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BAGL > SEC Filings for BAGL > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for EINSTEIN NOAH RESTAURANT GROUP INC

Form 10-Q for EINSTEIN NOAH RESTAURANT GROUP INC


1-Aug-2014

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 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 December 31, 2013. 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 on Form 10-Q 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 December 31, 2013 (the "2013 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 2013 and 2014 ended on July 2, 2013 and July 1, 2014, respectively. Each quarter contained thirteen weeks. Our current fiscal year ends on December 30, 2014 and consists of 52 weeks. Fiscal year 2013 consisted of 52 weeks and ended on December 31, 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 report, we have provided certain non-GAAP financial information, including adjusted earnings before interest, taxes, depreciation and amortization, management transition and related reorganization expenses, 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 24.


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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 permanently closed on the date it ceases operations.

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 second quarter and/or year to date periods ended July 1, 2014 by considering the following key factors:

• Comparable store sales - In the second quarter of 2014, we recorded a system-wide comparable store sales increase of +1.6%, while company-owned comparable store sales increased +0.9%. The increase in company-owned comparable store sales was due to increased pricing, improved product mix and reduced discounting, partially offset by a decrease in transactions.

• Catering/Coffee - Catering sales, which continue to be a strong revenue driver, comprised approximately 10.0% of our company-owned restaurant sales for the second quarter of 2014, with total catering sales increasing by 17.3% from the second quarter of 2013. Coffee sales also remain strong and total hot beverage sales represent approximately 9% of our comparable company-owned stores sales on a year to date basis.


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• Unit development - We opened seven units in the second quarter of 2014. On a year to date basis, we have opened 20 units compared to 18 units in 2013. A year to date summary of unit development activity is shown below:

                                                          Twenty-six weeks ended July 1, 2014
                                            Company
                                             Owned             Franchised           Licensed          Total
Beginning Balance-January 1, 2014                458                   114                280            852
Opened restaurants                                 3                     8                  9             20
Closed restaurants                                (5 )                  (4 )               (6 )          (15 )
Refranchising, net                                -                     -                  -              -

Ending balance-July 1, 2014                      456                   118                283            857

• Manufacturing - Manufacturing sales remain robust and increased 11.1% from the second quarter of 2013. Manufacturing gross margin increased to $1.8 million from $1.6 million, a 16.5% increase, as we saw a favorable shift in sales mix and efficiencies in our manufacturing processes.

• Share Buy-back - On April 29, 2014, our Board approved a new share buy-back program authorizing the Company to buy back up to $20 million of its common stock from time to time in the open market or through privately negotiated transactions. The new authorization has no expiration date, but may be terminated by the Board at any time. The authorization does not obligate us to buy back any particular amount of common stock and it may be suspended or discontinued at any time. The amount and timing of any buy-backs under the program will depend upon a number of factors, including the price and availability of our shares, trading volume and general market conditions. During the second quarter of 2014, we bought back 111,408 of our outstanding shares. As of July 1, 2014, there is $18.3 million remaining under this program.

2014 Outlook

Our 2014 Brand Revitalization Plan includes:

• Growing same store sales through traffic and check;

• Improving guest satisfaction through our "Plan to Win" initiative and product quality enhancements;

• Increasing capital spending to grow units and refresh our base units;

• Continuing to pursue catering growth towards 20% or more per annum;

• Optimizing our marketing spend;

• Driving lunch traffic through product and promotional efforts; and

• Implementing costs savings as a result of cost rationalization.

We expect that our catering channel will further benefit from new initiatives in fiscal 2014 that include an enhanced call center, expanding search engine marketing, utilization of sales coordinators in smaller markets, database activation and operations execution.

We plan to improve corporate margins by focusing on strategic contract renegotiations, distribution optimization, improving packaging quality and costs, and improving marketing and construction material purchases.

We currently have a robust pipeline of existing franchise development agreements and new license locations. As of July 24, 2014, we have 31 development agreements in place for 223 total restaurants, 51 of which have already opened. Based upon the development agreements, we expect the remaining 172 new restaurants to open on various dates through 2024.


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Fiscal Year 2014 Guidelines

We are providing the following updated guidelines for the 2014 fiscal year, which is a 52-week period ended December 30, 2014:

• 75 to 85 system-wide openings;

• Capital expenditures of $30 million to $35 million;

• Cost of goods inflation of approximately 1% to 2%;

• Pre-opening expense of $65,000 to $75,000 per new company-owned restaurant;

• General and administrative expenses between $9.5 million and $10.5 million per quarter;

• Interest expense of $4.25 to $4.75 million; and

• An estimated annual effective tax rate of approximately 39%; however, we expect to only pay minimal cash taxes for the next several years.

Results of Operations for the Quarterly Periods ended July 2, 2013 and July 1, 2014

Financial Highlights for the Second Quarter 2014 as compared to the Second Quarter 2013

• Total revenues increased $4.4 million, or 4.1%, driven by positive comparable store sales, unit growth and increased third party sales by our manufacturing plant:

                                                        13 weeks ended
                                                     July 2,       July 1,
                                                      2013          2014
           Revenues:
           Company-owned restaurant sales           $  97,097     $ 100,244
           Manufacturing revenues                       8,239         9,155
           Franchise and license related revenues       2,701         3,049

           Total revenues                             108,037       112,448

• System-wide comparable store sales and company-owned comparable store sales increased +1.6% and +0.9%, respectively, which we attribute to an increase in pricing (which we took to offset inflation) and a shift in sales mix, partially offset by a decline in transactions. We continue to focus on stimulating comparable transactions at breakfast and lunch with better taste and quality features, as well as innovative premium sandwiches.


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• Our overall gross margin (excluding depreciation and amortization) for the second quarter of 2014 was $22.2 million (19.8%), an increase of 0.7%, and was driven by revenue growth partially offset by increased operating expenses:

                                                     13 weeks ended
                                                                      Increase/
                                             (in thousands)          (Decrease)
                                          July 2,       July 1,         2014
                                           2013          2014         vs. 2013
        Total revenues                   $ 108,037     $ 112,448             4.1 %
        Company-owned restaurant costs      79,281        82,882             4.5 %
        Manufacturing costs                  6,666         7,322             9.8 %

        Gross Margin                     $  22,090     $  22,244             0.7 %

• Increased general and administrative expenses, primarily for increased consulting fees, offset interest expense savings during the second quarter of 2014.

• We incurred approximately $1.2 million in costs related to the departure of certain members of management in the second quarter of 2014. These costs primarily include severance costs, the accelerated vesting of equity awards, external legal fees, retained search fees and other one-time expenses related to these events.

• Net income decreased $0.8 million, or 23.6%, and Adjusted EBITDA decreased $0.1 million, or 0.7%, from the second quarter of 2013.

• Earnings per share ("EPS") decreased to $0.14 per share on a dilutive basis for the second quarter of 2014, compared to $0.19 per share on a dilutive basis for the second quarter of 2013. Management transition and related reorganization expenses impacted our EPS for the second quarter of 2014 by $0.04 per diluted share.

Consolidated Results



                                                13 weeks ended                                26 weeks ended
                                                                 Increase/                                     Increase/
                                        (in thousands)          (Decrease)            (in thousands)          (Decrease)
                                     July 2,       July 1,         2014            July 2,       July 1,         2014
                                      2013          2014         vs. 2013           2013          2014         vs. 2013
Revenues                            $ 108,037     $ 112,448             4.1 %     $ 214,425     $ 222,316             3.7 %
Cost of sales                          85,947        90,204             5.0 %       171,410       179,055             4.5 %
Operating expenses                     15,262        16,954            11.1 %        30,823        33,465             8.6 %

Income from operations                  6,828         5,290           (22.5 %)       12,192         9,796           (19.7 %)
Interest expense, net                   1,650         1,079           (34.6 %)        3,393         2,200           (35.2 %)

Income before income taxes              5,178         4,211           (18.7 %)        8,799         7,596           (13.7 %)
Total provision for income taxes        1,846         1,666            (9.8 %)        3,106         2,993            (3.6 %)

Net income                          $   3,332     $   2,545           (23.6 %)    $   5,693     $   4,603           (19.1 %)
Adjustments to net income:
Interest expense, net                   1,650         1,079           (34.6 %)        3,393         2,200           (35.2 %)
Provision for income taxes              1,846         1,666            (9.8 %)        3,106         2,993            (3.6 %)
Depreciation and amortization           4,614         4,567            (1.0 %)        9,554         8,889            (7.0 %)
Management transition and related
reorganization expenses                    -          1,166               * *            -          2,259               * *
Other operating expenses, net             144           483               * *           270           644           138.5 %

Adjusted EBITDA                     $  11,586     $  11,506            (0.7 %)    $  22,016     $  21,588            (1.9 %)

** Not meaningful

System-wide comparable store sales were +1.6% and +1.7% for the second quarter and year to date periods ended July 1, 2014, respectively, which is primarily attributable to an increase in pricing and a shift in sales mix, partially offset by a decline in transactions. On a comparable basis, discounting at our company-owned stores decreased $1.0 million when compared to the second quarter of 2013, and decreased $1.3 million when compared to the first half of 2013. While we are not discounting at past levels, management still believes that discounting, along with new product development, plays a key role in driving improvement in transaction trends.


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We opened two company-owned stores and five franchised locations in the second quarter of 2014. We have opened 63 units system-wide since July 2, 2013. Sales and purchases of restaurants to franchisees have resulted in net acquisitions of two company-owned stores since July 2, 2013.

For the first half of 2014, we concentrated on re-investing in our core business through store refurbishments in select markets, improved product quality and increased advertising. While this reinvestment has had a negative impact on our results, we believe that this negative impact will be short-term in nature and should lead to significant long-term improvements.

We incurred approximately $1.2 million and $2.3 million in costs related primarily to the departure of certain members of management during the second quarter and year to date periods ended July 1, 2014, respectively. These costs primarily include severance costs, the accelerated vesting of equity awards, external legal fees, retained search fees and other one-time expenses related to these events. These charges impacted our earnings per share for the second quarter of 2014 by $0.04 per diluted share and by $0.08 per share for the year to date period ended July 1, 2014.

Net income was $2.5 million for the second quarter of 2014, a decrease of $0.8 million, or 23.6%, from the second quarter of 2013, primarily due to the management transition and related reorganization expenses.

Company-Owned Restaurant Operations



                                                                       13 weeks ended
                                                                      Increase/           Percentage of company-owned
                                          (in thousands)             (Decrease)                 restaurant sales
                                      July 2,         July 1,           2014               July 2,              July 1,
                                       2013            2014           vs. 2013              2013                  2014
Company-owned restaurant sales       $  97,097       $ 100,244               3.2 %
Percent of total revenues                 89.9 %          89.2 %
Cost of sales (exclusive of
depreciation and amortization):
Cost of goods sold                   $  26,398       $  27,037               2.4 %               27.2 %             27.0 %
Labor costs                             28,524          29,322               2.8 %               29.4 %             29.2 %
Rent and related expenses               10,732          11,618               8.3 %               11.1 %             11.6 %
Other operating costs                   10,786          11,940              10.7 %               11.1 %             11.9 %
Marketing costs                          2,841           2,965               4.4 %                2.9 %              3.0 %

Total company-owned restaurant
costs                                $  79,281       $  82,882               4.5 %               81.7 %             82.7 %

Total company-owned restaurant
gross margin                         $  17,816       $  17,362              (2.5 %)              18.3 %             17.3 %


                                                                       26 weeks ended
                                                                      Increase/           Percentage of company-owned
                                          (in thousands)             (Decrease)                 restaurant sales
                                      July 2,         July 1,           2014               July 2,              July 1,
                                       2013            2014           vs. 2013              2013                  2014
Company-owned restaurant sales       $ 191,323       $ 196,796               2.9 %
Percent of total revenues                 89.2 %          88.5 %
Cost of sales (exclusive of
depreciation and amortization):
Cost of goods sold                   $  52,245       $  53,589               2.6 %               27.3 %             27.2 %
Labor costs                             57,204          58,177               1.7 %               29.9 %             29.5 %
Rent and related expenses               21,436          22,941               7.0 %               11.2 %             11.7 %
Other operating costs                   21,054          23,191              10.2 %               11.0 %             11.8 %
Marketing costs                          5,327           6,221              16.8 %                2.8 %              3.2 %

Total company-owned restaurant
costs                                $ 157,266       $ 164,119               4.4 %               82.2 %             83.4 %

Total company-owned restaurant
gross margin                         $  34,057       $  32,677              (4.1 %)              17.8 %             16.6 %


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Since July 2, 2013, we have opened ten new company-owned restaurants and closed nine existing company-owned restaurants. We have also acquired two stores from franchisees. We continue to focus on driving transactions at both breakfast and lunch by using higher quality, better tasting ingredients, as well as offering innovative premium sandwiches.

Company-owned restaurant sales for the second quarter of 2014 increased 3.2% due to an increase in company-owned comparable store sales of +0.9%, incremental sales from new, higher performing stores and a decrease in discounting. The increase in comparable store sales is due to an increase in pricing (+1.6%), a shift in product mix (+2.4%) and reduced discounting (+0.7%), partially offset by a decrease in transactions (-3.8%).

Company-owned restaurant sales for the first half of 2014 increased 2.9% due to an increase in company-owned comparable store sales of +1.3%, incremental sales from new, higher performing stores and a decrease in discounting. The increase in comparable store sales is due to an increase in pricing (+2.0%), a shift in product mix (+2.2%) and reduced discounting (+0.8%), partially offset by a decrease in transactions (-3.7%).

Total catering sales, which continue to be a strong revenue driver for us, comprised approximately 10% of our product mix for both the second quarter and first half of 2014, reflecting year over year increases in sales of 17.4% for the second quarter of 2014 and 19.0% for the first half of 2014 as compared to their respective 2013 periods. 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 100 basis points in the second quarter and 120 basis points on a year to date basis, primarily due to the initial ramp-up of new stores, minimum wage increases and increased marketing spend.

As part of our ongoing effort to improve transaction trends, at the start of fiscal 2014, we required our bakers to undergo a new training and certification program. We also required our bagel bins to be fully stocked at all times. While we believe that this will have a positive impact on transaction trends, our waste costs have increased in fiscal 2014 when compared to fiscal 2013 as a result of these initiatives.

As a percentage of company-owned restaurant sales, our food costs decreased 20 basis points for the second quarter of 2014 compared to the second quarter of 2013. As a percentage of company-owned restaurant sales, our food costs . . .

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