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Einstein Noah Restaurant Group Inc.’s (BAGL - Snapshot Report) second-quarter fiscal 2013 earnings of 19 cents per share missed the Zacks Consensus Estimate by a penny but increased 11.8% from the year-ago level of 17 cents. A higher operating margin facilitated bottom-line growth on a year-over-year basis.

Total revenue grew 1.7% year over year to $107.8 million but missed the Zacks Consensus Estimate of $112.0 million. The year-over-year upside in revenues can be attributed to a 0.7% increase in company-owned restaurant sales, a 10% rise in manufacturing and commissary revenues, and a 14.7% increase in franchise and license related revenues.  

System-wide comparable store sales growth of 0.7% included 2.9% growth in average check, which was partially offset by a 2% decline in transaction. However, management noted that the rate of decline in transaction was the lowest in more than two years.

Company-owned restaurant gross margin contracted 20 basis points (bps) year over year to 17.6%, primarily due to increased rent, labor and other operating costs. Notably, margin erosion was quite smaller to the last two quarters which suffered mainly due to substantial decrease in marketing costs.

Considering the franchised as well as manufacturing and commissary operations, total gross margin improved 50 bps to 20.5%. Manufacturing gross margin was up 630 bps to 29.2% mainly due to sales leverage.

Store Update

In the reported quarter, Einstein Noah opened 2 company-owned units, closed 5 units and refranchised another 5 units. As many as 3 new franchised units were opened during the quarter. On a licensed basis, 2 units were unveiled and 3 were shut down.

The company exited the second quarter of 2013 with 821 restaurants, out of which 453 were company owned, 107 were franchised and 261 were licensed.

Guidance for 2013

For fiscal 2013, the company plans to open 60–80 restaurants. Capital expenditures are estimated in a range of $20–$22 million. Commodity inflation for the full year is expected to remain in the 2%–3% range.

Our Take

Lakewood, Colo.-based Einstein Group's performance has been faltering in the last few quarters. Its revenue performance remained choppy, falling short of the Zacks Consensus Estimate for the seventh straight quarter. While there was some progress in the reported quarter due to improved margin performance and a narrower rate of transaction decline, the company still has a long way to go to match some other industry players. Stiff competition and weak consumer confidence amid sluggish economic recovery also add to our concerns.

Einstein Noah Restaurant Group currently carries a Zacks Rank #4 (Sell). Other players in the same industry, which look attractive at current levels include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Famous Dave's of America Inc. (DAVE - Snapshot Report) all of which carry a Zacks Rank #2 (Buy).

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