Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BAGL > SEC Filings for BAGL > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for EINSTEIN NOAH RESTAURANT GROUP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for EINSTEIN NOAH RESTAURANT GROUP INC


3-May-2013

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 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 Federal and/or State legislation including, but not limited to, 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 1, 2013 and 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 1, 2013 (the "2012 Form 10-K").

We operate on a 52 or 53-week fiscal year, which ends on the Tuesday closest to December 31. The first quarters in fiscal years 2012 and 2013 ended on April 3, 2012 and April 2, 2013, respectively. Each quarter contained thirteen weeks. Our current fiscal year ends on December 31, 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 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 14 and 18.


Table of Contents

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 2, 2013 there are seven 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 specialty 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, gourmet soups and salads, assorted pastries, premium coffees and an assortment of snacks. Our manufacturing operations and network of independent distributors deliver high-quality ingredients to our restaurants.

In the context of our key strategies to drive comparable store sales growth, to manage corporate margins and to accelerate unit growth, we evaluated our financial performance for the first quarter of 2013 by considering the following key factors:

• Comparable store sales - In the first quarter of 2013, we recorded a system-wide comparable store sales decrease of -0.6%, while Company-owned comparable stores sales decreased -1.0%. To stimulate growth in transactions, during the quarter we emphasized our $3.99 breakfast and $5.99 lunch value bundles at our company-owned stores ("investment in everyday value"). We invested approximately $2.5 million in everyday value and discounting. Our performance in comparable transactions was our best since the first quarter of 2011. Our investment in everyday value and discounting was also a tactical effort to mitigate a calendar shift in the Easter and Passover holidays, and macro-economic headwinds in the quarter. While quarterly comparable sales were soft, we did make sequential progress in comparable transactions by coupling our breakfast and lunch value combos with a lineup of premium sandwiches. Looking ahead, we are optimistic that we can build frequency from current


Table of Contents
levels through fresh-baked bagels, specialty beverages, and meal combos that provide our customers with both quality and everyday value throughout the day. Catering sales, which continue to be a strong revenue driver, comprised approximately 8.3% of our comparable company-owned restaurant sales for the first quarter of 2013. Coffee sales also remain strong and total hot beverage sales represent approximately 10% of our comparable company-owned restaurant sales.

• Unit development - We more than doubled our openings of new restaurants in the first quarter of 2013 from the first quarter of 2012, particularly with our licensed partners. We opened a total of 11 company-owned units in the first quarter of 2013 compared to five in the first quarter of 2012 and licensed openings increased to eight locations from one in 2012.

• Manufacturing - Compared to the first quarter of 2012, revenues for our manufacturing and commissary segment grew by $0.5 million as sales from our manufacturing facility grew by $1.0 million, or 13.1%, to $8.9 million in the first quarter of 2013 as a result of additional export business. This was partially offset by a decline in commissary revenues of $0.5 million in 2013 from 2012. We closed all of our commissaries by the end of the first quarter of 2012. For this segment, profitability improved by $0.8 million, or 56.9%.

2013 Outlook

Our execution plan to grow comparable store sales includes:

• Building traffic by:

• Launching everyday value combos;

• Leveraging our strength in bagels;

• Driving frequency through increased coffee and specialty beverage focus;

• Building awareness around lunch; and

• Accelerating our in-store experience and guest satisfaction.

• Building average check through bulk bagels, catering, and new signature sandwich lines.

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

• Local brand activation;

• Directional outdoor billboards;

• Television test; and

• Digital marketing/social media.

We expect our catering business to continue to benefit from our online ordering system, an outsourced and expanded call center, focus on online and digital marketing, and an optimized menu. New support for catering will include expanding our sales force, focusing on marketing search engine, managing outlier markets and penetrating the lunch daypart.

Our approach to enhancing corporate margins will extend and build on the initiatives that we have already started, namely, aggressively managing the sourcing of our commodities, utilizing new packaging to drive cost advantages, further rationalize our distribution network, and negotiate favorable contracts with our vendors.

Our emphasis on acceleration of unit growth will continue to focus on a franchise first growth model, asset light unit economics, penetration into new key channels and opportunistic refranchising and acquisition efforts. Our unit growth plan for 2013 considers our long-term annual unit growth objective of
+10%, or 60 to 80 system-wide openings for 2013. This includes the opening of 15 to 20 company-owned restaurants, 15 to 20 franchised restaurants and 30 to 40 licensed restaurants. We also see selective refranchising of our units as an opportunity to attract high quality franchisees that will support our accelerated growth initiatives.


Table of Contents

We expect to spend between $20 million and $22 million in capital expenditures in 2013 which includes the opening of new company-owned restaurants and the relocation of existing company-owned restaurants. We also intend to deploy our capital into areas such as installing drive-thru lanes and adding new exterior signage.

Results of Operations for the Quarterly Periods ended April 3, 2012 and April 2, 2013

• Total revenues increased $1.3 million, or 1.2%, driven by an increase in company-owned restaurant sales of $0.8 million, or 0.8% and an increase in revenue from our manufacturing and commissary segment of $0.5 million, or 5.7%. Company-owned restaurant sales were adversely impacted in the short term by the rollout of our new transaction strategy and the upfront investment in everyday value and discounting which we believe will drive transaction growth in the long-term. In an effort to improve transactional growth, discounting increased by $2.8 million ($2.5 million on a comparable basis) from Q1 2012 as we emphasized our $3.99 breakfast and $5.99 lunch value bundles at our company-owned stores.

• Company-owned restaurant gross margin decreased 290 basis points primarily due to our investment in everyday value and discounting and the upfront investment from new store openings. Management expects store level margins to be compressed for approximately ninety days after a store opens, which we refer to as the "ramp up period". We opened eleven company-owned stores in the fourth quarter of fiscal 2012, nine of which were opened in December. Management believes that new stores generally run lower margins during their first ninety days of operations.

• Interest expense increased $0.9 million primarily due to an increase of $59.2 million in our average debt balance and a 1% increase in our weighted average interest rate.

• Net income decreased $0.8 million, or 26.3%, and Adjusted EBITDA decreased $1.1 million, or 9.7%, for the first quarter of 2013.

• Earnings per share ("EPS") decreased to $0.14 per share on a dilutive basis for the first quarter of 2013 compared to $0.19 per share on a dilutive basis for the first quarter of 2012. Additional investments in everyday value and discounting during the first quarter of 2012 reduced our EPS by approximately $0.09 per diluted share. Restructuring charges incurred during the first quarter of 2012 reduced our EPS by approximately $0.02 per diluted share.

Consolidated Results



                                                      13 weeks ended
                                                                      Increase/
                                             (in thousands)           (Decrease)
                                         April 3,      April 2,          2013
                                           2012          2013          vs. 2012
      Revenues                           $ 104,873     $ 106,123              1.2 %
      Cost of sales                         82,180        85,198              3.7 %
      Operating expenses                    16,649        15,561             (6.5 )%

      Income from operations                 6,044         5,364            (11.3 )%
      Interest expense, net                    800         1,743            117.9 %

      Income before income taxes             5,244         3,621            (30.9 )%
      Total provision for income taxes       2,040         1,260            (38.2 )%

      Net income                         $   3,204     $   2,361            (26.3 )%
      Adjustments to net income:
      Interest expense, net                    800         1,743            117.9 %
      Provision for income taxes             2,040         1,260            (38.2 )%
      Depreciation and amortization          4,767         4,940              3.6 %
      Restructuring expenses                   554            -            (100.0 )%
      Other operating expenses, net            184           126            (31.5 )%

      Adjusted EBITDA                    $  11,549     $  10,430             (9.7 )%


Table of Contents

During the first quarter of 2013, our focus was on generating transactions at our company-owned stores by investing in value bundling and other discounts, continuing with various cost saving initiatives and unit development.

System-wide comparable store sales were -0.6% for the first quarter of fiscal 2013. Investments in everyday value and discounts at our company-owned stores, on a comparable basis, increased over $2.5 million when compared to Q1 2012. Management believes that this investment in discounting directly led to sequential improvement in transaction growth.

We opened one company-owned store, two franchised locations and eight licensed locations in the first quarter of 2013. We have opened 61 units system-wide since April 3, 2012.

Net income decreased by $0.8 million for the first quarter of 2013 from the first quarter of 2012. We attribute this to discounting and increased interest expense.

Company-Owned Restaurant Operations



                                                                          13 weeks ended
                                                                    Increase/                Percentage of company-owned
                                        (in thousands)              (Decrease)                     restaurant sales
                                   April 3,        April 2,            2013
                                     2012            2013            vs. 2012          April 3, 2012             April 2, 2013

Company-owned restaurant sales     $  93,447       $  94,226                0.8 %
Percent of total revenues               89.1 %          88.8 %
Cost of sales (exclusive of
depreciation and amortization):
Cost of goods sold                 $  26,365       $  26,570                0.8 %                28.2 %                    28.2 %
Labor costs                           26,836          28,680                6.9 %                28.7 %                    30.4 %
Rent and related expenses             10,268          10,832                5.5 %                11.0 %                    11.5 %
Other operating costs                  9,321          10,140                8.8 %                10.0 %                    10.8 %
Marketing costs                        2,494           2,486               (0.3 )%                2.7 %                     2.6 %

Total company-owned restaurant
costs                              $  75,284       $  78,708                4.5 %                80.6 %                    83.5 %

Total company-owned restaurant
gross margin                       $  18,163       $  15,518              (14.6 )%               19.4 %                    16.5 %

Company-owned restaurant sales for the first quarter 2013 increased 0.8%, which is attributable to unit growth partially offset by a decrease in company-owned comparable store sales of -1.0%. The decrease in comparable store sales is due to a decline in transactions (-2.7%) and the impact of discounting (-2.8%), partially offset by pricing (+1.0%) and a shift in product mix (+3.5%). Since April 3, 2012, we have opened 15 new company-owned stores, of which 11 were opened in the fourth quarter 2012. To stimulate transaction growth during the first quarter of 2013, we concentrated on providing $3.99 and $5.99 value bundling to our customers. We believe that this investment in discounting had a positive impact on our transaction growth, resulting in our highest level of customer transactions since the first quarter of 2011.

Catering sales, which continue to be a strong revenue driver, comprised approximately 8.3% of our comparable company-owned restaurant sales for the first quarter of 2013. Coffee sales also remain strong and hot beverage sales represent approximately 10% of our comparable company-owned restaurant sales.

Total costs for company-owned restaurants, as a percentage of company-owned restaurant sales, increased 290 basis points in the first quarter, primarily due to our investment in discounting and the initial ramp-up of nine new stores opened in December 2012.

As a percentage of company-owned restaurant sales, our food costs remained flat at 28.2%. Savings from our initiatives (-100 basis points) and the impact of our price increases (-10 basis points) fully offset the impact of a


Table of Contents

shift in product mix (+30 basis points) and the leveraged impact of investing in value and discounting (+80 basis points). As of April 2, 2013, we have secured protection for approximately 95% of our wheat needs and 100% of our coffee needs for 2013.

As a percentage of company-owned restaurant sales, labor costs increased 1.7% primarily due to deleveraging of costs resulting from our investment in everyday value and discounting, new stores, minimum wage increases, larger group insurance claims and higher worker compensation expenses.

As a percentage of company-owned restaurant sales, rent and related expenses increased 0.5% primarily due to unit growth, rent increases on renegotiated leases and related increases in property taxes.

As a percentage of company-owned restaurant sales, other operating costs increased 0.8% primarily due to increased utility charges, increased repairs and maintenance and increased bank charges.

Manufacturing Operations



                                                                           13 weeks ended
                                                                       Increase/               Percentage of manufacturing
                                          (in thousands)              (Decrease)                 and commissary revenues
                                     April 3,         April 2,         2013 vs.
                                       2012             2013             2012            April 3, 2012             April 2, 2013
Manufacturing and commissary
revenues                            $    8,450       $    8,928               5.7 %
Percent of total revenues                  8.1 %            8.4 %
Manufacturing and commissary
costs                               $    6,896       $    6,490              (5.9 )%               81.6 %                    72.7 %

Total manufacturing and
commissary gross margin             $    1,554       $    2,438              56.9 %                18.4 %                    27.3 %

Revenues for this segment grew by $0.5 million as sales from our manufacturing facility grew by $1.0 million, or 13.1%, to $8.9 million as a result of additional export business. This was partially offset by a decline in commissary revenues of $0.5 million. We closed all of our commissaries by the end of the first quarter of 2012. Sales that were previously made to our franchisees and licensees by the commissaries are now being handled directly through our distributors. Cost savings resulting from the closures of our commissaries and other initiatives continue to have a significant positive impact on our margins.

Franchise and License Operations



                                                                  13 weeks ended
                                                                                       Increase/
                                                         (in thousands)               (Decrease)
                                                   April 3,          April 2,            2013
                                                     2012              2013            vs. 2012
Franchise and license related revenues            $    2,976        $    2,969               (0.2 )%
Percent of total revenues                                2.8 %             2.8 %

Number of franchise and license restaurants              330               361

Franchise and license comparable store sales were +0.3% for the thirteen weeks ended April 2, 2013. Since April 3, 2012 we have opened 34 licenses locations and 12 franchised locations. Revenue from this business segment has remained flat primarily due to the timing of initial fee revenue and the mix of franchise and license openings when compared to the first quarter of 2012. As of April 15, 2013, we have 29 development agreements in place for 176 total restaurants, 40 of which have already opened. Based on these development agreements, we expect the remaining 136 restaurants to open on various dates through 2021.


Table of Contents

Corporate



                                                                      13 weeks ended
                                                                      Increase/               Percentage of
                                             (in thousands)           (Decrease)             total  revenues
                                         April 3,      April 2,          2013           April 3,        April 2,
                                           2012          2013          vs. 2012           2012            2013
General and administrative expenses      $  11,080     $  10,208             (7.9 )%         10.6 %           9.6 %
Depreciation and amortization                4,767         4,940              3.6 %           4.5 %           4.6 %
Pre-opening expenses                            64           287                * *           0.0 %           0.3 %
Restructuring expenses                         554            -            (100.0 )%          0.5 %           0.0 %
Other operating expenses, net                  184           126            (31.5 )%          0.2 %           0.1 %

Total operating expenses                 $  16,649     $  15,561             (6.5 )%         15.8 %          14.6 %
Interest expense, net                          800         1,743            117.9 %           0.8 %           1.7 %
Provision for income taxes                   2,040         1,260            (38.2 )%          1.9 %           1.2 %

** Not meaningful

Our total general and administrative expenses decreased in the first quarter of 2013 primarily due to adjustments in our variable incentive compensation plans. We expect general and administrative expenses to be approximately $11.0 million per quarter for the remainder of fiscal 2013.

Depreciation and amortization expenses increased $0.2 million for the first quarter of 2013 when compared to the same period in 2012. The increase is due to approximately $23.3 million in capital asset expenditures since the first . . .

  Add BAGL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BAGL - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.