Einstein Noah Restaurant Group Reports Third Quarter 2010 Financial Results

Einstein Noah Restaurant Group, Inc. (NASDAQ: BAGL), a leader in the quick-casual segment of the restaurant industry operating under the Einstein Bros.® Bagels, Noah's New York Bagels®, and Manhattan Bagel® brands, today reported financial results for the third quarter ended September 28, 2010.

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

• Total revenues increased 1.3% to $101.4 million.
• System-wide comparable restaurant sales and comparable transactions increased 0.7%.
• Total gross margin improved 120 basis points to 19.8% from 18.6%.
• Adjusted EBITDA improved to $10.9 million from $10.5 million. (*)
• Adjusted net income improved to $3.4 million, or $0.20 in adjusted diluted EPS, from $2.5 million, or $0.15 in adjusted diluted EPS. (*)
• Free cash flow for the third quarter increased by $3 million, or 45%, to $9.6 million. (*)

Jeff O’Neill, Chief Executive Officer and President of Einstein Noah, stated “The third quarter was very successful for Einstein Noah on many levels. For the first time in 2010, system-wide comparable restaurant sales and transactions were positive, driven by the successful launch of our new line-up of bagel thin sandwiches. Our 32% adjusted net income growth was healthy, as we continued to realize cost efficiencies through ongoing initiatives at the store-level, within our supply chain, and in our manufacturing operations. Finally, we reached a new development milestone by surpassing 700 restaurants, which further underscores our mission to be the fastest growing, fast casual restaurant chain in North America.”

As of July 1, 2010, Halpern Denny had a one year option to exchange up to $7.0 million of the outstanding Series Z and accrued additional redemption amount for up to 608,695 shares of freely tradable common stock. A total of $7.1 million in Series Z preferred stock was redeemed by the Company during the third quarter of 2010, including accrued additional redemption. As of September 28, 2010, $6.5 million of the Series Z preferred stock and $0.6 million in accrued additional redemption amount held by Halpern Denny was outstanding. On October 25, 2010, the Company redeemed $3.6 million of the Series Z preferred stock, including accrued additional redemption amount, and pursuant to the terms of the agreement with Halpern Denny, the exchange option has expired.

O’Neill continued, “Our ability to generate healthy free cash flow is indicative of our operational excellence and disciplined use of capital. This enabled the redemption of our Series Z Preferred Stock, and will support our intent to finish fiscal 2010 with a balance of less than $4.0 million. It also facilitates our focus on a franchise-first growth model, which stresses franchise and licensing development along with continued Company expansion. Our asset-light approach is designed to further strengthen the Company’s financial condition, and in our estimation, is the best means to maximize value for our shareholders over the long-term. We look forward to continued progress in the fourth quarter and through 2011.”

Third Quarter 2010 Financial Results

For the third quarter ended September 28, 2010, system-wide comparable store sales increased 0.7%, which was driven by an increase in traffic growth through the quarter. Total revenues increased 1.3% to $101.4 million compared to $100.0 million in the third quarter of 2009. Company-owned restaurant sales increased to $91.8 million from $91.2 million. Company-owned comparable store sales were relatively flat (-0.2%), and reflected a 200 basis point improvement from the negative 2.2% in comparable store sales in the second quarter of 2010.

As a percentage of company-owned restaurant sales, cost of goods sold were 28.4%, favorable by 40 basis points; labor costs were 29.6%, favorable by 90 basis points; while other operating costs were 11.0%, 40 basis points higher compared to last year. The Company invested $1.8 million in marketing initiatives during the third quarter of 2010 compared to $1.4 million last year to build traffic and drive awareness of its brands.

Total gross profit was $20.1 million in the third quarter of 2010, or 19.8% of total revenues, compared to $18.6 million, or 18.6% of total revenues in the third quarter of 2009. Company-owned restaurant gross profit was $17.0 million, or 18.5% of restaurant sales in the period, compared to $16.0 million, or 17.5% of restaurant sales, last year.

New Units and Development

Restaurant openings during the third quarter of 2010 consisted of 17 Einstein Bros. units, including 1 franchise restaurant and 16 license restaurants.

In the trailing twelve months since September 29, 2009, the Company has benefitted from a net increase of 9 additional franchise restaurants and 34 license restaurants since September 29, 2009. The effect of the new locations helped increase franchise and license related revenues by 17.2% to $2.1 million in the third quarter of 2010 from $1.8 million in the third quarter of 2009.

Other Operating Items

Manufacturing and commissary gross profit grew 14.7% to $1 million compared to $0.9 million in the third quarter of 2009. The substantial improvement in gross profit was attributed to favorable raw ingredient costs, coupled with higher sales volumes.

Adjusted EBITDA grew 3.1% to $10.9 million in the third quarter of 2010 compared to $10.5 million in the third quarter of 2009.

Adjusted net income increased to $3.4 million, or $0.20 in adjusted diluted EPS, in the third quarter of 2010, compared to $2.5 million, or $0.15 in adjusted diluted EPS, in the third quarter of 2009.

* 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 expects to open between 57 and 65 total restaurants which is in line with the Company’s prior guidance of 57 to 74 total restaurants. By ownership type, the Company anticipates the opening of 7 to 8 new company-owned restaurants, 15 to 17 new franchise restaurants, and 35 to 40 license restaurants.

The Company currently has 20 signed development agreements for Einstein Bros. Bagels franchises, and coupled with the 4 planned additional development agreements in 2010, the Company expects to yield an ending pipeline of 100 to 110 additional franchise locations.

As of September 28, 2010, the Company has secured pricing on approximately 90% of all major agricultural commodities, including wheat, for the remainder of 2010, which should result in favorable prices compared to 2009.

The Company estimates a 2010 annual effective tax rate of 42.7%. The Company will continue to only pay minimal cash-taxes for the next several years because of the benefit realized from the Company’s NOL carryforwards.

Logos, product and company names mentioned are the property of their respective owners.

Reader Comments:

Be the first to leave a comment for this article

Tweet