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BAGL > SEC Filings for BAGL > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for EINSTEIN NOAH RESTAURANT GROUP INC

Form 10-Q for EINSTEIN NOAH RESTAURANT GROUP INC


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

We wish to caution our readers that this Quarterly Report on Form 10-Q and certain information incorporated herein by reference contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future performance or achievements expressed or implied by these forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include matters such as future economic performance, general economic conditions, consumer preferences and spending, costs, competition, new product execution, restaurant openings or closings, operating margins, the availability of acceptable real estate locations, the sufficiency of our cash balances, the strategic alternatives review that has been undertaken by the company and cash generated from operating and financing activities for our future liquidity and capital resource needs, growth of franchise and licensing, the impact on our business as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act") and the rules promulgated thereunder, future litigation and other matters, and are generally accompanied by words such as: "believes," "anticipates," "plans," "intends," "estimates," "predicts," "targets," "expects," "contemplates" and similar expressions that convey the uncertainty of future events or outcomes. These risks and uncertainties include, but are not limited to, the risk factors described in our annual report on Form 10-K for the fiscal year ended January 3, 2012 as updated in subsequent quarterly reports on Form 10-Q, including Item 1A of Part II of this report. We do not undertake any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as may be required under applicable law.

General

This information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Form 10-K for the fiscal year ended January 3, 2012 (the "2011 Form 10-K").

We have a 52/53-week fiscal year ending on the Tuesday closest to December 31. The third quarters in fiscal years 2011 and 2012 ended on September 27, 2011 and October 2, 2012, respectively. Each quarter contained thirteen weeks and each year to date period contained thirty-nine weeks. Our current fiscal year ends on January 1, 2013 and consists of 52 weeks.

As used in this report, the terms "company," "we," "our," or "us" refer to Einstein Noah Restaurant Group, Inc. and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. The terms "fiscal quarter ended," "fiscal quarter," or "quarter ended" refer to the entire fiscal quarter, unless the context otherwise indicates.

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, we have 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 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


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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 have reconciled the non-GAAP financial information to the nearest GAAP measure on pages 16 and 21.

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 October 2, 2012 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.

Overview

We are the largest owner/operator, franchisor and licensor of bagel bakery café restaurants in the United States. As a leading fast-casual restaurant chain, our restaurants specialize in high-quality foods for breakfast, lunch and afternoon snacks in a bakery-café atmosphere with a neighborhood emphasis. Our product offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels, breads or wraps, soups and salads, assorted pastries, premium coffees and an assortment of snacks.

In the context of our key strategies to drive comparable store sales growth, to enhance corporate margins and to accelerate unit growth, we evaluated our financial performance for the third quarter and year to date 2012 by considering the following key factors:

• Comparable store sales - Our system-wide comparable store sales have been positive in each of the last six quarters with the third quarter of 2012 delivering +0.2% with positive comparable store sales at our restaurants on a company-owned basis over the last five quarters. Positive comparable store sales has been driven by growth in average check, led by our strength in catering sales, favorable menu mix and a slight reduction in customer discounts.


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                                    Q2          Q3          Q4          Q1          Q2          Q3
                                   2011        2011        2011        2012        2012        2012
 System-wide comparable sales       +0.2 %      +1.0 %      +1.2 %      +1.1 %      +1.3 %      +0.2 %
 Company-owned comparable sales     -0.3 %      +0.7 %      +0.8 %      +1.1 %      +1.2 %      +0.2 %

Our catering business, on a comparable store basis, grew by approximately 21.9% and 20.6% on a quarterly and year to date basis, respectively, with our focus on our online ordering system as well as search engine/online marketing. Our catering business now makes up over 7% of our company-owned restaurant revenues. We have also seen strong growth in our specialty beverage line of business. Coffee and specialty beverage sales now represent approximately 10% of our menu mix and continue to grow.

• Manufacturing and Commissaries - Revenues for our manufacturing business and commissaries declined by 14.4% reflecting our commissary closures in the first quarter of 2012, while our margin as a percentage of manufacturing and commissary revenue improved to 23.6% from 8.7%. We completed the closure of all five of our commissaries by the end of the first quarter 2012 and have benefited from the resultant efficiencies in our supply chain.

• Franchise and License Revenue - Total franchise and license related revenues increased by 4.6% as a result of the royalty streams from 20 net additional units opened since September 27, 2011, together with favorable comparable store sales.

• Margin improvement - Our margin improved in our company-owned restaurants as a percentage of company owned restaurant sales by 20 basis points for the third quarter 2012 when compared to the third quarter 2011, which we primarily attribute to favorable cost initiatives, lower food costs and relatively flat labor costs and other operating costs more than offsetting an increase of $1.5 million in marketing investment.

• Unit development - As of October 3, 2012, we owned/operated, franchised and licensed 797 restaurants. We have added 35 restaurants and closed 11 restaurants during the first three quarters of 2012.

2012 Outlook

Our execution plan to grow comparable store sales includes:

• Build traffic by leveraging our strengths in:

• Breakfast (bagels & sandwiches)

• Smart Choice menu options

• Specialty beverages and coffee

• Build average check through bulk bagels, catering and premium sandwich innovation


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• Build brand awareness with a balanced approach of grass roots and mass marketing:

• Grass roots local brand activation

• Targeted digital/outdoor media

• Targeted outdoor billboard advertising

We expect that our catering channel will continue to benefit from our online ordering system, an outsourced and expanded call center, focus on online and digital marketing, and an optimized menu.

Our approach to enhancing corporate margins will extend and build on the initiatives that we have already started, namely, managing the sourcing of our commodities, streamlining our network of product distribution centers, utilizing point of sale technology to drive sustainable cost advantage, and improving restaurant level operating efficiency through targeted initiatives around product costs and labor.

Our acceleration of unit growth will continue to focus on franchising of our Einstein Bros. concept, asset light unit economics and continued expansion into new key licensing channels. Our unit growth plan for 2012 considers our long-term annual growth objective of +10%, or 66 to 72 system-wide openings for 2012. This includes the openings of 14 to 15 company-owned restaurants, 12 to 14 franchised restaurants and 40 to 43 licensed restaurants. We view refranchising opportunistically as a strategy to attract high quality franchisees that will support our accelerated growth initiatives.

We expect to spend between $24 million and $26 million in capital expenditures in 2012 which includes the opening of company-owned restaurants and the relocation of company-owned restaurants, along with the continued roll-out of our new point of sale ("POS") system. We also intend to deploy our capital into areas such as installing drive-thru lanes and adding new exterior signage.

We have a robust pipeline of existing franchise development agreements and new license locations. We will continue to host discovery days for potential franchisees as well as to expand our license footprint.

Results of Operations for the Quarter and Year to Date Periods ended September 27, 2011 and October 2, 2012

Financial Highlights for the Third Quarter 2012 as compared to the Third Quarter 2011

• Total revenues increased $2.0 million, or 1.9%, driven by an increase in company-owned restaurant revenue of $3.1 million, or 3.4%, offset by declines in manufacturing revenue due to the closure of our commissaries.

• Cost of goods sold decreased 210 basis points as a percentage of company owned restaurant sales primarily as a result of our cost saving initiatives.

• Net income increased $0.6 million, or 20.4%, and Adjusted EBITDA increased $1.4 million, or 13.6%, for the third quarter of 2012.


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• Earnings per share ("EPS") increased to $0.20 per share on a dilutive basis for the third quarter of 2012 compared to $0.17 per share on a dilutive basis for the third quarter of 2011. For the third quarter 2012, charges incurred towards the exploration of strategic alternatives decreased EPS by $0.01 per diluted share.

Consolidated Results



                                                          13 weeks ended                                          39 weeks ended
                                                                               Increase/                                               Increase/
                                                  (in thousands)              (Decrease)                 (in thousands)                (Decrease)
                                          September 27,       October 2,         2012            September 27,        October 2,          2012
                                              2011               2012          vs. 2011              2011                2012           vs. 2011
Revenues                                 $       103,532     $    105,494             1.9 %     $       308,455      $    316,360              2.6 %
Cost of sales                                     84,664           84,747             0.1 %             253,420           251,912             (0.6 %)
Operating expenses                                13,614           14,415             5.9 %              40,856            46,482             13.8 %

Income from operations                             5,254            6,332            20.5 %              14,179            17,966             26.7 %
Interest expense, net                                772              744            (3.6 %)              2,507             2,322             (7.4 %)
Income before income taxes                         4,482            5,588            24.7 %              11,672            15,644             34.0 %
Total provision for income taxes                   1,647            2,174            32.0 %               4,589             6,070             32.3 %

Net income                               $         2,835     $      3,414            20.4 %     $         7,083      $      9,574             35.2 %
Adjustments to net income:
Interest expense, net                                772              744            (3.6 %)              2,507             2,322             (7.4 %)
Provision for income taxes                         1,647            2,174            32.0 %               4,589             6,070             32.3 %
Depreciation and amortization                      4,836            5,014             3.7 %              13,984            14,792              5.8 %
Restructuring expenses                               121               -                * *                 334               480             43.7 %
Strategic alternatives expenses                       -               250               * *                  -                685                * *
Other operating expenses (income), net                47               60            27.7 %                (776 )             319           (141.1 %)

Adjusted EBITDA                          $        10,258     $     11,656            13.6 %     $        27,721      $     34,242             23.5 %

** Not meaningful

During the third quarter of 2012, we maintained our focus on enhancing corporate margins by increasing company revenues while managing store level margins by focusing on food costs, and implementing cost saving initiatives.

System-wide comparable store sales were +0.2% and +0.9% for the third quarter and year to date periods ended October 2, 2012, respectively, driven by strong check growth of +4.1% for the quarter and +4.3% on a year to date basis, reflecting price and product mix favorability.

Net income increased by $0.6 million for the third quarter of 2012 from the third quarter of 2011. We attribute this to increased revenue resulting from positive same store sales, increased unit count and cost leveraging.


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Company-Owned Restaurant Operations



                                                                                 13 weeks ended
                                                                                  Increase/               Percentage of company-owned
                                                (in thousands)                   (Decrease)                    restaurant sales
                                       September 27,          October 2,            2012             September 27,             October 2,
                                           2011                  2012             vs. 2011                2011                    2012
Company-owned restaurant sales        $        92,311        $     95,418                3.4 %
Percent of total revenues                        89.2 %              90.5 %
Cost of sales (exclusive of
depreciation and amortization):
Cost of goods sold                    $        27,693        $     26,676               (3.7 %)                30.0 %                 27.9 %
Labor costs                                    27,329              27,906                2.1 %                 29.6 %                 29.2 %
Rent and related expenses                       9,926              10,761                8.4 %                 10.7 %                 11.3 %
Other operating costs                          10,145              10,649                5.0 %                 11.0 %                 11.2 %
Marketing costs                                 1,567               3,017               92.5 %                  1.7 %                  3.2 %

Total company-owned restaurant
costs                                 $        76,660        $     79,009                3.1 %                 83.0 %                 82.8 %

Total company-owned restaurant
gross margin                          $        15,651        $     16,409                4.8 %                 17.0 %                 17.2 %

                                                                                39 weeks ended
                                                                                 Increase/               Percentage of company-owned
                                               (in thousands)                   (Decrease)                    restaurant sales
                                      September 27,          October 2,            2012             September 27,             October 2,
                                          2011                  2012             vs. 2011                2011                    2012
Company-owned restaurant sales       $       275,723        $    285,264                3.5 %
Percent of total revenues                       89.4 %              90.2 %

Cost of sales (exclusive of
depreciation and amortization):
Cost of goods sold                   $        81,971        $     80,048               (2.3 %)                29.7 %                 28.1 %
Labor costs                                   81,514              82,982                1.8 %                 29.6 %                 29.1 %
Rent and related expenses                     30,205              31,508                4.3 %                 11.0 %                 11.0 %
Other operating costs                         29,485              30,152                2.3 %                 10.7 %                 10.6 %
Marketing costs                                7,793               9,007               15.6 %                  2.8 %                  3.1 %

Total company-owned restaurant
costs                                $       230,968        $    233,697                1.2 %                 83.8 %                 81.9 %

Total company-owned restaurant
gross margin                         $        44,755        $     51,567               15.2 %                 16.2 %                 18.1 %

Company-owned restaurant sales for the third quarter and year to date 2012 increased 3.4% and 3.5%, respectively, which is attributable to unit growth and favorable company-owned comparable store sales of +0.2% and +0.8% for the third quarter and year to date 2012, respectively. Catering sales comprised approximately 7.8% of our comparable company-owned restaurant sales for the third quarter of 2012 and 7.5% for year to date 2012, reflecting year over year increases in comparable sales of 21.9% and 20.6%, respectively. On a year to date basis, coffee sales remain strong and now represent approximately 10% of our comparable company-owned restaurant sales. We have also added a net of nineteen new company-owned stores since September 27, 2011, including a net of nine stores acquired from or sold to franchisees.

As a percentage of company-owned restaurant sales, we saw a decrease in our food costs to 27.9% in the third quarter 2012 from 30.0% in the third quarter 2011. This 210 basis point favorability includes savings from our initiatives (-130 basis points), the impact of our price increases (-80 basis points) and the impact of inflation in our commodity costs (-50 points), partially offset by a shift in product mix (+50 basis points).

On a year to date basis, we saw a decrease in our food costs from 29.7% in 2011 to 28.1% in 2012. This 160 basis point improvement includes savings from our initiatives (-130 basis points) and the impact of our price increases (-90 basis points), partially offset by the impact of inflation in our commodity costs (+50 basis points) and a shift in product mix (+10 basis points).

We have secured protection for all of our commodity needs for the remainder of 2012. We have secured protection for approximately 33% of our wheat needs and 96% of our coffee needs for 2013.

As a percentage of company-owned restaurant sales, labor costs decreased in the second quarter due largely to a reduction in group insurance and workers compensation claims. On a year to date basis, overall labor costs (as a percentage of company-owned restaurant sales) have declined due to the leveraged impact of our revenue increases.


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We invested $1.5 million more in marketing during the third quarter of 2012 than we did for the third quarter of 2011, primarily resulting from testing in two of our markets, continued local store (grass roots) marketing and grand opening support. On a year to date basis, marketing expenses have increased to $9.0 million in 2012 from $7.8 million in 2011.

Manufacturing and Commissary Operations



                                                                                 13 weeks ended
                                                                                  Increase/                Percentage of manufacturing
                                                (in thousands)                    (Decrease)                 and commissary revenues
                                       September 27,          October 2,             2012             September 27,             October 2,
                                           2011                  2012              vs. 2011                2011                    2012
Manufacturing and commissary
revenues                              $         8,766        $      7,507               (14.4 %)
Percent of total revenues                         8.4 %               7.1 %
Manufacturing and commissary
costs                                 $         8,004        $      5,738               (28.3 %)                91.3 %                 76.4 %

Total manufacturing and
commissary gross margin               $           762        $      1,769               132.2 %                  8.7 %                 23.6 %

                                                                                39 weeks ended
                                                                                 Increase/                Percentage of manufacturing
                                               (in thousands)                    (Decrease)                 and commissary revenues
                                      September 27,          October 2,             2012             September 27,             October 2,
                                          2011                  2012              vs. 2011                2011                    2012
Manufacturing and commissary
revenues                             $        25,541        $     23,196                (9.2 %)
Percent of total revenues                        8.3 %               7.3 %
Manufacturing and commissary
costs                                $        22,452        $     18,215               (18.9 %)                87.9 %                 78.5 %

Total manufacturing and
commissary gross margin              $         3,089        $      4,981                61.2 %                 12.1 %                 21.5 %

We closed all five of our commissaries by the end of the first quarter 2012. Sales that were previously made to our franchisees and licensees by the commissaries are now being handled directly through our distributors.

. . .

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