Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL) reported financial results for the first quarter ended April 1, 2014.
Highlights for the First Quarter 2014 Compared to the First Quarter 2013:
- Total revenues increased $3.5 million, or 3.3%, to $109.9 million from $106.4 million.
- System-wide comparable store sales increased 1.6%. Company-owned comparable store sales increased 1.7%.
- Adjusted EBITDA was $10.1 million compared to $10.4 million in the prior year, reflecting store-level investments to ensure operational excellence and foster greater brand awareness. (*)
- Net income was $2.1 million or $0.11 per diluted share compared to net income of $2.4 million or $0.14 per diluted share. Net income in the first quarter 2014 included pre-tax senior management transition costs of $1.1 million or $0.04 per diluted share after-tax.
- 13 system-wide openings compared to 11 system-wide openings in the prior year.
- The Company paid a total of $2.3 million of regular quarterly dividends.
Michael Arthur, Interim President and Chief Executive Officer, stated, “We grew total revenues by 3.3% over the prior year by realizing the fruits of our topline strategies and delivered our strongest Company-owned comparable store sales gain since the first quarter of 2008 of 1.7% despite unfavorable weather. Restaurant gross margins were equal or better than prior periods when normalized for one-time events, up front investments, and the timing of expenditures.”
Arthur continued, “We are investing in our corporate store base, on the heels of a successful remodeling initiative in our 12-store Orlando market, where we experienced a profitable sales lift on an average expenditure of $115,000 per store remodel. We now plan to remodel at least 20 additional stores, and with continued success, we may remodel as many as 75 Company-owned stores during 2014 to further enhance our brand image. This opportunistic investing is reflected in our updated capital expenditure guidelines.”
Arthur concluded, “Our strong free cash flows not only enable us to invest in our existing store assets, and pay corporate dividends, but also allow us to build new Company-owned stores. We plan to open 75 to 85 new stores during 2014, including 15 to 20 new corporate locations based upon continued use of a more disciplined site selection process. Stricter real estate criteria and new store training teams yielded higher sales volumes of more than 10% per store for our 2013 class and we are hopeful for similar outperformance with respect to our 2014 class. Our lead indicators, such as customer satisfaction and management bench strength, give us confidence in our growth objectives.”
First Quarter 2014 Financial Results
Total revenues increased 3.3% to $109.9 million from $106.4 million compared to the same period last year, and consisted of a 2.5% increase in Company-owned restaurant sales, a 3.2% increase in manufacturing revenues, and a 28.8% increase in franchise and license related revenues.
System-wide comparable store sales increased 1.6%, despite unfavorable weather. Company-owned comparable stores sales increased 1.7%, with an estimated negative weather impact of 1.3%. Company-owned comparable store sales grew at their fastest pace since the first quarter of 2008 and exceeded the industry benchmark for the first quarter of 2014. A favorable sales mix combined with a moderate price increase to offset inflation generated an average check increase near 5.3% which was partially offset by a decline in transactions. Although the increase in comparable store sales for the quarter is viewed favorably, continuous positive same store sales growth remains as a core objective.
Restaurant gross margin decreased 130 basis points as a percentage of restaurant sales from 17.2% to 15.9%. Prime costs, defined as cost of goods sold and labor, were favorable by 50 basis points as a percentage of restaurant sales due to sales leverage over inflation and labor efficiencies. Rent and related expenses were unfavorable by 30 basis points, primarily due to the mix of newer store leases. Other operating expenses increased 80 basis points compared to the year-ago period due to weather-related increases in utility rates as well the timing of general liability claims expenses. Marketing costs increased 70 basis points to 3.3% of Company-owned restaurant sales reflecting increased radio advertising and general timing of the marketing spend for fiscal 2014.
Manufacturing revenues increased $0.3 million, or 3.2%, in the first quarter of 2014 to $9.5 million as a result of $0.6 million of higher sales to third-party customers, franchisees and licensees, partially offset by a $0.3 million decrease in incremental non-recurring sales that occurred solely in 2013. Manufacturing gross margin as a percentage of manufacturing revenues increased 110 basis points to 19.8% from 18.7% due to various cost-saving initiatives. In addition, manufacturing costs and gross profit has been reclassified from the prior presentation format, such that the cost savings from self-manufacturing a significant portion of bagel supply is now presented as a reduction to cost of sales versus margin created by the manufacturing activities.
Overall, total gross margin was $21.0 million in the first quarter of 2014 compared to $20.9 million in the first quarter of 2013, and as a percentage of total revenues, gross margin decreased 60 basis points to 19.1% from 19.7% in the year-ago period.
General and administrative expenses increased to $10.8 million in the first quarter of 2014 from $10.2 million in the first quarter of 2013, reflecting management vacancies that have since been filled, compensation increases, and higher professional and board of director fees.
Income from operations decreased 16.0% to $4.5 million from $5.4 million.
Adjusted EBITDA* was $10.1 million in the first quarter of 2014 compared to $10.4 million in the first quarter of 2013.
Interest expense was $1.1 million in the first quarter of 2014 compared to $1.7 million in the first quarter of 2013, reflecting a lower outstanding debt balance and a lower interest rate.
The effective tax rate in the first quarter of 2014 was 39.2% compared to 34.8% in the year-ago period. The 2014 effective tax rate excludes federal work opportunity tax credits which have not been renewed for 2014. Although federal employment tax credits have decreased our effect tax rate by an average of 1.8% over the past three years, the recognition of these federal employment tax credits for 2014 new hires cannot be predicted.
Net income in the first quarter of 2014 was $2.1 million, or $0.11 per diluted share, compared to net income in the first quarter of 2013 of $2.4 million, or $0.14 per diluted share. Net income in the first quarter of 2014 included pre-tax senior management transition costs of $1.1 million or $0.04 per diluted share after-tax. Additionally, the Company estimates that adverse weather conditions negatively impacted diluted earnings per share by approximately $0.02 in the first quarter of 2014.
* A reconciliation of the non-GAAP measure to the nearest GAAP measure can be found in the accompanying tables below.
As of April 1, 2014, there were 862 Einstein Bros.® Bagels, Noah's New York Bagels®, and Manhattan Bagel® branded restaurants in operation consisting of 459 Company-owned and operated restaurants, 115 franchised restaurants and 288 licensed restaurants. During the first quarter 2014, the Company opened 13 restaurants consisting of one Company-owned restaurant, three franchised restaurants, and 9 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. All guidelines are unchanged from previous communications, with the exception of the range for capital expenditures, which has been updated to reflect additional remodeling projects at Company-operating restaurants.
- 75 to 85 system-wide openings.
- Capital expenditures of $30.0 million to $35.0 million.
- Cost of goods inflation of approximately 1% to 2%.
- Restaurant gross margin similar to 2013 on a full year basis.
- 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 estimated 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 860 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 report, we have provided certain non-GAAP financial information, including adjusted earnings before interest, taxes, depreciation and amortization, senior management transition costs, restructuring expenses, strategic alternative expenses, write-off of debt issuance costs and other operating expenses/income (“Adjusted EBITDA”) and “Free Cash Flow,” which we define 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, our Board of Directors (the “Board”) 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. Not all of the aforementioned items defining Adjusted EBITDA occur in each reporting period, but have been included in our definition based on historical activity. Our definitions of these non-GAAP disclosures may differ from how others in our industry may define them.
We include 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 we intend to relocate a restaurant, we consider 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, we include the restaurant in our open store count, but exclude its sales from our comparable store sales. As of April 1, 2014 there are five stores that we intend to relocate, and are thus considered to be temporarily closed.
We use 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. We believe 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. We do 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)|
|13 weeks ended||Increase/|
|April 2,||April 1,||2014|
|Company-owned restaurant sales||$||94,226||$||96,552||2.5||%|
|Franchise and license related revenues||2,969||3,825||28.8||%|
|Cost of sales (exclusive of depreciation and amortization shown separately below):|
|Company-owned restaurant costs|
|Cost of goods sold||25,847||26,552||2.7||%|
|Rent and related expenses||10,704||11,323||5.8||%|
|Other operating costs||10,268||11,251||9.6||%|
|Total company-owned restaurant costs||77,985||81,237||4.2||%|
|Total cost of sales||85,463||88,851||4.0||%|
|Franchise and license||2,969||3,825||28.8||%|
|Total gross margin||20,925||21,017||0.4||%|
|General and administrative expenses||10,208||10,779||5.6||%|
|Depreciation and amortization||4,940||4,322||(12.5||%)|
|Senior management transition costs||-||1,093||**|
|Other operating expenses, net||126||161||27.8||%|
|Income from operations||5,364||4,506||(16.0||%)|
|Interest expense, net||1,743||1,121||(35.7||%)|
|Income before income taxes||3,621||3,385||(6.5||%)|
|Provision for income taxes||1,260||1,327||5.3||%|
|Net income – Basic||$||0.14||$||0.12||(14.3||%)|
|Net income – Diluted||$||0.14||$||0.11||(21.4||%)|
|Cash dividend declared per common share||$||0.125||$||0.130||4.0||%|
|Weighted average number of common shares outstanding:|
** Not meaningful
|EINSTEIN NOAH RESTAURANT GROUP, INC.|
|SELECTED FINANCIAL INFORMATION|
Selected Consolidated Balance Sheet Information:
|January 1, 2013||
April 1, 2014
|Cash and cash equivalents, end of period||$||5,982||$||3,959|
|Property, plant and equipment, net||64,229||64,012|
|13 weeks ended|
Selected Consolidated Cash Flow Information:
|April 2, 2013||April 1, 2014|
|Net cash provided by operating activities||$||1,379||$||1,473|
|Net cash used in investing activities||(4,812||)||(4,749||)|
|Net cash (used in) provided by financing activities||(6,533||)||1,253|
Free cash flow (cash provided by operating
activities less cash used in investing activities)
Reconciliation of GAAP to Non-GAAP Measures:
|13 weeks ended|
|Adjustments to net income:|
|Interest expense, net||1,743||1,121|
|Provision for income taxes||1,260||1,327|
|Depreciation and amortization||4,940||4,322|
|Senior management transition costs||-||1,093|
|Other operating expense, net||126||161|
EINSTEIN NOAH RESTAURANT GROUP, INC.
SELECTED FINANCIAL INFORMATION
|Thirteen weeks ended April 1, 2014|
|Beginning balance - December 31, 2013||458||114||280||852|
|Ending balance - April 1, 2014||459||115||288||862|
|Trailing 12 Months Activity|
|Beginning balance - April 2, 2013||461||99||
|Ending balance - April 1, 2014||459||115||288||862|
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