Einstein Lags, Outlook Reiterated

Zacks

Einstein Noah Restaurant Group Inc. (BAGL) has recently reported second quarter 2012 adjusted earnings of 19 cents per share, which lagged the Zacks Consensus Estimate of 23 cents but surpassed the year-ago adjusted earnings of 15 cents.

On a GAAP basis, including expenses related to the strategic alternatives review process, earnings were 17 cents per share in second quarter 2012 versus 18 cents in the year-ago quarter.

Total revenue budged up 2.2% year over year to $106.0 million but missed the Zacks Consensus Estimate of $109.0 million. The uptick reflects a system-wide comparable restaurant sales increase of 1.3%, aided by a 3.9% rise in average check, partially offset by a 2.6% reduction in transactions.

Segment-wise, company-owned restaurant sales inched up 3.0% to $96.4 million, while Manufacturing and Commissary revenue declined 7.2% to $7.2 million, hurt by recent commissary closures. Franchise and License related revenue grew 3.9% to $2.4 million due to solid royalty revenue generation from additional franchise and licensed units unveiled in the last year.

Gross profit expanded 15.0% year over year to $21.1 million in the quarter, primarily on cost containment initiatives. Cost-saving initiatives combined with positive comps led to gross margin expansion of 220 basis points to 19.9%.

Total company-owned restaurant costs fell 150 bps to 82.3%, as cost of goods slipped 210 basis points to 28% of restaurant sales due to the operational efficiencies. Other operating costs dipped 30 bps to 10.6%.

These benefits were partially offset by an increase of 30 basis points in labor costs at 29.3% owing to healthcare-related expenditures, a 50 basis-point hike in investment towards marketing initiatives at 3.6% and rent increment of 10 bps at 10.8%.

Store Update

At the end of the quarter, the company had 783 restaurants, out of which 448 were company owned, 95 were franchised and 240 were licensed.

In the reported quarter, Einstein Noah opened one company-owned unit and five franchised units as well as closed one unit. Additionally, the company opened four licensed units, and three were shut down.

Liquidity

Einstein Noah ended the quarter with cash and cash equivalents of approximately $14.7 million and a debt burden of $70.5 million. The company reduced its debt burden by around $1.9 million in the quarter.

Outlook

For fiscal 2012, the company plans to open 60-80 restaurants. Expected openings include 8-12 company-owned units, 12-14 franchise restaurants and 40-54 license restaurants. Capital expenditures are estimated at $24-$26 million. Commodity inflation for the full year is expected to remain in the 2%-3% range.

Our Take

For last few quarters, Lakewood, Colorado-based Einstein Group’s performance remains choppy.  After beating the earnings estimates for the last two quarters, the company lagged this quarter.  Prior to the preceding two quarters, quarterly earnings had failed to meet the estimate for three consecutive quarters.

Now, Einstein Noah Restaurant Group, which operates under the Einstein Brothers Bagels, Noah's New York Bagels, and Manhattan Bagel brands, considers an assessment of strategic alternatives to bolster shareholder return. These strategies also include the likelihood of a merger or sale of the company. However, we have yet to see any concrete outcome of the review of strategic alternatives program.

Einstein Noah continues to concentrate on sales-driven initiatives as well as cost-cutting measures to foster earnings growth. Einstein Group will also enjoy the payment of minimum cash-taxes for the next several years. To counter inflation, management locked in 90% of its wheat and 100% of its 2012 coffee needs at current levels.  

However, we remain cautious about the stiff competition and wavering consumer confidence. We are maintaining our long-term Neutral recommendation on the stock.

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