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Traffic Slowing for Einstein Noah
Einstein Noah (BAGL - Snapshot Report) is positioned to grow EPS at low-teens CAGR, while boosting ROIC [return on invested capital] from the mid-single digits, through 3%+ comps and 10% unit growth, heavily weighted towards franchises. The bagel chain has been enjoying 13 consecutive quarters of positive comps and excellent unit economics.
However, in our view, this stock’s story is risky as Einstein Noah must resuscitate traffic, which has been declining for five years, to maintain healthy comps and stable margins. Price increases, necessary to offset rising food and labor costs, could dampen traffic and further menu mix shifts to higher-priced items may not be possible. Moreover, industry headwinds are considerable as rising gas prices and mortgage payments squeeze consumer spending, while competition intensifies from quick service operators entering the breakfast segment.
Shares of Einstein Noah are currently trading at an EV/2008 EBITDA multiple of 7.1x3, a well-deserved discount to its bakery and coffee peers, particularly Starbucks (SBUX - Analyst Report), which has a long track record of superior execution. Before buying BAGL shares, we would like to see the company reverse its five-year run of declining traffic without eroding restaurant margins through heavy promotions, a feat that may prove particularly difficult in the face of industry headwinds (higher gas prices and adjustable rate mortgage payments and intensifying competition in the breakfast segment), leaving it vulnerable to missed expectations. We rate the stock as a Hold with a price target of $12.50.
Read the full analyst report on BAGL.
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| Market Summary | Jul 31, 2010 13:10 pm ET |
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