Einstein Noah Restaurant Group, Inc. ( BAGL)

Q3 2010 Earnings Call Transcript

November 4, 2010 5:00 pm ET

Executives

Manny Hilario – CFO

Jeff O'Neill – President and CEO

Analysts

Steve West – Stifel Nicolaus

Bart Glenn – D.A. Davidson

Paul Westra – Cowen and Company

Fan Li [ph] – Oppenheimer & Co.

Presentation

Operator

Greetings and welcome to the Einstein Noah Restaurant Group’s third quarter 2010 earnings conference call. (Operator instructions)

It is now my pleasure to introduce your host, Manny Hilario, CFO for Einstein Noah Restaurant Group. Thank you, Mr. Hilario. You may now begin.

Manny Hilario

Good afternoon and welcome to the Einstein Noah Restaurant Group’s third 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.

Jeff O'Neill

Thanks, Manny, and welcome everyone. We are very pleased with our performance during the third quarter as we made meaningful progress in executing against our three key objectives, creating more awareness for our brands, financing our operational efficiencies, and driving unit growth through our franchise-first model.

Total revenues for the third quarter increased slightly to $101 million, with particularly strong performances from our franchise and license segment. Improved system wide comp sales helped our results, along with a net increase of 31 locations compared to 2009.

On a comparable basis, we generated positive system restaurant sales and transactions, a turnaround of almost 200 basis points versus the second quarter. We also held our average check steady against heavy value driven competition. And finally, we reached a development milestone of surpassing 700 restaurants and we are very excited about that.

Company gross margins increased 120 basis points to almost 20% of revenues. Adjusted EBITDA improved to 10.9 million, while adjusted diluted EPS increased 33%. These key metrics outpaced total revenue growth and reflect our disciplined approach to managing the P&L. We are focused on differentiating ourselves through innovation, health and fresh baked goodness.

Towards the end of the second quarter we launched bagel thin sandwiches into our lunch day part, and have since extended the line to breakfast as well. Today they comprise just under 4% of our total mix, and have emerged as a particularly attractive option for consumers. In addition, our lighter side menu features six freshly prepared breakfast and lunch items, all less than 400 calories. These items are gaining in popularity and currently account for roughly 2% of our total mix.

With respect to our coffee business, we are testing premium roast and specialty drinks to expand our offering and raise our beverage mix. We have introduced new equipment and training and now plan to have barista [ph] in 40 company locations. While the results today are compelling, we are still at the early stages of our valuation on this project.

Catering is another area of our business with a lot of potential, and I’m pleased to report that we delivered growth of 9% during the quarter. While the overall impact to our business is still modest given their rather small base, we’re encouraged to be gaining traction through our added focus, marketing and online ordering system.

Creating more awareness for our brand is critical, and we have been successful in moving into digital marketing through social networking sites like Facebook, and now have over 614,000 fans that we are engaging with on a regular basis to help build our customer loyalty.

Turning to development, while we are obviously pleased to have expanded our footprint beyond the 700 plus restaurant milestone, there is certainly more opportunity ahead for the Einstein Bros. brand. We currently have 20 signed development agreements for Einstein Bros. franchises, and coupled with the four additional development agreements planned for 2010, the company expects to yield an ending pipeline of 100 to 110 additional franchise locations.

Most of our franchising and licensing interest is coming from Tier 1 operators through our experienced QSR franchisees looking to diversify both their own businesses and gain a foothold in fast casual. With comparatively modest build out costs, and compelling unit level returns we are very attractive option for them.

All in costs for new unit continued to be below $0.5 million, delivering cash on cash returns of approximately 30%. This year our original plan calls for between 57 and 74 restaurant openings, primarily franchise and license locations, and we expect to finish the year at the lower end of that range. The difference is that we have made a conscious effort to fine-tune our site selection process throughout the year, stressing quality over quantity. And as a result, we have pushed a few locations into 2011.

Through the third quarter, we have already opened a net 31 units. We now expect to open seven or eight company-owned stores, 15 to 17 new franchise restaurants, and 35 to 40 new license locations this year.

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