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Einstein Noah's EPS Meets; Rev Lags

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Einstein Noah Restaurant Group Inc. recently reported third quarter 2012 adjusted earnings of 21 cents per share. The results were in line with the Zacks Consensus Estimate.

On a GAAP basis, including expenses related to the strategic alternatives review process, earnings per share were 20 cents in the reported quarter versus 17 cents in the year-ago quarter.

Total revenue nudged up 1.9% year over year to $105.5 million but missed the Zacks Consensus Estimate of $106.0 million. The uptick reflects a system-wide comparable restaurant sales increase of 0.2%.

Segment-wise, company-owned restaurant sales inched up 3.4% to $95.4 million, while Manufacturing and Commissary revenue declined 14.4% to $7.5 million, hurt by the recent commissary closures. Franchise and License related revenue grew 4.6% to $2.6 million.

Gross profit expanded 9.5% year over year to $20.7 million in the quarter, primarily due to cost containment initiatives. Cost-saving initiatives combined with positive comps led to a gross margin expansion of 150 basis points (bps) to 19.7%.

Total company-owned restaurant costs declined 20 bps to 82.8%, as cost of goods plummeted 210 bps and labor costs dipped 40 bps. These benefits were partially offset by an increase of 60 bps in rent, a 120 bps hike in other operating costs and a 150 bps spike in marketing costs.

Store Update

At the end of the quarter, the company had 797 restaurants, out of which 450 were company owned, 94 were franchised and 253 were licensed.

In the reported quarter, Einstein Noah opened two company-owned, one franchised and 17 licensed units. It also shut down a total of 6 units.


Einstein Noah ended the quarter with cash and cash equivalents of approximately $12.7 million and a debt burden of $68.6 million.


For fiscal 2012, the company plans to open 66–72 restaurants (previous guidance was 60–80). 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

Lakewood, Colorado-based Einstein Group's performance has been faltering in the last few quarters. After missing the earnings estimate in the last quarter, the company just about matched it this quarter. The revenue performance also remained choppy year to date.

Based on recent performances, we remain cautious on the stock at the current level. Moreover, stiff competition and weak consumer confidence amid a sluggish economy also support our view on the stock. Although the company considers an assessment of strategic alternatives to bolster shareholders' return, the program is yet to deliver any concrete results. Besides, the probability of increased commodity inflation also lurks in 2013.   

Einstein Noah Restaurant Group currently carries a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, its peer Panera Bread Co. holds a Zacks #2 Rank, translating into a short-term ‘Buy’ rating.

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