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Einstein Noah Restaurant Group Inc. Q2 2010 Earnings Call Transcript

Einstein Noah Restaurant Group Inc. Q2 2010 Earnings Call Transcript

Einstein Noah Restaurant Group Inc. (BAGL)

Q2 2010 Earnings Call

August 5, 2010 5:00 pm ET


Manny Hilario - CFO

Jeff O'Neill - President and CEO


Nicole Miller - Piper Jaffray and Company

Matt DiFrisco - Oppenheimer & Company

Bart Glenn - DA Davidson and Company



Greetings and welcome to the Einstein Noah Restaurant Group second quarter 2010 earnings conference call. (Operator Instructions)

It is now my pleasure to introduce your host, Manny Hilario, CFO for Einstein Noah Restaurant Group.

Manny Hilario

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» Einstein Noah Restaurant Group Inc. Q1 2010 Earnings Call Transcript
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Good afternoon and welcome to the Einstein Noah Restaurant Group second quarter 2010 conference call. I am Manny Hilario, Chief Financial Officer. And with me today is Jeff O'Neill, Chief Executive Officer and President.

I will start by covering a few regulatory matters. Please note that during our formal remarks and in our responses to your questions, certain items may be discussed which are not based on historical facts. Such items including statements indicating our belief, trends, plans, expectations, assumptions, anticipation, guidance, projections, estimates and the like should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. For more details, please refer to our news release issued today and to the risk factors in our SEC filings.

And now, let me turn the call over to Jeff O'Neill.

Jeff O



Thanks, Manny. As this is Manny's inaugural call as our CFO, I want to first publicly welcome him to the Einstein Noah Restaurant Group. Manny is a seasoned financial professional, a great restaurant operator, a respected leader in the industry, and I am pleased to have him as a partner on the business.

Now, with regard to the second quarter, I'd like to begin our conversation with a review of our three key objectives for 2010 and then discuss our execution in relation to them. Overall, 2010 is shaping up to be an exciting year at Einstein Noah on many levels, and I would characterize our performance during the second quarter as generally in line with our expectations and we made progress in a number of strategic areas.

As we started the second quarter, discretionary spending slowed somewhat compared to Q1 and particularly in the month of June as our momentum had been building from Q1 through May. Against this backdrop, we also faced intense price-driven competition from QSR and sandwich chains, especially as it relates to our breakfast daypart.

While much of the competition is focusing on value menus, we see this as a more short-term solution. Instead, we're committed to healthy innovation, fresh baked goodness and a strong line of new products that will build consumer loyalty for the long run.

From the value perspective, we will continue with our successful direct mail and Facebook coupon activity focused on generating trial and repeat purchases against both our new items and our core bagels with our Free Bagel Friday offers.

As noted in our press release, we generated $103 million in total revenues during the quarter, a decline of approximately $900,000. System-wide comp store sales decreased by 1.1%, while comp transactions improved modestly on a sequential basis. This of course is inclusive of the June softness I spoke about.

We also invested in check driving initiative during the quarter to have offset some of the short-term impact of the heavy breakfast value dealing by the competition and are pleased with the results we saw in sequential transaction build during Q2 from this activity.

In terms of our profitability, we realized substantial margin improvement at both the restaurant and manufacturing level. Our supply chain team continues to make advances with year-over-year commodity cost improvements, reduction in freight expenses and savings from a new vendor price verification process.

From an operating perspective, we also made improvements in labor efficiencies and held the line on other operating costs. At our manufacturing and commissary facilities, our teams continue to increase profitability on top of last year's substantial gains in this area. In the end, gross margin held steady at 20% and adjusted EBITDA remained virtually flat at $11.7 million despite the softness of the top-line.

In terms of development, we recently highlighted the growing importance of our franchise and license unit growth with the term franchise first model. Although our Einstein Bros. and Noah's brands consist primarily of company-owned locations, we have considerable experience as a successful franchisor with our 72-unit Manhattan Bagel brand located in the Northeast. We intend to build on our institutional knowledge and significantly expand our franchising opportunities with focus on our national brand Einstein Bros. Bagels.

We're focused on new development agreements and expect to sign as many as 40 to 60 new franchise stores this year. Our current franchisees will also build 12 to 17 new locations in 2010, of which six have been opened as of June 29. As of the end of the quarter, we had a pipeline of 84 franchise locations, six of which have been signed to date.

We look to sign up nine more agreements through the end of 2010. In total, we look to raise our pipeline to somewhere between 90 and 100 restaurants by yearend.

We also have aggressive growth plans in our license channel as well, and already have a robust pipeline to deliver 35 to 45 new locations this year, of which nine have been opened so far with an additional 16 units in various stages of construction. While the unit economics of franchise and licensed stores are different, they both ensure that we drive strong revenue growth and superior ROIs with limited capital outlays on our part.

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