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Analyst Blog

Einstein Noah Restaurant Group Inc. has recently reported first quarter 2012 adjusted earnings of 21 cents per share, which handily surpassed the Zacks Consensus Estimate of 11 cents as well as year-ago adjusted earnings of 8 cents.

On a GAAP basis, including restructuring expenses, earnings were 19 cents per share in first quarter 2012 versus 7 cents in the year-ago quarter.

Total revenue grew 3.6% year over year to $104.9 million. The uptick reflects system-wide comparable restaurant sales increase of 1.1% aided by a 5% rise in average check partially offset by declining transactions. Comparable restaurant sales (comps) at company-owned stores nudged up 1.1%. Franchisee and licensee comparable restaurant sales were up 1.2% in the first quarter.

Segment-wise, company-owned restaurant sales grew 4.1% to $93.4 million, while Manufacturing and Commissary revenue declined 5.9% to $9.0 million and Franchise and License related revenue shot up 20.5% to $3.0 million.

Gross profit expanded 26.8% year over year to $22.6 million in the quarter primarily on lower marketing costs, manufacturing and commissary costs and labor costs. Cost saving initiatives clubbed with positive comps and higher pricing led to a gross margin expansion of 400 basis points to 21.6%.

Store Update

At the end of the quarter, the company had 777 restaurants, out of which 447 were company owned, 91 were franchised and 239 were licensed.

Financial Position

Einstein Noah ended the quarter with cash and cash equivalents of approximately $9.6 million and a debt burden of $72.3 million. The company repaid nearly $1.9 million in the quarter. Free cash flow was $4.6 million.

Outlook

For fiscal 2012, the company plans to open 60 to 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 2% to 3% range.

Our Take

After missing the quarterly earnings estimate for the last three quarters, the company swung back to profit since the fourth quarter of 2011. 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. The decision had a positive impact on the stock. 

The company continues to concentrate on sales-driven initiatives as well as cost-cutting measures to foster earnings growth. Moreover, the company’s unit expansion policy remains on track. Lakewood, Colorado-based Einstein Group will also enjoy the payment of minimum cash-taxes for the next several years. To counter inflation, management locked in 81% of its wheat and 100% of its 2012 coffee needs at the current level. 

However, we remain cautious about inflation, stiff competition and unstable consumer confidence. We are maintaining our long-term Neutral recommendation on the stock. Einstein Noah competes with companies like Jamba Inc. (JMBA - Snapshot Report) and Kona Grill Inc. (KONA - Snapshot Report).

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