right to exchange Series Z shares for shares of our common stock. A total of $6.0 million was redeemed by the Company during the second quarter.

* A reconciliation of non-GAAP measures (Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share) to GAAP measures presented can be found in the accompanying tables below. Free cash flow is defined as net cash provided by operating activities less net cash used in investing activities.

2010 Outlook

The Company anticipates the opening of 10-12 new company-owned restaurants, 12-17 new franchise restaurants, and 35-45 license restaurants.

The Company currently has 19 signed development agreements for Einstein Bros. Bagels franchises, and coupled with the efforts to sign additional development agreements in 2010 is expected to yield an ending pipeline of 90-100 additional franchise locations.

As of June 30, 2010, the Company has secured contract pricing on approximately 60% of all major agricultural commodities for the remainder of 2010, which should result in favorable prices compared to 2009, along with an opportunity to benefit from further reductions in the market.

The Company estimates a 2010 annual tax rate of 42.6%, excluding the impact of the March 17, 2010 amendment of the Series Z. 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.

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