Einstein Noah Restaurant Group, Inc. (NASDAQ: BAGL), a leader in the quick-casual segment of the restaurant industry operating under the Einstein Bros.® Bagels, Noah’s New York Bagels®, and Manhattan Bagel® brands, today reported financial results for the fourth quarter and full year ended December 29, 2009.
Selected Highlights for the Fourth Quarter 2009 Compared to the Fourth Quarter 2008:
- Total revenues were virtually flat at $103.7 million vs. $103.9 million.
- System-wide comparable store sales decreased (1.4%), a 130 basis point improvement over the third quarter trend.
- Total gross margin improved to 21.0% compared with 20.7%, due to strong cost controls as well as a substantial improvement in manufacturing & commissary profitability.
- Adjusted EBITDA improved $1.0 million to $12.7 million compared to $11.7 million.
- Redeemed an incremental $2.0 million in Series Z Preferred Stock on December 29, 2009, for a total redemption of approximately $5.0 million.
Selected Highlights for 2009 Compared to 2008:
- Total revenues declined modestly to $408.6 million from $413.5 million
- System-wide comparable store sales decreased (2.4%), while transactions decreased (2.3%).
- Total gross margin was 19.0% compared to 19.8%.
- Adjusted EBITDA was virtually flat at $42.3 million compared to $42.2 in 2008.
- Maintained an unrestricted cash balance of $9.9 million after making payments of approximately $25.0 million and $8.1 million on the Series Z and term loan respectively.
Jeff O’Neill, Chief Executive Officer and President of Einstein Noah, stated, “The results we reported today underscore the progress we’ve made in building a platform for sustainable long-term growth. Our comparable store sales, transaction performance, and gross margins were the highest of the year in the fourth quarter, and demonstrate the continued build from our marketing and merchandising initiatives, as well as our disciplined approach to execution and cost control. Even in today’s economic environment, I am gratified that we can create equity for our brand, generate substantial cash flow and meet our financial goals.”
O’Neill continued, “Our key strategies for 2010 are straightforward and build upon our prior-year accomplishments. We intend to drive transaction growth by increasing brand trial through our core bagel/breakfast offerings, rebuild gross margins through our focus on supply chain, manufacturing and operational efficiency, and accelerate unit growth primarily through franchise and license expansion. With a committed team and results-oriented culture, I am confident that we can succeed in all of these areas to maximize shareholder value.”
Fourth Quarter 2009 Financial Results
For the fourth quarter ended December 29, 2009, system-wide comparable store sales, which include Company-owned, franchised, and licensed locations, decreased (1.4%). Total revenues were virtually flat at $103.7 million vs. $103.9 million in the fourth quarter of 2008. Company-owned restaurant sales decreased (0.7%) to $93.7 million from $94.3 million, mostly as a result of a (1.7%) decrease in comparable store sales, which was partially offset by a net increase of two additional company-owned restaurants since December 30, 2008.
The Company’s on-going investments in marketing initiatives to build traffic and drive awareness of its brands yielded a modest decline of (1.5%) in transactions during the fourth quarter and a significant build on trends coming into 2009, when transactions were declining in the (8%) to (9%) range. Marketing initiatives and trial generating incentives increased $0.7 million and $0.4 million, respectively, compared to the prior-year period. Company-owned restaurant gross profit was $18.5 million, or 19.7% of restaurant sales in the fourth quarter of 2009, compared to $18.9 million, or 20.0% of restaurant sales, in the fourth quarter of 2008.
As a percentage of company-owned restaurant sales, cost of goods sold were favorable by 130 basis points in the fourth quarter of 2009 compared to last year. Labor costs, as a percentage of company-owned restaurant sales, rose 100 basis points in the fourth quarter of 2009 compared to the prior-year period due largely to higher health benefits costs, along with continued investments in the Company’s catering business.
New Units and Development
The Company benefitted from a net increase of six additional franchise restaurants and 26 license restaurants since December 30, 2008. The effect of the new locations helped drive franchise and license related revenues up 17.1% to $2.2 million in the fourth quarter of 2009 from $1.9 million in the prior-year period.
Restaurant openings during the fourth quarter of 2009 consisted of 15 outlets, including four Einstein Bros. company-owned restaurants, two Manhattan Bagel franchise restaurants, and nine Einstein Bros. licensed restaurants. Three licensed outlets were also closed during the period.
Other Operating Items
Manufacturing and commissary revenues increased modestly to $7.8 million in the fourth quarter of 2009 vs. $7.7 million, while gross profit grew 58.3% to $1.1 million, compared to $0.7 million in the fourth quarter of 2008. The substantial improvement in gross profit was attributed to lower raw ingredient costs as well as production and labor efficiencies at the Company’s bagel manufacturing facility.
Adjusted EBITDA increased $1.0 million to $12.7 million in the fourth quarter of 2009, compared to $11.7 million in 2008. The 8.5% increase in adjusted EBITDA is attributable to the improvements previously mentioned.
In the third quarter, the Company reversed the valuation allowance on its deferred tax asset. Accordingly, 2009 now includes a charge of $2.9 million for incomes taxes compared to $0.5 million in 2008. The Company also reported $0.7 million of accrued additional redemption costs on the unredeemed portion of the Series Z Preferred Stock. The 2008 results include minimal income tax expense and no charge for the Series Z Preferred Stock.
Taking the aforementioned charges into account, net income was $2.8 million in the fourth quarter of 2009, or $0.17 per diluted share, compared to net income of $5.8 million, or $0.36 per diluted share, in the fourth quarter of 2008.
2009 Financial Results
For the full year ended December 29, 2009, system-wide comparable store sales, which include Company-owned, franchised, and licensed locations, decreased (2.4%). Total revenues declined modestly to $408.6 million from $413.5 million last year.
Company-owned restaurant sales decreased (1.7%) to $370.4 million from $376.7 million, inclusive of a comparable store sales decline of (3.4%). Company-owned restaurant gross profit was $66.2 million, or 17.9% of restaurant sales, compared to $73.5 million, or 19.5% of restaurant sales, in 2008.
Franchise and license related revenues increased 17.1% to $7.5 million in 2009, compared to $6.4 million last year. The Company benefitted from a net increase of 32 franchise and license locations, along with a comparable store sales increase of 1.1%.
Manufacturing and commissary revenues increased to $30.6 million, compared to $30.4 million last year, while gross profit grew 125.5% to $4.1 million, vs. $1.8 million in 2008.
Adjusted EBITDA was virtually flat at $42.3 million in 2009, compared to $42.2 million in 2008.
In the third quarter, the Company reversed the valuation allowance on its deferred tax asset. Therefore, income tax expenses for both periods are not comparable. Additionally, the Company recorded a charge of approximately $1.5 million of accrued additional redemption costs on the unredeemed portion of the Series Z Preferred Stock. The 2008 results did not have this charge.
Net income was $72.0 million for 2009, or $4.36 per diluted share, compared to net income of $21.1 million, or $1.29 per diluted share for 2008.
Rick Dutkiewicz, chief financial officer of Einstein Noah, added, “We substantially improved the quality of our asset base this past year, while investing in projects that generate significant returns on our capital. Inclusive of the 45 locations that were upgraded in 2009, approximately 50% of our Company-owned restaurants were built or remodeled in the last four years. Our balance sheet also improved in 2009. It remains well-capitalized, and we paid down a total of $8.1 million of long-term debt and redeemed nearly $25.0 million of Series Z Preferred Stock throughout the year. In addition, our valuable deferred tax asset will minimize our cash taxes paid for the next several years. We will utilize this asset to continue to reduce our indebtedness as well as provide sufficient capital to grow our business. We will continue to accelerate our franchise and licensing development in 2010 and have an asset light business model that sets the stage for strong free cash flow. Together, these items are an important part of driving returns for our shareholders.”
2010 Outlook
The Company anticipates the opening of 10-12 new Einstein Bros. Bagels company-owned restaurants, 12-16 new Einstein Bros. Bagels franchised restaurants, and 35-45 Einstein Bros. Bagels licensed restaurants.
The Company currently has 14 signed development agreements for Einstein Bros. Bagels franchises. This coupled with the efforts to sign additional development agreements in 2010 is expected to ultimately yield an ending pipeline of 90-100 additional franchise openings.
The Company has secured contract pricing on approximately 50% of all major agricultural commodities that will result in favorable prices compared to 2009, with an option to benefit from further reductions in the market.
About Einstein Noah Restaurant Group
Einstein Noah Restaurant Group is a leading company in the quick casual restaurant industry that operates locations primarily under the Einstein Bros.® Bagels and Noah’s New York Bagels® brands and primarily franchises locations under the Manhattan Bagel® brand. The company’s retail system consists of more than 680 restaurants, including more than 175 license locations, in 36 states plus the District of Columbia. It also operates a dough production facility. The company’s stock is traded under the symbol BAGL.
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