Einstein Noah Restaurant Group's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: Einstein Noah (BAGL)

Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL)

Q3 2013 Earnings Call

October 31, 2013 05:00 pm ET

Executives

Jeff O’Neill – President & Chief Executive Officer

Manny Hilario – Chief Operations Officer

John Coletta – Chief Financial Officer

Analysts

Alex Slagle – Jefferies

Mike Tamas – Oppenheimer & Company

Will Slabaugh – Stephens

Josh Long – Piper Jaffray

Paul Westra – Stifel Nicolaus

Operator

Good day and welcome to the Einstein Noah Restaurant Group Q3 2013 Earnings Conference Call. Today’s call is being recorded, and at this time I’d like to turn the conference over to Mr. Manny Hilario, Chief Financial Officer. Please go ahead, sir.

Manny Hilario

Thank you. Good afternoon everyone and thank you for your time today. Let’s begin by covering a few regulatory matters.

During our formal remarks and in response to your questions certain items may be discussed which are not based on historical fact. Such items, including statements indicating our beliefs, trends, plans, expectations, assumptions, anticipations, guidance, projections, estimates or 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 which could cause our actual results to differ materially. For more details please refer to our earnings release issued today and to the risk factors in our recent SEC filings.

And now let me turn the call over to our President and CEO Jeff O’Neill. Jeff?

Jeff O’Neill

Thanks, Manny. We appreciate you all joining us today.

Let me begin by welcoming incoming CFO John Coletta as the newest member of our Einstein Noah Leadership Team. John joined the company last week and brings to us an impressive public and private company background along with extensive restaurant and franchising experience, and we’re grateful to be strengthening our organization with such a capable leader. As you all know last quarter Manny was moved over as our COO and we’re really excited about that opportunity as well.

So with that introduction let’s discuss our performance. Despite a good start sales softened as the quarter went on. This resulted in a system unit-wide comp sales decline of 1.4% versus the year ago period which we attribute to both category headwinds as well as a shift in timing on our pricing year-over-year from Q3 to Q4. And while revenue was up less than 1% we’re pleased to have maintained our restaurant level and gross profit margins through strong cost management and labor focus along with strong manufacturing profits.

Our breakfast business continues to hold up well while our biggest day part issue remains lunch traffic. We’ve effectively targeted ourselves as a strong and unique breakfast destination with our fresh baked positioning, everyday value and strong innovation; but continued price competition from QSR and aggressive pricing from casual dine poses an ongoing lunch challenge. Recent lunch additions to the menu like our gourmet grilled cheese sandwich and our creamy tomato soup and drink combo have proven to be a good addition to our lunch lineup, and we have more plans to discuss in this area as 2014 unfolds.

Catering sales growth moderated somewhat to plus 13.2% in the quarter from our recent highs of plus 18.0% to plus 20.0% but we’re expecting a strong finish to the year. Our efforts here are supported by a regional sales force that evaluates opportunities store-by-store to promote greater awareness of our offering and capabilities. We also know that as we gain traction in catering we benefit by converting more people to our everyday restaurant business.

Manufacturing sales remained strong due largely to growth in third-party accounts, but a change in our sales mix more toward par-baked versus frozen dough did adversely impact margins versus prior year. We view this margin erosion as temporary as we are currently increasing automation in our manufacturing facility to improve the profitability of our growing par-bake line.

Over the last 39 weeks we’ve added nearly 500 basis points to our manufacturing margins through savings in packaging and supply contracts, as well as distribution center rationalization and we’re on track to save $4.0 million to $4.5 million across our entire business over the next twelve months. This is of course on top of what we’ve already achieved over the last two years.

Year-to-date we’ve had record system unit openings and our most recent openings are exceeding our historical averages with weekly sales north of 20,000 per week. Growing our system while improving the quality of our store base and financial returns is the key to our long-term plans and the past twelve months were the busiest and most productive on record.

We also had 27 franchise development agreements on file and 176 stores to be developed under these agreements, of which 42 have already been opened. We’re continuing to execute on our asset-lite strategy and 2013 will be our biggest year so far with respect to franchise store openings. Interestingly, many of our franchisees are now building their second and third restaurants, and as their franchisor we’re doing everything that we can to ensure that they are well grounded with strong operations.

License stores are also being developed at a very healthy pace. Those of you who travel to places like Denver and Atlanta and Detroit may have noticed that we’re adding to our airport presence in these areas where we enjoy some of our highest volume units across our system. Overall we’re bullish on our ability to grow the base business through a combination of continued company expansion and by partnering with experienced franchise and license operators.

As we move into Q4 and beyond I believe that we’re well positioned to grow revenues and comp store sales. We have successfully tested media this year and plan to expand that test to a number of DMAs next year. In addition we’ve restructured around specialty beverage innovation and have invested in our call center which is showing early signs of accelerating growth in catering as we move into Q4.

We’ve also tested digital LTL boards at Noah’s this year and based on these results we will be rolling them out across our system in the first half of 2014. Most importantly we have an impressive lineup of news and promotions next year that we are expecting to bring a renewed level of interest and excitement to the brand.

And with that I’d now like to turn the call back over to Manny, our Chief Operating Officer.

Manny Hilario

Thanks, Jeff. In addition to the financial review I will also discuss our outlook for the remainder of 2013 as well as provide a glimpse into 2014.

Total revenues increased $0.9 million or 0.9% to $106.4 million from $105.5 million. System-wide comparable restaurant sales decreased 1.4% and this consisted of a 1.5% increase in average check that was offset by a decrease in transactions.

Company-owned restaurant sales increased 0.2% to $95.6 million compared to the year-ago period. Comparable restaurant sales decreased 1.4% and consisted of a 1.9% increase in average check that was offset by a decrease in transactions. Franchise and licensed revenues increased 11.7% to $2.9 million reflecting higher unit counts for both franchise and licensees over the trailing twelve-month period.

Our prime costs, which consist of cost of goods sold and labor costs, decreased 30 basis points for a combined total of 56.9% of restaurant sales compared to 57.2% in the prior year. Despite the modest decrease in comparable store sales we effectively controlled two of the biggest costs on our P&L.

Ramped unrelated expenses increased 40 basis points to 11.5% from11.1% primarily due to the 18 new restaurants that we have added over the last four quarters along with sales due averaging at our existing company-operated store base. Other operating expenses increased 60 basis points to 11.7% from 11.1% for similar reasons.

Our investment and marketing initiatives decreased $0.6 million from the same period in 2012 or 60 basis points as a percentage of restaurant sales and it’s related more to the timing of expenditures between Q3 and Q4 versus a reduction of spend. For the full fiscal year we still expect to spend approximately 3% of company-owned restaurant sales on marketing initiatives. Overall, gross margin in our company stores decreased by a mere 10 basis points to 17.4%.

Manufacturing revenues from our Whittier facility increased by 5.4% to $7.9 million due to the strength of orders from third parties. However, gross margin as a percentage of manufacturing revenues decreased to 22.3% from 23.6%. This was a consequence of a change in our mix related to stronger demand for partially-baked or par-baked products from customers in Asia which is more labor intensive than our other products.

While Q3 G&A is higher than the year-ago period it is actually lower than Q2 both in absolute dollars and as a percentage of revenues. General and administrative expenses increased to $9.8 million in Q3 2013 from $9.1 million in Q3 2012. This change largely reflects unfilled vacancies in the prior year during the strategic alternative evaluation process that have now been filled.

Pre-opening expenses were $343,000 compared to $250,000 in the prior year period and were related to the two company openings in Q3 as well as expenses for several openings that are planned for Q4.

Income from operations increased 2.8% to $6.5 million from $6.3 million while adjusted EBITDA was $11.2 million in Q3 2013 compared to $11.7 million in Q3 2012. I refer you to the reconciliation table in the earnings release for a detailed presentation of how we arrived at those numbers.

Interest expense rose to $1.4 million in Q3 2013 compared to $0.7 million in Q3 2012 reflecting a higher level of debt related to our capitalization and the special dividend paid in December, 2012. This increase alone in interest expense impacted our after-tax diluted EPS by $0.03 per share in Q3.

Total debt as of October 1st was $117.3 million and consisted of $96.3 million under the Term Loan A and $21.0 million under the revolver. We paid down $8.3 million in debt during Q3 and our cash balance at quarter end was $6.2 million. We are now less than 2.5x levered on trailing four-quarter adjusted EBITDA basis which will lower our future applicable margin by 50 basis points.

In terms of our system unit count we ended the quarter with 844 restaurants including 457 company-owned and –operated restaurants, 109 franchise restaurants, and 278 license restaurants. We opened 24 restaurants across the system in Q3 and this consisted of four company-owned restaurants, two franchise restaurants, and 18 license restaurants.

In terms of our 2013 outlook we are refining our expectations for development while leaving our other guidelines unchanged. We now expect 65 to 75 system-wide openings across our three channels. Capital expenditures are still estimated to be between $18 million and $20 million.

Cost of goods inflation is projected at approximately 2% to 3% which we will continue to offset through efficiency initiatives. Pre-opening expenses remain at $65,000 to $75,000 per new company-owned restaurant and interest expense has been narrowed to $5.8 million to $6.3 million for 2013. Finally our annual effective tax rate should not exceed 36% and we will continue to only pay minimal cash taxes for the next several years.

Now, with respect to 2014there are three key commodities that we are already partially locked, and this provides us with great visibility on our cost of goods, specifically wheat is 75% locked, coffee is 100% locked and butter is 50% locked. Overall we expect commodity inflation to be between 1% and 2%.

And now I would like to turn the call back over to Jeff.

Jeff O’Neill

Thanks, Manny. Our strategy of everyday value combined with premium sandwiches, specialty beverages and catering remains sound. We have no substantive changes planned to this base approach to the business and are confident that our sales initiatives are taking hold. In fact our traffic trends in October have proven to be one of our strongest periods of the year and we’re hopeful that this trend will continue through the balance of Q4.

We’re proud of our demonstrated track record of managing and controlling our cost base. In Q3 we delivered strong restaurant level and gross profit margins that were equal to the prior year, and we were also able to reduce our expanding debt by over $20 million year-to-date which in turn strengthened our balance sheet. This strengthened cash flow generation coupled with our future plans led the Board to increase our dividend for our shareholders to $0.13 for the current quarter.

Our system will exceed 850 restaurants by year end, and in addition to growing in numbers it’s also improving in quality. As you know we emphasize franchise and license development but we’re also adding and relocating company stores, and they are collectively outperforming their counterparts across a variety of metrics.

The bottom line is that we are very comfortable expanding our system footprint by what we consider a healthy pace of 10% annually, and believe that the totality of our efforts position us for strong cash flow generation and optimized returns.

So with that said now let’s open the line up to questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions.) We’ll take our first question from Alex Slagle with Jefferies.

Alex Slagle – Jefferies

Thanks, hey guys. I just wondered if you could talk a little bit more about the success you’re seeing in the new company-owned/franchise average weekly sales, how they’re exceeding the system average? And I assume much of that comes from the improved real estate site quality you’re seeing which has been a focus. So is it really more good sites available to you now than there were before or what are the dynamics of that?

Jeff O’Neill

Alex, let me touch on this and then I’ll turn it over to Manny. I’d really say there’s three things going on. The first thing, one of the first things that Manny did when he came onboard and even a little prior to this is we went back to something that was successful to us in the past which was the new store opening teams. This is a team that is dedicated to going in there and committing to staying in there and working with the local management to get us up and running.

You know, you only have one chance to open a great store and that is really we believe playing a key role to getting us off to a fast start; and when these teams move on they’re leaving the local teams in a much stronger position to carry on with that. That would be number one.

Site selection, no question – we brought in a new company about a year ago and Mike Ellis has been working with them, form analytics in our site selection process and refining that also plays a role as well. But I’d say really those two things are key and maybe the third one is we’re getting a stronger pipeline of new restaurant sites that’s sort of getting ahead of ourselves a little bit in this process as well. Manny, anything to add?

Manny Hilario

I would just add that the other thing that we’re doing is we have a pretty good routine with the pre-opening marketing stuff that we’re doing. So I think having the right marketing in place is also helping the (inaudible) revenues for when we’re opening them up.

Alex Slagle – Jefferies

Thanks. And one question on the everyday value rollout, I just kind of wanted to get some color on how the trends progressed regionally in Q3 following that initial rollout in Q2; and kind of what the ramp in traffic looked like compared to your expectations in terms of timing and magnitude.

Jeff O’Neill

Yeah, so I would say we were really feeling quite good about the trajectory and our traffic in Q3 when those economic headwinds set us back a little bit but nothing to deter us really. And you know, overall I think it’s pretty strong right across the board. If anything the West Coast and Noah’s had a little bit stronger grow but we did a couple of unique things there.

We put in those LTO digital menu boards and we were really pleased with how that just really helped to pop some of the big initiatives that we were doing with promotions in-store. So that’s why we’re excited about rolling those out across the country as we go into 2014.

But with the rebound back in October with traffic trends I think Manny and I are both feeling pretty strong. Manny’s got a real focus in addition to the marketing on that guest experience, and I don’t know, Manny, if you want to touch on anything there but I think we’ve been doing a good job on that as well.

Manny Hilario

Yeah, I mean I would say that since we rolled out plans when we’ve been emphasizing restaurant level experience, and I think we’ve made great progress. And overall we are on track with our original objectives on that plan.

Alex Slagle – Jefferies

Thanks, guys.

Jeff O’Neill

Okay, thanks Alex.

Operator

And we’ll take our next question from Brian Bittner with Oppenheimer and Company.

Mike Tamas – Oppenheimer & Company

Thanks, this is Mike Tamas on for Brian. Can you just talk about the momentum that you’re seeing in October? You just touched on it a little bit but I’m wondering what can we do to avoid the same path we kind of took in Q3 here with the slowdown ex any macro factors – if there’s anything internally you can do? And then secondly if you can just kind of touch on the everyday value strategy. It seems like everybody from fast casual to QSR is coming out with something like that now and how is it faring do you think against the competition and what you think it can do to help you continue the momentum. Thanks.

Jeff O’Neill

Yeah, okay. So your first question was on, yeah… I can’t do a lot about the macroeconomic trends unfortunately, Michael, but I think that what we do have in place is continuing to make traction. The move against traffic is going to be something that continues to build.

One of the other things I would just add is we brought Glenn Lunde onboard, our new Chief Concept Officer to head up marketing a little over a quarter ago; and if you look back prior to that we were a year, fundamentally a year without a head of marketing. Well we went through strategic alternatives last year and once we got that behind us then we went out looking for the absolute right leader to run marketing.

I’ve been looking at the plans that Glenn and the Marketing Team have pulled together for 2014 and I really do feel that we’ve got some real good consumer insight-based promotions and plans that are really going to give us the traction that we need in addition to the work that Manny has done with the Operations Team.

I will tell you I’m more excited about the Leadership Team that we have now than I have been in the last five years and we’ve got some great additions and some great moves internally that are really going to build on the strong Leadership Team that we have already. So I think that’s really a big piece of it is the consistency and the continuity that we’re getting and then continuing to build up on some of the insights that we have from a consumer promotion point of view.

Mike Tamas – Oppenheimer & Company

Thanks. And then can you just touch on the everyday value strategy versus fast casual and QSR peers?

Jeff O’Neill

Yeah, the big one to me is sort of the $3.99 bagel, cream cheese and coffee which we put in there. And when you think about fast casual obviously our price are higher. We’re offering a higher quality product. We’re fresh baked and fresh brewed in-store, and the whole idea there is to drive frequency among our users. The big piece that we continue to build on is around specialty beverage and coffee overall. We know that that’s going to drive frequency; we’re on a mission to increase that as a percent of our mix.

And so to go out with an everyday bagel, cream cheese and coffee at $3.99, that’s a good price point and we know our loyal users are excited about that. Now, we aren’t doing a lot of advertising outside the four walls about it so we’re aware of that, we’re okay with that. This is a frequency play that we’re looking at driving. And then in addition to that, we couple that with a very strong gourmet and upscale product lineup. We’re advertising our egg paninis with a promotion right now – that’s got a strong price point. I mentioned this gourmet grilled cheese with a drink and a side and a soup for $6.99, that’s a strong price point.

So that is more a fast casual approach to it. The big thing we’ve got to do is work on our lunch and really get that unique positioning, and I’ve got sort of more to talk about that as we get into 2014. But I think that’s really the build.

Manny Hilario

I would say the only thing we’re adding on top of that is the emphasis on beverage and coffee as well as if you will double pacing on catering. We have a very strong internal focus on driving that catering business which I think is really what makes the magic happen with the values. We can actually fund having a great value on the menu by driving the check through beverages and the catering business.

Jeff O’Neill

Right.

Mike Tamas – Oppenheimer & Company

Great, thank you.

Operator

(Operator instructions.) We’ll go next to Will Slabaugh with Stephens.

Will Slabaugh – Stephens

Hey, thanks guys. I want to ask you about the mix in ticket. It was the lowest we’ve seen here in a couple of years, and you mentioned the shift in pricing. So I wondered if you could talk a little bit more about what happened there, and then speak to what you would expect that check average increase to look like as we go forward.

Jeff O’Neill

Yeah, so the one thing I’ll touch on and Manny just mentioned this, but Will, one of the things we want to do and need to do and are really focused on is… So think of our bulk business which is grab-and-go buckets and sort of in-store bundles along with our catering business. Those two represent close to 30% of our business. Those are big check drivers. The average bucket, sort of that side of the bulk business is close to $12 and our average catering order is about $115.

So we have real plans to focus on those, and Manny’s been working with his team and with Marketing with some great plans going forward. And as we grow that piece of the business strongly we know that that takes care of check a great deal and really helps our overall mix-up pretty significantly. So from a pricing point of view, while we’re not going to go aggressively after pricing next year there’s a couple of areas where we can tighten up our pricing; but we really believe that between catering and bulk we have an opportunity to improve that check and strengthen that a little bit.

Manny Hilario

Yeah, I would just reemphasize the fact that we have less than 1% in effective pricing in the quarter so that’s one of the lowest price levels we’ve had effectively in a while. And so what you’re seeing, that’s why I kept saying that beverages and catering are an important element of the strategy. So we’ll keep pushing that because the reality is that we believe we’ll keep our pricing modest because our short-term emphasis and long-term emphasis is on everyday value. So you also have to remember that the pricing component is very small in this quarter.

Will Slabaugh – Stephens

Got it, that’s helpful. And then I wonder if you could talk a little bit more about the digital mini-boards and their rollout in the first half of next year. Can you talk just a little bit more about what you saw in tests, any metrics that you could give us? That would be helpful.

Jeff O’Neill

Yeah, so it’s tough to really break out with Noah’s exactly because we did interesting things in Noah’s. But Noah’s has picked up about two points of traffic if you will over that time period. And we also improved our mix with Noah’s as well because you see those limited time offers on the board and it really increased the focus and the ordering of those when you have those flashing up.

One of the reasons we just want to test a little bit to see what the difference might be at an Einstein’s is as you know, if you know the Noah’s at all they’re quite small footprints and Noah’s really benefits by having a digital LTO board up there because space is really at a premium and really tight. And so we have a little more space in the Einstein’s and we want to just really understand the difference between what we got in the Noah’s and what we might get in the Einstein’s when we put up those LTO boards.

But we’re really happy with Noah’s this year, we were happy with the trends. But I’d say what we’re expecting overall – a couple more points of traffic, a good solid check, and we’re hoping that the rest of the business follows as we roll out.

Will Slabaugh – Stephens

Great, and one more quick clarification if I could – I wanted to make sure I heard you correctly. You mentioned October trends had improved. Did you say that was the best month you’d seen so far this year?

Jeff O’Neill

Yeah, it was in traffic one of the best periods we’ve had probably over the last two years.

Will Slabaugh – Stephens

That’s great to hear, thanks guys.

Jeff O’Neill

Okay.

Operator

And we’ll take our next question from Nicole Miller Regan with Piper Jaffray.

Josh Long – Piper Jaffray

Thanks, this is Josh of for Nicole. I wanted to see if we could circle back toward the transition to everyday value and maybe remind us what the new customer demographic profile, that profile of the new customer is. Is it different from prior to the everyday value menu and how are we going to see that show up in the new marketing that you mentioned, Jeff, looking out into 2014?

Jeff O’Neill

Yeah, so Josh, remember that with the everyday value, especially with the $3.99 bagel, cream cheese and coffee – and that’s really a big piece of what we’re looking at here – that’s driving frequency among current users. And so that really isn’t changing the customer base at all; it’s just the customer’s realizing that they can get a great price every day coming in there and be able to opt for our signature product, meaning a bagel and cream cheese with a coffee for a very reasonable price point.

Now with digital menu boards and everything else we hope that they’ll walk out with more than a bagel with cream cheese and a coffee but that’s part of the merchandising piece of all that – so not a real change in target but really a focus on frequency.

Josh Long – Piper Jaffray

That makes sense. And now that we have a lot of those other vacancies that you mentioned filled from last year it seems like we’ve got a really good team up there. Is loyalty on the table and how do we complement those external outside the four walls marketings with kind of ongoing interactions with those customers to really ramp up and drive that frequency over time?

Manny Hilario

So on the short-term our focus is everyday value, so from a marketing perspective we certainly are focused on that. We have spoken of loyalty in the past and we have put in place the systems that can accommodate that so I think at some point in the future, once we get a good track line on value we’ll come back and evaluate. So at this point I would say that it’s in our plan; I can’t really tell you the timing, if it’s going to be six months or a year when we get back.

Jeff O’Neill

That’s right. We’ve got some other priorities in the short-term, let’s call them some in-store excellence and in-store enhancements that we’re looking at that we really are quite excited about for next year. We will though, Josh, be focusing more on loyalty from a digital social media perspective and that’s something that the marketing teams are looking at – getting out there with a lot of these, the fun and new and innovations that we have and putting them out into our social media realm to keep our loyal users linked in.

Josh Long – Piper Jaffray

Excellent, thanks so much guys for the update.

Jeff O’Neill

Thanks, Josh.

Operator

Thank you. We’ll go next to Paul Westra with Stifel.

Paul Westra – Stifel Nicolaus

Great, thanks. Good afternoon. Can you just repeat the pricing that you’re taking here in Q4, how much that is and where do you stand on the effective pricing?

Manny Hilario

So right now we have slightly less than 1.0% and we don’t plan to take any pricing, maybe about 0.2% to 0.4% for some stuff we’re doing with coffee but very small amounts. We will stay around that 1.0% effective pricing.

Paul Westra – Stifel Nicolaus

Okay, so that pickup in October was essentially a function of traffic; very little sequential increase in the price.

Jeff O’Neill

That’s right, yeah, you bet. We think there might be some upside in bulk and catering for the balance of the year as well that might give us a couple of tenths, but Manny’s got it modestly.

Paul Westra – Stifel Nicolaus

And the recent sequential pickup, is that a function of improving lunch or [less style] lunch maybe, or improving pickup in breakfast?

Manny Hilario

Everyday value.

Jeff O’Neill

Yeah, it really is a lot of the ongoing service levels that Manny’s got the team focused on, our plans to win efforts and you know, a little bit more of the social media stuff that we have going on building some awareness for that. But our plans for the balance of the year that we have out there for Q4, we’ve got some new beverage boards that are going out for the balance of the year on coffee that kind of enhances the lattes and specialty coffees in-store, so we’ve bumped up that presence.

We’re building our catering muscle not only for the balance of the year but into next year. We’ve got a real extensive database, over 250,000 customers in that database and we’re going after them in a more targeted way that we believe and are seeing is having an impact on our catering business. We’ve also looked at improving our outbound call center for catering as well.

And then the other piece that Manny’s really excited about and that really helps our business not only for the balance of the year but into Q4 is we’ve got a gift card promotion that I would say we’ve got strong efforts against, right Manny? And so I think I’m optimistic that we can hold that trend that we saw going into the balance of the year, and get some positive traffic coming out of the year and into next year.

Paul Westra – Stifel Nicolaus

Is catering still growing faster than non-catering?

Jeff O’Neill

So in Q3 our catering is plus 13%, which is a little slower than… We’ve kind of been in the plus 18% to plus 20% range over the last kind of year or so. It was plus 13% and change for Q3 but then again, in [period 10] we saw a pickup and with some of the planned programs we have we think we can get back to those high teens again.

Paul Westra – Stifel Nicolaus

Going for the high teens, good. And then a question on commodity costs, the 1:2 next year obviously good in say a normal year but can you just walk us through? I would hope you saw some deflation costs in maybe even wheat, so maybe give us a little more color on the big three and maybe where the offset is where you’re seeing some inflation.

Manny Hilario

Obviously coffee we saw a big decrease year-over-year, so going into 2014 we’re going to be more in the $1.40, $1.50 range where this year we’re in the $2.30 range. So that’ s a nice pickup, and I think wheat we’re going to be in the $8.00 to $8.50 range per bushel, so also a pretty good number for us.

Jeff O’Neill

So our commodities are in good line and we’ve got a lot purchased as you can imagine. And we’ve been doing some internal things around some of our supply contracts that have uncovered some good savings that will roll over into 2014 as well.

Paul Westra – Stifel Nicolaus

And is that $8.00, $8.50 for wheat, where does that stand versus your 2013 year?

Many Hilario

We’re looking at $8.50 versus… I’m sorry, ’13 was $8.50, we’re looking at the low $8.00 in ’14 so about a $0.50 pickup year-over-year.

Paul Westra – Stifel Nicolaus

So your inflation guidance 1:2 , obviously we can back into the fact that all the remaining foodstuffs are going to be…

Many Hilario

That’s right. We’ve also got proteins and other things in there that will have an increase but…

Paul Westra – Stifel Nicolaus

And then one more specific, on the digital menu boards did you tell us what the cost was?

Jeff O’Neill

We’re in pretty good shape with that and it’s all capitalized, and as we take a look at it we’ll just determine that relative to the other capital expenditures and kind of look at that on the best return on investment.

Many Hilario

It won’t be a material number when it gets to the balance sheet.

Paul Westra – Stifel Nicolaus

Great, okay. That’s all I had, thanks.

Jeff O’Neill

Thanks Paul.

Operator

(Operator instructions.) Mr. O’Neill, there appears to be no further questions at this time. I’d like to turn the call over to you for any closing remarks.

Jeff O’Neill

Yeah, just a couple, and thank you all for being in attendance. As we look at the business and where we are we brought a lot more rigor and focus to our new store openings, and we’re on pace for record openings and in addition to much stronger performance out of those openings. And we’ve talked a little bit about managing the costs in the middle of the P&L for solid flow through and we continue to do that, and we expect that those costs will continue; and our focus in that area should be able to reap some strong benefits as we get into 2014 as well and then along with some manufacturing upside and good, strong profit margins out of that.

The focus that Manny and Glenn Lunde have put on what I call elevating our in-store experience, we really have a good strong focus around the guest experience. And some of the work that Manny has done in really getting in there and rolling up his sleeves with the Leadership Team and making some strong regional leadership moves, I feel really good about from an operations point of view and the focus and the discipline and commitment that the team under Manny has provided.

And as I mentioned, the work that Glenn Lunde’s been able to do now that he’s been in here four or five months and what we have planned coming out of the year and even more specifically going into 2014. So given the strong balance sheet and the cash flow – we’ve paid more than $20 million in debt service this year, and we were able to increase our dividend as you saw up to $0.13 for the quarter and so we’re excited about that. And so I look forward to talking with you as we come out of the year and roll into 2014.

Operator

And ladies and gentlemen, this does conclude today’s conference. We appreciate your participation. You may disconnect at this time.

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Einstein Noah (BAGL): FQ3 EPS of $0.22 misses by $0.01. Revenue of $106.4M misses by $1.52M. (PR)