Einstein Noah Restaurant Group Reports Fourth Quarter and Fiscal Year 2013 Financial Results

2014-03-03
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  • Einstein Noah Restaurant Group System-wide comparable store sales for the fourth quarter increased 0.1% over the prior year while fiscal year system-wide comparable store sales decreased 0.3%.

    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, reported financial results for the fourth quarter and fiscal year ended December 31, 2013. The Company also provided guidelines for fiscal year 2014.

    Highlights for the Fourth Quarter 2013 Compared to the Fourth Quarter 2012; and for Fiscal Year 2013 Compared to Fiscal Year 2012:

    • System-wide comparable store sales for the fourth quarter increased 0.1% over the prior year while fiscal year system-wide comparable store sales decreased 0.3%.
    • Total revenues for the fourth quarter increased $3.5 million, or 3.2%, to $114.2 million from $110.6 million. Total revenues for the fiscal year increased $7.5 million, or 1.8%, to $434.5 million from $427.0 million.
    • For the fiscal year, adjusted EBITDA was $47.2 million compared to $49.7 million for the prior year. (*)
    • Net income for the fourth quarter was $4.9 million or $0.27 per diluted share compared to net income of $3.2 million or $0.18 per diluted share.
    • Net income for the fiscal year was $14.6 million or $0.82 per diluted share versus $12.7 million and $0.74 in the prior year. Interest expense increased $2.6 million to $6.0 million as a consequence of the recapitalization in December 2012 which impacted earnings per diluted share by $0.10.
    • A record number of 61 stores were opened system-wide in the fiscal year, including 19 in the fourth quarter.
    • The Company paid a total of $9.1 million of regular quarterly dividends.

    Michael Arthur, Interim President and Chief Executive Officer, stated, “Despite the weather and holiday related headwinds the Company exceeded industry traffic trends over the 13-week timeframe and delivered our best traffic performance since the fourth quarter of 2010. We are further encouraged that through mid-February, Company-owned comparable store sales have trended positive despite unseasonably cold weather and weak consumer confidence.”

    Arthur continued, “A lack of net pricing and a timing delay in implementing planned cost-saving initiatives yielded lower profitability compared to the year-ago period and each of these opportunities were addressed coming out of the year. In addition to driving transactions through our ongoing value emphasis, expanded Smart Choices menu, and growing catering business, we are also benefiting from our commitment to store level execution with overall satisfaction scores up sharply versus the industry. Looking ahead, our unique brand attributes of fresh-baked goodness combined with the speed and convenience of QSR, along with our enhanced in-store experience are key drivers in our plan to build a continued improvement in customer frequency.”

    Arthur concluded, “2013 was a record year for restaurant development, with 61 system-wide store openings. We have plans to continue accelerating our unit growth beginning with an additional 75 to 85 openings in 2014. Our disciplined site selection process and strong execution, delivered an average annual revenue for new Company restaurants of approximately $1 million in revenues per store in 2013.”

    Fourth Quarter 2013 Financial Results

    Total revenues increased 3.2% to $114.2 million from $110.6 million compared to the same period last year, and consisted of a 1.9% increase in Company-owned restaurant sales, a 12.0% increase in manufacturing revenues, and a 21.6% increase in franchise and license related revenues.

    System-wide comparable store sales increased 0.1%, reflecting 1.1% growth in average check that was partially offset by a 1.0% decrease in transactions. The estimated impact of unfavorable December weather and one fewer holiday shopping week between Thanksgiving and Christmas on system-wide transactions totaled 1.0%. Inclusive of these impacts, the change in system-wide transactions was its most favorable since the fourth quarter of 2010 and exceeded the industry benchmark as the commitment to an expanded value strategy that began in early 2013 continued to gain traction with customers.

    Restaurant gross margin decreased 270 basis points as a percentage of restaurant sales from 20.5% to 17.8% reflecting inflationary pressures on semi-variable and fixed components of restaurant level expenses, along with an investment in coffee stations during the quarter and to a lesser extent a delay in the implementation of various cost-saving measures, all of which were not offset by net pricing actions in the fourth quarter.

    Prime costs, defined as cost of goods sold and labor, rose 60 basis points as a percentage of restaurant sales due to higher food costs that were partially offset by realized labor efficiencies, particularly at newer Company-owned stores. Cost and margin rates were also impacted from an increased mix of new stores covering early period training and onboarding of infrastructure.

    Marketing costs were up by $0.7 million from the fourth quarter of 2012 but were down $0.5 million on the full fiscal year, reflecting a planned adjustment in timing through-out the year. During 2013, the company incrementally invested in research and media testing, both of which will be used to drive new consumer strategies going forward. Rent and other operating expenses were higher than the year-ago period driven primarily by the investment in new Company-operated stores.

    Manufacturing revenues increased $0.9 million, or 12.0%, in the fourth quarter of 2013 to $8.8 million on the strength of sales to third-party customers. Manufacturing gross margin as a percentage of manufacturing revenues increased 280 basis points to 26.0% from 23.2% as the Company implemented a more efficient operating process at its manufacturing facility.

    Overall, total gross margin was $24.3 million in the fourth quarter of 2013 compared to $25.5 million in the fourth quarter of 2012, and as a percentage of total revenues, gross margin decreased 180 basis points to 21.3% from 23.1% in the year-ago period.

    General and administrative expenses increased to $10.2 million in the fourth quarter of 2013 from $9.4 million in the fourth quarter of 2012. This is in line with historical run rates and the change versus the prior year largely reflects vacancies in the prior year that have now been filled.

    Income from operations increased 46.3% to $9.2 million from $6.3 million. In the fourth quarter of 2013, the Company incurred $0.8 million in expenses, or $0.03 per diluted share, related to a legal settlement reported in the other operating expenses, net line. In the fourth quarter of 2012, the Company incurred $3.0 million in expenses related to the completion of the strategic alternatives review process and $1.2 million in expense related to an employee benefit settlement both of which were reported in the other operating expenses, net line.

    Adjusted EBITDA* was $14.0 million in the fourth quarter of 2013 compared to $15.4 million in the fourth quarter of 2012.

    Interest expense was $1.2 million in the fourth quarter of 2013 compared to $1.1 million in the fourth quarter of 2012.

    Net income in the fourth quarter of 2013 was $4.9 million, or $0.27 per diluted share, compared to net income in the fourth quarter of 2012 of $3.2 million, or $0.18 per diluted share.

    * A reconciliation of the non-GAAP measure to the nearest GAAP measure can be found in the accompanying tables below.

    Restaurant Development

    As of December 31, 2013, there were 852 Einstein Bros.® Bagels, Noah's New York Bagels®, and Manhattan Bagel® branded restaurants in operation. During 2013, the Company opened 61 restaurants consisting of 10 Company-owned restaurants, 14 franchised restaurants, and 37 licensed restaurants. The Company ended fiscal year 2013 with 458 Company-owned and operated restaurants, 114 franchised restaurants and 280 licensed restaurants.

    Fiscal Year 2014 Guidelines

    The Company is providing the following guidelines for the 2014 fiscal year which is a 52-week period ending December 30, 2014.

    • 75 to 85 system-wide openings.
    • Capital expenditures of $24.0 million to $26.0 million.
    • Cost of goods inflation of approximately 1% to 2%.
    • Pre-opening expense of $65,000 to $75,000 per new Company-owned restaurant.
    • Interest expense of $4.5 million to $5.0 million.
    • An annual effective tax rate of approximately 39%; however, the Company expects to only pay minimal cash-taxes for the next several years.

    About Einstein Noah Restaurant Group

    Einstein Noah Restaurant Group, Inc. is a leading company in the quick-casual segment of the restaurant industry that operates, franchises and licenses locations under the Einstein Bros.®, Noah's New York Bagels® and Manhattan Bagel® brands. The Company's retail system consists of over 850 restaurants in 42 states and the District of Columbia. It also operates a dough production facility. The Company's stock is traded on the NASDAQ under the symbol BAGL. 

    Use of Non-GAAP Financial Information

    In addition to the results reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”) included in this filing, the Company has provided certain non-GAAP financial information, including adjusted earnings before interest, taxes, depreciation and amortization, restructuring expenses, strategic alternative expenses, write-off of debt issuance costs and other operating expenses/income (“Adjusted EBITDA”) and “Free Cash Flow,” which the Company defines as net cash provided by operating activities less net cash used in investing activities. Management believes that the presentation of this non-GAAP financial information provides useful information to investors because this information may allow investors to better evaluate our ongoing business performance and certain components of our results. In addition, the Company’s Board of Directors uses this non-GAAP financial information to evaluate the performance of the Company and its management team. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information to the nearest GAAP measures.

    The Company includes in this report information on system-wide comparable store sales percentages. System-wide comparable store sales percentages refer to changes in sales of our restaurants, whether operated by the company or by franchisees and licensees, in operation for six fiscal quarters including those restaurants temporarily closed for an immaterial amount of time. Some of the reasons restaurants may be temporarily closed include remodeling, road construction, rebuilding related to site-specific catastrophes and natural disasters. Franchise and license comparable store sales percentages are based on sales of franchised and licensed restaurants, as reported by franchisees and licensees. Management reviews the increase or decrease in comparable sales to assess business trends. Comparable store sales exclude permanently closed locations. When the Company intends to relocate a restaurant, it considers that restaurant to be temporarily closed for up to twelve months after it ceases operations. If a suitable relocation site has not been identified by the end of twelve months, we consider the restaurant to be permanently closed. Until that time, the Company includes the restaurant in our open store count, but excludes its sales from our comparable store sales. As of December 31, 2013, there are four stores that we intend to relocate, and are thus considered to be temporarily closed.

    The Company uses company-owned comparable store sales, franchise and license sales and the resulting system-wide sales information internally in connection with restaurant development decisions, planning, and budgeting analyses. The Company believes system-wide comparable store sales information is useful in assessing consumer acceptance of our brands; facilitates an understanding of our financial performance and the overall direction and trends of sales and operating income; helps us evaluate the effectiveness of our advertising and marketing initiatives; and provides information that is relevant for comparison within the industry.

    Comparable store sales percentages are non-GAAP financial measures, which should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP, and may not be equivalent to comparable store sales as defined or used by other companies. The Company does not record franchise or license restaurant sales as revenues. However, royalty revenues are calculated based on a percentage of franchise and license restaurant sales, as reported by the franchisees or licensees.

               
    EINSTEIN NOAH RESTAURANT GROUP, INC.
    CONSOLIDATED STATEMENTS OF OPERATIONS
    (in thousands, except earnings per share and related share information)
    (unaudited)
     
    13 weeks ended Increase/
    (in thousands) (Decrease)
    January 1, December 31, 2013
    2013 2013 vs. 2012
     
    Revenues:
    Company-owned restaurant sales $ 99,519 $ 101,414 1.9 %
    Manufacturing revenues 7,841 8,781 12.0 %
    Franchise and license related revenues   3,286   3,995 21.6 %
    Total revenues 110,646 114,190 3.2 %
     
    Cost of sales (exclusive of depreciation and amortization shown separately below):
    Company-owned restaurant costs
    Cost of goods sold 26,893 28,680 6.6 %
    Labor costs 28,930 28,934 0.0 %
    Rent and related expenses 10,669 11,447 7.3 %
    Other operating costs 10,192 11,101 8.9 %
    Marketing costs   2,413   3,194 32.4 %
    Total company-owned restaurant costs 79,097 83,356 5.4 %
     
    Manufacturing costs   6,021   6,499 7.9 %
    Total cost of sales 85,118 89,855 5.6 %
     
    Gross margin:
    Company-owned restaurant 20,422 18,058 (11.6 %)
    Manufacturing and commissary 1,820 2,282 25.4 %
    Franchise and license   3,286   3,995 21.6 %
    Total gross margin 25,528 24,335 (4.7 %)
     
    Operating expenses:
    General and administrative expenses 9,375 10,207 8.9 %
    Depreciation and amortization 4,915 4,229 (14.0 %)
    Pre-opening expenses 711 118 (83.4 %)
    Strategic alternatives expense 2,992 -

     

    **

    Other operating expenses, net   1,273   619 (51.4 %)
    Income from operations 6,262 9,162 46.3 %
     
    Interest expense, net   1,062   1,211 14.0 %
    Income before income taxes 5,200 7,951 52.9 %
    Provision for income taxes   2,033   3,099 52.4 %
    Net income $ 3,167 $ 4,852 53.2 %
     
    Net income – Basic $ 0.19 $ 0.28 47.4 %
    Net income – Diluted $ 0.18 $ 0.27 50.0 %
    Cash dividend declared per common share $ 4.125 $ 0.130 (96.8 %)
     
    Weighted average number of common shares outstanding:
    Basic 16,992,803 17,573,644 3.4 %
    Diluted 17,278,632 18,022,855 4.3 %
     

    ** Not meaningful

     
               
    EINSTEIN NOAH RESTAURANT GROUP, INC.
    CONSOLIDATED STATEMENTS OF OPERATIONS
    (in thousands, except earnings per share and related share information)
     
    52 weeks ended Increase/
    (in thousands) (Decrease)
    January 1, December 31, 2013
    2013 2013 vs. 2012
     
    Revenues:
    Company-owned restaurant sales $ 384,783 $ 388,362 0.9 %
    Manufacturing and commissary revenues 31,037 33,585 8.2 %
    Franchise and license related revenues   11,186   12,534 12.1 %
    Total revenues 427,006 434,481 1.8 %
     
    Cost of sales (exclusive of depreciation and amortization shown separately below):
    Company-owned restaurant costs
    Cost of goods sold 106,925 109,122 2.1 %
    Labor costs 111,784 113,849 1.8 %
    Rent and related expenses 41,993 44,233 5.3 %
    Other operating costs 40,320 42,962 6.6 %
    Marketing costs   11,380   10,906 (4.2 %)
    Total company-owned restaurant costs 312,402 321,072 2.8 %
     
    Manufacturing and commissary costs   24,236   24,779 2.2 %
    Total cost of sales 336,638 345,851 2.7 %
     
    Gross margin:
    Company-owned restaurant 72,381 67,290 (7.0 %)
    Manufacturing 6,801 8,806 29.5 %
    Franchise and license   11,186   12,534 12.1 %
    Total gross margin 90,368 88,630 (1.9 %)
     
    Operating expenses:
    General and administrative expenses 39,569 40,350 2.0 %
    Depreciation and amortization 19,707 18,203 (7.6 %)
    Pre-opening expenses 1,115 1,075 (3.6 %)
    Restructuring expenses 480 -

     

    **

    Strategic alternatives expense 3,677 -

     

    **

    Other operating expenses, net   1,592   1,138 (28.5 %)
    Income from operations 24,228 27,864 15.0 %
     
    Interest expense, net   3,384   5,970 76.4 %
    Income before income taxes 20,844 21,894 5.0 %
    Provision for income taxes   8,103   7,329 (9.6 %)
    Net income $ 12,741 $ 14,565 14.3 %
     
    Net income – Basic $ 0.75 $ 0.84 12.0 %
    Net income – Diluted $ 0.74 $ 0.82 10.8 %
    Cash dividends declared per common share $ 4.500 $ 0.505 (88.8 %)
     
    Weighted average number of common shares outstanding:
    Basic 16,935,018 17,373,396 2.6 %
    Diluted 17,217,180 17,813,397 3.5 %
     

    ** Not meaningful

     
           
    EINSTEIN NOAH RESTAURANT GROUP, INC.
    SELECTED FINANCIAL INFORMATION
    (in thousands)
     

    Selected Consolidated Balance Sheet Information:

    January 1, 2013 December 31, 2013
    Cash and cash equivalents, end of period $ 17,432 $ 5,982
    Property, plant and equipment, net 63,013 64,229
    Total assets 213,613 198,254
    Total debt 136,700 107,000
    Total liabilities 186,106 159,295
     
     
     
    52 weeks ended

    Selected Consolidated Cash Flow Information:

    January 1, 2013 December 31, 2013
    Net cash provided by operating activities $ 48,511 $ 42,625
    Net cash used in investing activities (25,861 ) (18,508 )
    Net cash used in financing activities (13,870 ) (35,567 )
    Free cash flow (cash provided by operating

    activities less cash used in investing activities)

    22,650 24,117
     
       

    Reconciliation of GAAP to Non-GAAP Measures:

    13 weeks ended
    January 1,     December 31,
    2013 2013
    (in thousands)
    Net income $ 3,167 $ 4,852
    Adjustments to net income:
    Interest expense, net 1,062 1,211
    Provision for income taxes 2,033 3,099
    Depreciation and amortization 4,915 4,229
    Strategic alternative expenses 2,992 -
    Other operating expense, net   1,273   619
     
    Adjusted EBITDA $ 15,442 $ 14,010
     
           
    EINSTEIN NOAH RESTAURANT GROUP, INC.
    SELECTED FINANCIAL INFORMATION
     

    Reconciliation of GAAP to Non-GAAP Measures:

    52 weeks ended
    January 1, December 31,
    2013 2013

    (in thousands)

    Net income $ 12,741 $ 14,565
    Adjustments to net income:
    Interest expense, net

     

    3,384

     

    5,970
    Provision for income taxes

     

    8,103

     

    7,329
    Depreciation and amortization

     

    19,707

     

    18,203
    Restructuring expenses

     

    480

     

    -
    Strategic alternative expenses

     

    3,677

     

    -
    Other operating expense, net   1,592   1,138
     
    Adjusted EBITDA $ 49,684 $ 47,205
     
             
    Fiscal 2013 Activity
    Company      
    Owned   Franchised Licensed Total
    Consolidated Total
    Beginning balance - January 1, 2013 461 97

     

    258 816
    Opened restaurants 10 14 37 61
    Closed restaurants (10 ) - (15 ) (25 )
    Refranchising, Net (3 ) 3 -   -  
    Ending balance - December 31, 2013 458   114 280   852  


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

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