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BAGL > SEC Filings for BAGL > Form 10-Q on 2-Aug-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


2-Aug-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 second quarters in fiscal years 2012 and 2013 ended on July 3, 2012 and July 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 17 and 23.


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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 July 2, 2013 there are eight 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 second quarter of 2013 by considering the following key factors:

• Comparable store sales - System-wide comparable store sales increased
+0.7%, while Company-owned comparable stores sales increased +0.4%. This represents the eighth quarter out of the last nine quarters of positive system-wide comparable store sales. To stimulate growth in transactions during the quarter, we rolled out $3.99 breakfast and $5.99 lunch value bundles throughout the system ("investment in everyday value"). Our performance in comparable transactions improved over the first quarter 2013. We continued to make sequential progress in comparable transactions by coupling our breakfast and lunch value combos with limited time offers ("LTOs") on our premium sandwiches. Looking ahead, we are optimistic that we can build frequency from current levels through fresh-baked bagels, specialty beverages, and meal combos that provide our customers with both quality and everyday value throughout the day. Both our drip coffee and specialty coffee sales remain strong and total hot beverage sales represent approximately 9% of our comparable company-owned restaurant sales.


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• Catering - Catering sales continue to be a strong revenue driver. Our catering sales are fulfilled upon geographic proximity to the customer at a given restaurant within a given market when the order is placed. Total catering sales represented 8.5% and 8.2% of total company-owned restaurant sales for the second quarter and year to date 2013 periods, respectively, reflecting growth of 17.7% and 14.8% over the same respective 2012 periods.

• Unit development - We continue to outpace 2012 with regards to unit openings. Through the second quarter of 2013, we have opened 18 units, compared to 15 unit openings through the second quarter of 2012. We opened seven and ten units system wide in the second quarters of 2013 and 2012, respectively, with a solid pipeline planned through the balance of the year.

• Manufacturing - Compared to the second quarter of 2012, revenues for our manufacturing segment grew by $0.7 million, or nearly 10%. Additionally, the gross profit from our manufacturing segment increased approximately 40% to $2.3 million with a gross margin percentage of 29.2%.

• Amendment to our senior credit facility - We amended our senior credit facility on June 27, 2013. This amendment resulted in a reduction in the applicable interest rate of approximately 75 basis points. As a result of the amendment, we expect to save approximately $0.5 million in interest expense for the remainder of fiscal 2013 and $1.0 million on an annualized basis.

2013 Outlook

Our execution plan to grow comparable store sales includes:

• Building traffic by:

• rolling out everyday value combos across our system throughout 2013;

• leveraging our leadership position in bagels;

• driving frequency through increased coffee and specialty beverage focus; and

• accelerating our in-store experience and guest satisfaction.

• Building average check through bulk bagels, catering, and promotions of our gourmet sandwiches.

• Building brand awareness with a combined approach of local (grass roots) and mass marketing through:

• local brand activation;

• directional outdoor billboards;

• television testing; 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 our 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 rationalizing our distribution network, and negotiating favorable contracts with our vendors.


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Our emphasis on acceleration of unit growth will continue to focus on a franchise first growth model, asset light unit economics, penetration into licensed channels and opportunistic refranchising and acquisition efforts. Our unit growth plan for 2013 of 60 to 80 system-wide openings is consistent with our long-term annual unit growth objective of a 10% increase in system-wide restaurants. Our 2013 growth plan includes total potential openings 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.

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 capital into areas such as installing drive-thru lanes and adding new exterior signage.

Results of Operations for the Quarterly and Year to Date Periods ended July 3, 2012 and July 2, 2013

Financial Highlights for the Second Quarter 2013 as compared to the Second Quarter 2012

• Total revenues increased $1.8 million, or 1.7%, driven by increases in sales in all our segments:

                                                 13 weeks ended           Increase/
                                                 (in thousands)          (Decrease)
                                              July 3,       July 2,         2013
                                               2012          2013         vs . 2012
    Revenues:
    Company-owned restaurant sales           $  96,399     $  97,097             0.7 %
    Manufacturing and commissary revenues        7,239         7,962            10.0 %
    Franchise and license related revenues       2,355         2,701            14.7 %

    Total revenues                             105,993       107,760             1.7 %

• System-wide comparable store sales increased +0.7%, while Company-owned comparable stores sales increased +0.4%. We continued to make sequential progress in comparable transactions by featuring our breakfast and lunch value combos coupled with innovative features on our premium sandwiches. Catering sales, which continue to be a strong revenue driver, comprised approximately 9% of our comparable company-owned restaurant sales for the second quarter of 2013. Coffee sales also remain strong and total hot beverage sales represent approximately 9% of our comparable company-owned restaurant sales.

• Our overall gross margin (excluding depreciation and amortization) for the second quarter was 20.5%, an increase of 4.4% driven by a combination of cost saving initiatives and revenue growth:

                                                        13 weeks ended
                                                                        Increase/
                                               (in thousands)           (Decrease)
                                            July 3,       July 2,          2013
                                             2012          2013          vs. 2012
      Total revenues                       $ 105,993     $ 107,760              1.7 %
      Company-owned restaurant costs          79,256        80,032              1.0 %
      Manufacturing and commissary costs       5,581         5,638              1.0 %

      Gross Margin                         $  21,156     $  22,090              4.4 %

• Interest expense increased $0.9 million due to an increase of $58.0 million in our average debt balance and a 1% increase in our weighted average interest rate.

• Net income increased $0.4 million, or 12.7%, and Adjusted EBITDA increased $0.5 million, or 5.0%, for the second quarter of 2013.


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• Earnings per share ("EPS") increased to $0.19 per share on a dilutive basis for the second quarter of 2013 compared to $0.17 per share on a dilutive basis for the second quarter of 2012. For the second quarter 2013, relocation and recruitment charges in connection with the hiring of our new Chief Concept Officer reduced our EPS by $0.01 per diluted share. For the second quarter 2012, charges incurred towards the exploration of strategic alternatives reduced our EPS by $0.02 per diluted share.

Consolidated Results



                                                13 weeks ended                                  26 weeks ended
                                                                 Increase/                                      Increase/
                                        (in thousands)           (Decrease)            (in thousands)           (Decrease)
                                    July 3,        July 2,          2013            July 3,       July 2,          2013
                                     2012           2013          vs. 2012           2012          2013          vs. 2012
Revenues                           $ 105,993      $ 107,760              1.7 %     $ 210,866     $ 213,883              1.4 %
Cost of sales                         84,837         85,670              1.0 %       167,017       170,868              2.3 %
Operating expenses                    15,566         15,262             (2.0 %)       32,215        30,823             (4.3 %)

Income from operations                 5,590          6,828             22.1 %        11,634        12,192              4.8 %
Interest expense, net                    778          1,650            112.1 %         1,578         3,393            115.0 %
Income before income taxes             4,812          5,178              7.6 %        10,056         8,799            (12.5 %)
Total provision for income taxes       1,856          1,846             (0.5 %)        3,896         3,106            (20.3 %)

Net income                         $   2,956      $   3,332             12.7 %     $   6,160     $   5,693             (7.6 %)
Adjustments to net income:
Interest expense, net                    778          1,650            112.1 %         1,578         3,393            115.0 %
Provision for income taxes             1,856          1,846             (0.5 %)        3,896         3,106            (20.3 %)
Depreciation and amortization          5,011          4,614             (7.9 %)        9,778         9,554             (2.3 %)
Restructuring expenses                   (74 )           -            (100.0 %)          480            -            (100.0 %)
Strategic alternatives expenses          435             -            (100.0 %)          435            -            (100.0 %)
Other operating expenses, net             75            144             92.0 %           259           270              4.2 %

Adjusted EBITDA                    $  11,037      $  11,586              5.0 %     $  22,586     $  22,016             (2.5 %)

During the second quarter of 2013, we maintained our focus on generating transactions at our company-owned stores through value bundling and other discounts, continuing with various cost saving initiatives and unit development.

System-wide comparable store sales were +0.7% and -0.1% for the second quarter and year to date periods ended July 2, 2013, respectively. On a comparable basis, discounting at our company-owned stores, through value bundling and other means, increased over $1.9 million when compared to the second quarter 2012, and $4.3 million when compared to the first half of fiscal 2012. Management believes that this investment in discounting played a key role in driving improvement in transaction trends.

We opened two company-owned stores, three franchised locations and two licensed locations in the second quarter of 2013. We also sold five company-owned restaurants to an existing franchisee during the second quarter 2013. We have opened 58 units system-wide since July 3, 2012.

Net income increased by $0.4 million for the second quarter of 2013 from the second quarter of 2012. We attribute this to a $1.2 million improvement in income from operations, partially offset by a $0.9 million increase in interest expense.


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Company-Owned Restaurant Operations



                                                                     13 weeks ended
                                                                 Increase/                Percentage of company-owned
                                    (in thousands)               (Decrease)                     restaurant sales
                               July 3,          July 2,             2013
                                2012             2013             vs. 2012           July 3, 2012             July 2, 2013
Company-owned restaurant
sales                         $  96,399        $  97,097                 0.7 %
Percent of total revenues          91.0 %           90.1 %
Cost of sales (exclusive
of depreciation and
amortization):
Cost of goods sold            $  26,999        $  27,149                 0.6 %                28.0 %                   28.0 %
Labor costs                      28,176           28,524                 1.2 %                29.2 %                   29.4 %
Rent and related expenses        10,435           10,953                 5.0 %                10.8 %                   11.3 %
Other operating costs            10,170           10,565                 3.9 %                10.6 %                   10.8 %
Marketing costs                   3,476            2,841               (18.3 %)                3.6 %                    2.9 %

Total company-owned
restaurant costs              $  79,256        $  80,032                 1.0 %                82.2 %                   82.4 %

Total company-owned
restaurant gross margin       $  17,143        $  17,065                (0.5 %)               17.8 %                   17.6 %


                                                                     26 weeks ended
                                                                 Increase/                Percentage of company-owned
                                    (in thousands)               (Decrease)                     restaurant sales
                               July 3,          July 2,             2013                July 3,                 July 2,
                                2012             2013             vs. 2012               2012                     2013
Company-owned restaurant
sales                         $ 189,846        $ 191,323                 0.8 %
Percent of total revenues          90.0 %           89.5 %
Cost of sales (exclusive
of depreciation and
amortization):
Cost of goods sold            $  53,364        $  53,719                 0.7 %                28.1 %                   28.1 %
Labor costs                      55,012           57,204                 4.0 %                29.0 %                   29.9 %
Rent and related expenses        20,703           21,785                 5.2 %                10.9 %                   11.4 %
Other operating costs            19,491           20,705                 6.2 %                10.3 %                   10.8 %
Marketing costs                   5,970            5,327               (10.8 %)                3.1 %                    2.8 %

Total company-owned
restaurant costs              $ 154,540        $ 158,740                 2.7 %                81.4 %                   83.0 %

Total company-owned
restaurant gross margin       $  35,306        $  32,583                (7.7 %)               18.6 %                   17.0 %

Since July 3, 2012, we have opened 16 new company-owned stores, of which 11 were opened in the fourth quarter of 2012. To stimulate transaction growth during the first two quarters of 2013, we concentrated on providing $3.99 and $5.99 value bundling to our customers. We believe that this investment in discounting has had a positive impact on our transaction growth.

Company-owned restaurant sales for the second quarter 2013 increased 0.7%. We attribute this increase in restaurant sales to unit growth and an increase in company-owned comparable store sales of +0.4%. The increase in comparable store sales is due to an increase in pricing (+1.1%) and a shift in product mix (+3.9%), partially offset by a decline in transactions (-2.6%) and the impact of discounting (-2.0%).

For the first half of 2013, company-owned restaurant sales increased 0.8%. We attribute this increase to unit growth, partially offset by a decrease in company-owned comparable store sales of -0.3%. The decrease in comparable store sales is due to a decline in transactions (-2.7%) and the impact of discounting (-2.4%), partially offset by pricing (+0.7%) and a shift in product mix (+4.1%).

Total catering sales, which continue to be a strong revenue driver, comprised approximately 8.5% and 8.2% of our product mix for the second quarter 2013 and year to date 2013, respectively, reflecting year over year increases in sales of 17.7% and 14.8%, respectively. Our catering sales are fulfilled based upon geographic proximity to the customer and the order backlog at a given restaurant relative to other catering orders within a given market when the order is placed. Coffee and hot beverage sales remain strong and represent approximately 9% of our comparable company-owned restaurant sales on a year to date basis.


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Total costs for company-owned restaurants, as a percentage of company-owned restaurant sales, increased 20 basis points in the second quarter and 160 basis points on a year to date basis, primarily due to our investment in discounting. Minimum wage increases and the initial ramp-up of nine new stores opened in December 2012 have also impacted our costs as a percentage of company-owned restaurant sales on a year to date basis.

As a percentage of company-owned restaurant sales, our food costs remained flat at 28.0% in the second quarter 2013 compared to second quarter of 2012, and also remained flat at 28.1% for the year to date 2013 period compared to year to date 2012. The following items affected the comparability of our cost of sales for the second quarter 2013 compared to the second quarter 2012:

            Cost of Goods Sold - 2012                                28.0 %
            Savings from initiatives ($0.4 million)     (0.4 %)
            Price increases                             (0.3 %)
            Shift in product mix                        (0.1 %)
            Inflation                                    0.2 %
            Investment in value and discounting          0.6 %        0.0 %

            Cost of Goods Sold - 2013                                28.0 %

The following items affected the comparability of our food costs (as a percentage of company-owned restaurant sales) for the year to date 2013 period compared to the year to date 2012 period: . . .

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