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Einstein Noah Restaurant (BAGL) Shares Offer Solid Upside Potential

 March 02, 2012 03:49 PM

Shares of Einstein Noah Restaurant Company, Inc. (NASDAQ:BAGL) offers upside potential in the next 2 years as several of its same store sales driving initiatives are underway and should drive margins in the coming quarters.

Einstein Noah reported fourth-quarter earnings of $6.1 million or 36 cents per share, up from $3.6 million, or 21 cents per share in the year ago quarter. Wall Street expected the company to earn 34 cents a share.

Total revenues increased 8.6 percent to $115.1 million, and system-wide comparable store sales rose 1.2 percent, reflecting strong growth in check and strength 'in catering sales'.

[Related -Einstein Noah Concerns Overdone - Analyst Blog]

Restaurant gross margin increased 40 basis points to 21.4 percent,  and other operating costs were offset by continued inflation.

As of Jan. 3, 2012, there were 773 system-wide Einstein Bros. Bagels, Noah's New York Bagels, and Manhattan Bagel branded restaurants in operation. During the fourth quarter of 2011, the company added fifteen net restaurants to its operations including five locations in Portland, Oregon area through its acquisition of Kettleman Bagel Company.

Although no specifics were provided, the company seemed to indicate that same store sales (SSS) trends accelerated out of the quarter as it finished lapping its Free Bagel Fridays promotion and completed the roll out of its new specialty coffee platform.

"Investors should note that most of BAGL's SSS-driving initiatives are just rolling out, with the new coffee platform rolled at the end of 4Q'11 and several more initiatives are set to launch in 2Q & 3Q (Smart Choices menu, a new value layer, fresh fruit smoothies & a loyalty program)," Jefferies analyst Alexander Slagle wrote in a note to clients.

[Related -Retail Survey Report: Ross Stores, Einstein Bros. Bagels, Williams-Sonoma, Granite City Brewery, Sonic Drive-Ins, Quiksilver]

For fiscal year 2012, the company expects 60 to 80 system-wide openings and capital expenditures of $24 million to $26 million. The restaurant operator sees commodity inflation of 2 percent to 3 percent and has secured price protection on 88 percent and 93 percent of its wheat and coffee requirements, respectively.

Slagle raised his 2012 earnings estimate to 93 cents from 90 cents, while analysts polled by Thomson Reuters expect earnings of 90 cents a share for 2012.

"Investors looking to gain exposure to the attractive Fast Casual segment should take a close look at BAGL, because if the company's robust pipeline of SSS drivers deliver even modestly higher SSS, we think BAGL could show meaningful EPS upside, especially as recent cost-saving initiatives accelerate," the analyst said.

Slagle, who has a "buy rating and $17 price target on Einstein Noah shares, sees potential upside in 2012 related to SSS drivers, and the company's outlook for 2013 and beyond is shaping up well, with a development pipeline that continues to grow and remains on-track to deliver 10 percent system growth.

"Stronger SSS & 10 percent unit growth are key drivers for the stock & continue to be moving ahead in-line w/ plan. We think these points to upside potential in 12 & 13 that are not reflected in current valuation or estimates," the analyst added.



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