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Einstein Noah a Nickel Ahead

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Einstein Noah Restaurant Group Inc. has recently reported fourth quarter 2011 adjusted earnings of 39 cents per share, which surpassed the Zacks Consensus Estimate of 34 cents as well as year-ago adjusted earnings of 22 cents. Better-than-expected results were attributable to easy comparisons arising out of one extra week of operation in the fourth quarter that contributed 3 cents a share.

On a GAAP basis, including restructuring expenses, earnings were 36 cents per share in fourth quarter 2011 versus 21 cents in the year-ago quarter. In full-fiscal 2011, earnings per share were 78 cents as against 67 cents in 2010.

Total revenue grew 8.6% year over year to $115.1 million. The uptick reflects strong growth in check and improved catering sales, which were offset by lower comparable transactions. In full-fiscal 2011, revenue increased 2.9% year over year to $423.6 million. System-wide same-store sales inched up 1.2%.

Segment-wise, company-owned restaurant sales grew 7.9% to $103.0 million, while Manufacturing and Commissary revenue climbed 16.9% to $9.0 million and Franchise and License related revenue was up 7.4% at $3.1 million.

Gross margin expanded 40 basis points (bps) year over year to 21.4% primarily on lower other operating costs, rent and marketing costs that were offset by continued inflation and an unfavorable shift in product mix to third party customers.

Store Update

At the end of the quarter, the company had 773 restaurants, out of which 440 were company owned, 94 were franchised and 239 were licensed.

Financial Position

At the end of the quarter, Einstein Noah had cash and cash equivalents of approximately $8.7 million and a debt burden of $74.2 million. Free cash flow was $15.4 million.


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.

Our Take

After missing the quarterly earnings estimate for the last three quarters, the company swung back to profit in the fourth quarter. The company continues to concentrate on sales-driven initiatives such as menu innovation, launch of a loyalty program, new POS system and promotion of premium products as well as focus on everyday value to attract customers. The newly enhanced beverage platform will also be a center of attention with a particular focus on its specialty coffee program.

Moreover, the company’s unit expansion policy remains on track. Lakewood, Colorado-based Einstein Noah will also enjoy the payment of minimum cash-taxes for the next several years. To counter inflation, management locked in 88% of its wheat and 93% of its 2012 coffee needs at the current level.  Management also believes a pricing power of over 1.5% is still left over despite the pricing action taken in 2011.

However, we remain cautious about inflation, stiff competition and unstable consumer confidence. Einstein Noah currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are maintaining our long-term Neutral recommendation on the stock. Einstein Noah competes with companies like Jamba Inc. and Kona Grill Inc. .

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