Zacks_Analysts' Blog : Einstein Noah Lags on Rising Costs - Analyst Blog

Einstein Noah Restaurant Group Inc. (BAGL) has recently reported second quarter 2011 adjusted earnings of 18 cents per share, which missed the Zacks Consensus Estimate as well as prior-year earnings of 21 cents per share. Lower-than-expected results were due to soft same-store sales and commodity cost inflation.

Total revenue inched up 0.2% year over year to $103.7 million. The uptick reflects strong growth in check driven by moderate pricing, favorable mix shift and strength in catering sales offset by lower comparable transactions.

The company benefited from its Free Bagel Friday promotion last year that led to a tough comparison in the second quarter 2011. System-wide same-store sales upped 0.2%.

Segment-wise, company-owned restaurant sales dipped 0.7% to $94.2 million, while Manufacturing and Commissary revenue climbed 7.5% to $7.3 million and Franchise and license related revenue was up 14.5% at $2.0 million.

Gross margin contracted 270 basis points (bps) year over year to 17.6% primarily due to a spike in commodity cost and sales deleveraging, partially offset by lower labor and marketing expense.

Store Update

At the end of the quarter, the company had 736 restaurants, out of which 432 were company owned, 93 were franchised and 211 were licensed.

Financial Position

At the end of the quarter, Einstein Noah had cash and cash equivalents of approximately $10.0 million and a debt burden of $77.8 million. Free cash flow was $9.3 million.

Outlook

For fiscal 2011, the company plans to open 75 to 90 restaurants, of which 10 to 14 will be company owned, 20 to 26 franchised and 45 to 50 licensed.

Einstein Noah also expects cost inflation to be much higher in 2011 than in 2010.

Capital expenditures are estimated between $25 million and $27 million.

Our Take

We expect the company to benefit from sales-driven initiatives such as the introduction of products and promotion of premium products to attract customers. A national roll-out of the enhanced coffee program will be completed in 2011.

Moreover, the company’s unit expansion policy remained on a solid track. Lakewood, Colorado-based Einstein Noah will also enjoy the payment of minimal amount cash-taxes for the next several years.

However, we remain cautious over mounting inflation and wavering consumer confidence. Einstein Noah currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.