Einstein Noah expects value strategy to pay off

Einstein Noah expects value strategy to pay off

CEO takes long view of plan after first-quarter sales drop

Einstein Noah Restaurant Group Inc. got off to a bumpy start in the first quarter, but company officials say its new Everyday Value strategy is starting to drive traffic.

The Lakewood, Colo.-based company, which operates and franchises more than 815 restaurants under the Einstein Bros. Bagels, Noah’s New York Bagels and Manhattan Bagels brands, reported its first decline in same-store sales in two years last week.

Systemwide same-store sales dropped 0.6 percent for the April 2-ended quarter, mostly reflecting tough macroeconomic trends, as well as a shift in the Easter and Passover holidays. The same-store sales results consisted of a 3.1-percent increase in average check offset by a 2.7-percent decrease in transactions.

The company’s investments in rolling out its new Everyday Value strategy also negatively impacted results but will pay off later in the year, said Einstein Noah president and chief executive Jeff O’Neill.

The Everyday Value strategy includes the debut of new combo meals for $3.99 and $5.99 — a discount of about 12 percent — replacing a discounting plan that relied on methods like direct mail coupons. The plan also includes extended hours and efforts to improve the guest experience.

When the company tested the value initiative last year, traffic rose 3–5 percent.

There is generally about a six-week lag before traffic accelerates and makes up the difference for lower prices on combo meals, analyst Alexander Slagle of Jefferies said in a report.

Slagle expects traffic in the second quarter to remain slightly negative but to pick up in the second half of the year, resulting in positive same-store sales of about 2 percent for fiscal 2013. “We believe 1Q actions represent the inflection point for traffic acceleration in 2H [second half], which we see turning positive,” Slagle wrote.

While the negative earnings were “not pretty,” leaving investors to rely on a second-half acceleration, he added, “This was a critical initiative that had to take place in order to position the system to see long-term traffic growth.”

O’Neill noted that same-store sales were the highest in April since the last quarter of 2010, as the company completed the rollout. “We’re pleased with what we’re seeing from a traffic point of view, and it’s in line with our expectations,” he told analysts in a call last week. “I really believe that what we have is a sustainable traffic improvement program and strategy, and that’s what we’re looking for.”

Value was an ongoing theme throughout recent first-quarter earnings reports among limited-service operators, as consumers appeared to pull back on spending.

Chains including Taco Bell, Wendy’s, Del Taco, Arby’s and Dairy Queen are tinkering with their value menus, while full-service brands like IHOP and Applebee’s noted the challenges of operating in an environment of aggressive discount promotions by competitors.

For the first quarter, Einstein Noah reported net income of $2.4 million, or 14 cents per share, down about 25 percent compared with $3.2 million, or 19 cents per share a year ago.

Revenue increased 1.2 percent to $106.1 million.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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