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BAGL > SEC Filings for BAGL > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for EINSTEIN NOAH RESTAURANT GROUP INC

Form 10-Q for EINSTEIN NOAH RESTAURANT GROUP INC


1-Nov-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, which are intended to speak only as of the date thereof, 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 third quarters in fiscal years 2012 and 2013 ended on October 2, 2012 and October 1, 2013, respectively. Each quarter contained thirteen weeks. Our current fiscal year ends on December 31, 2013 and consists of 52 weeks. Fiscal year 2012 consisted of 52 weeks and ended on January 1, 2013.

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


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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 24.

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 1, 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, specialty beverages 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 third quarter of 2013 by considering the following key factors:

• Comparable store sales - System-wide and company-owned comparable store sales each decreased -1.4%. To stimulate growth in transactions during the quarter, we continued to introduce breakfast and lunch value bundles throughout the system ("investment in everyday value"). We continued to make 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 8.6% and 8.3% of total company-owned restaurant sales for the third quarter and year to date 2013 periods, respectively, reflecting growth of 13.2% and 14.0% over the same respective 2012 periods.

• Unit development - We continue to outpace 2012 with respect to unit openings. Through the third quarter of 2013, we have opened 42 units, compared to 35 unit openings through the third quarter of 2012. We opened 24 and 20 units system wide in the third quarters of 2013 and 2012, respectively, with a solid pipeline planned through the balance of the current fiscal year.

• Manufacturing - Compared to the third quarter of 2012, revenues for our manufacturing segment grew by $0.4 million, representing growth of 5.4%. Gross profit from our manufacturing segment was flat, primarily due to labor related to the production of partially baked ("par-baked") bagels for third party customers. To improve our par-bake efficiency, we are planning to automate the production of our par-baked bagel line at our Whittier facility.

2013 Outlook

Our execution plan to grow comparable store sales includes:

• Building traffic by:

• emphasizing everyday value combos across our system throughout 2013;

• leveraging our leadership position in bagels through innovation and LTO's;

• 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 day-part.

Our approach to enhancing corporate margins will extend and build on the initiatives that we have already started, including, among other things, 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. We have refined our unit growth plan for 2013 of 65 to 75 system-wide openings, which is consistent with our long-term annual unit growth objective of a 10% increase in system-wide restaurants. Our 2013 growth plan now includes total potential openings of 10 to 15 company-owned restaurants, 15 to 20 franchised restaurants and approximately 40 licensed restaurants. We also remain open to future refranchising of select units in order to attract high quality franchisees that will support our accelerated growth initiatives.

We expect to spend between $18 million and $20 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 October 2, 2012 and October 1, 2013

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

• Total revenues increased $0.9 million, or 0.9%, driven by unit growth and increased wholesale sales by our manufacturing plant:

                                                         13 weeks ended
                                                                             Increase/
                                                 (in thousands)             (Decrease)
                                           October 2,       October 1,         2013
                                              2012             2013          vs. 2012
 Revenues:
 Company-owned restaurant sales           $     95,418     $     95,625             0.2 %
 Manufacturing and commissary revenues           7,507            7,914             5.4 %
 Franchise and license related revenues          2,569            2,869            11.7 %

 Total revenues                                105,494          106,408             0.9 %

• System-wide comparable store sales and company-owned comparable store sales each decreased -1.4%. We are focusing on stimulating 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 third 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 third quarter was $21.3 million (20.0%), an increase of 1.4% driven by a combination of cost saving initiatives and revenue growth:

                                                       13 weeks ended
                                                                           Increase/
                                               (in thousands)             (Decrease)
                                         October 2,       October 1,         2013
                                            2012             2013          vs. 2012
   Total revenues                       $    105,494     $    106,408             0.9 %
   Company-owned restaurant costs             78,765           78,976             0.3 %
   Manufacturing and commissary costs          5,738            6,152             7.2 %

   Gross margin                         $     20,991     $     21,280             1.4 %


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• Interest expense increased $0.6 million due to an increase of $56.5 million in our average debt balance and a 0.4% increase in our weighted average interest rate.

• As a result of deferred tax true-ups, as well as the effects of estimate-to-actual income tax provision adjustments and federal employment tax credits, the effective tax rate for the third quarter of 2013 was reduced to 21.9%.

• Net income increased $0.6 million, or 17.8%, and Adjusted EBITDA decreased $0.5 million, or 4.1%, for the third quarter of 2013.

• Earnings per share ("EPS") increased to $0.22 per share on a dilutive basis for the third quarter of 2013, compared to $0.20 per share on a dilutive basis for the third quarter of 2012.

Consolidated Results



                                                      13 weeks ended                                       39 weeks ended
                                                                          Increase/                                            Increase/
                                              (in thousands)             (Decrease)               (in thousands)              (Decrease)
                                        October 2,       October 1,         2013            October 2,       October 1,          2013
                                           2012             2013          vs. 2012             2012             2013           vs. 2012
Revenues                               $    105,494     $    106,408             0.9 %     $    316,360     $    320,291              1.2 %
Cost of sales                                84,503           85,128             0.7 %          251,520          255,996              1.8 %
Operating expenses                           14,659           14,770             0.8 %           46,874           45,593             (2.7 %)

Income from operations                        6,332            6,510             2.8 %           17,966           18,702              4.1 %
Interest expense, net                           744            1,366            83.6 %            2,322            4,759            105.0 %

Income before income taxes                    5,588            5,144            (7.9 %)          15,644           13,943            (10.9 %)
Total provision for income taxes              2,174            1,124           (48.3 %)           6,070            4,230            (30.3 %)

Net income                             $      3,414     $      4,020            17.8 %     $      9,574     $      9,713              1.5 %
Adjustments to net income:
Interest expense, net                           744            1,366            83.6 %            2,322            4,759            105.0 %
Provision for income taxes                    2,174            1,124           (48.3 %)           6,070            4,230            (30.3 %)
Depreciation and amortization                 5,014            4,420           (11.8 %)          14,792           13,974             (5.5 %)
Restructuring expenses                           -                -                  **             480                * *         (100.0 %)
Strategic alternatives expenses                 250               -                  **             685                * *         (100.0 %)
Other operating expenses, net                    60              249                 **             319              519             62.7 %

Adjusted EBITDA                        $     11,656     $     11,179            (4.1 %)    $     34,242     $     33,195             (3.1 %)

** Not meaningful

While the third quarter of 2013 proved to be challenging to our top line, total revenue increased as we maintained our focus on generating transactions at our company-owned stores through value bundling and other discounts. We also continued with various cost saving initiatives and unit development. Management believes that the overall industry weakness in the third quarter also negatively impacted company transactions.

System-wide comparable store sales were -1.4% and -0.5% for the third quarter and year to date periods ended October 1, respectively. On a comparable basis, discounting at our company-owned stores, through value bundling and other means, increased over $1.2 million when compared to the third quarter of 2012, and $5.5 million when compared to the first nine months of fiscal 2012. Management believes that this investment in discounting, along with new product development, will play a key role in driving improvement in transaction trends.

We opened four company-owned stores, two franchised locations and eighteen licensed locations in the third quarter of 2013. On a year to date basis, we have opened seven company-owned stores, seven franchised locations and twenty-eight licensed locations. We have opened 62 units system-wide since October 2, 2012. We sold five company-owned restaurants to an existing franchisee in April 2013.

Net income was $4.0 million for the third quarter of 2013, an increase of $0.6 million, or 17.8%, from the third quarter of 2012.


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Company-Owned Restaurant Operations



                                                                                13 weeks ended
                                                                                Increase/              Percentage of company-owned
                                                (in thousands)                 (Decrease)                    restaurant sales
                                        October 2,          October 1,            2013              October 2,              October 1,
                                           2012                2013             vs. 2012               2012                    2013
Company-owned restaurant sales         $     95,418        $     95,625                0.2 %
Percent of total revenues                      90.5 %              89.9 %
Cost of sales (exclusive of
depreciation and amortization):
Cost of goods sold                     $     26,668        $     26,723                0.2 %                28.0 %                 27.9 %
Labor costs                                  27,842              27,711               (0.5 %)               29.2 %                 29.0 %
Rent and related expenses                    10,621              11,001                3.6 %                11.1 %                 11.5 %
Other operating costs                        10,637              11,156                4.9 %                11.1 %                 11.7 %
Marketing costs                               2,997               2,385              (20.4 %)                3.1 %                  2.5 %

Total company-owned restaurant
costs                                  $     78,765        $     78,976                0.3 %                82.5 %                 82.6 %

Total company-owned restaurant
gross margin                           $     16,653        $     16,649               (0.0 %)               17.5 %                 17.4 %


                                                                                39 weeks ended
                                                                                Increase/              Percentage of company-owned
                                                (in thousands)                 (Decrease)                    restaurant sales
                                        October 2,          October 1,            2013              October 2,              October 1,
                                           2012                2013             vs. 2012               2012                    2013
Company-owned restaurant sales         $    285,264        $    286,948                0.6 %
Percent of total revenues                      90.2 %              89.6 %
Cost of sales (exclusive of
depreciation and amortization):
Cost of goods sold                     $     80,032        $     80,442                0.5 %                28.1 %                 28.0 %
Labor costs                                  82,854              84,915                2.5 %                29.0 %                 29.6 %
Rent and related expenses                    31,324              32,786                4.7 %                11.0 %                 11.4 %
Other operating costs                        30,128              31,861                5.8 %                10.6 %                 11.1 %
Marketing costs                               8,967               7,712              (14.0 %)                3.1 %                  2.7 %

Total company-owned restaurant
costs                                  $    233,305        $    237,716                1.9 %                81.8 %                 82.8 %

Total company-owned restaurant
gross margin                           $     51,959        $     49,232               (5.2 %)               18.2 %                 17.2 %

Since October 2, 2012, we have opened eighteen new company-owned stores, eleven of which were opened in the fourth quarter of 2012. To stimulate transaction growth in 2013, we concentrated on value bundling to our customers. While the third quarter of 2013 proved to be challenging, we believe that this investment in discounting has had a positive impact on our transaction growth for the year.

Company-owned restaurant sales for the third quarter of 2013 increased 0.2% as incremental sales from unit growth more than offset a decrease in company-owned comparable store sales of -1.4%. The decrease in comparable store sales is due to a decrease in transactions (-3.3%) and the impact of discounting (-1.5%), partially offset by an increase from pricing (+1.2%) and a shift in product mix (+2.2%).

On a year to date basis, company-owned restaurant sales increased 0.6%, when compared to the same period last year. We attribute this increase to unit growth, partially offset by a decrease in company-owned comparable store sales of -0.7%. The decrease in comparable store sales is due to a decrease in transactions (-2.9%) and the impact of discounting (-2.2%), partially offset by an increase from pricing (+0.8%) and a shift in product mix (+3.6%).


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Total catering sales, which continue to be a strong revenue driver, comprised approximately 8.6% and 8.3% of our product mix for the third quarter of 2013 and year to date 2013, respectively, reflecting quarter over quarter and year over year increases in sales of 13.2% and 14.0%, 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.

Total costs for company-owned restaurants, as a percentage of company-owned restaurant sales, increased 10 basis points in the third quarter and 100 basis points on a year to date basis, primarily due to our investment in discounting. Minimum wage increases and the initial ramp-up of the sixteen new stores opened since 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 decreased to 27.9% in the third quarter of 2013 compared to 28.0% in the third quarter of 2012. The following items affected the comparability of our cost of sales for . . .

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