Source: Einstein Bros.
For many years, Starbucks (SBUX -0.35%) has been Wall Street's quick-service restaurant darling. Now Dunkin' Brands (DNKN) seems to be following Starbucks' lead. Could Einstein Noah Restaurant Group (NASDAQ: BAGL) be next? With its most recent earnings report, the bagel chain achieved something it had not done since 2010.
The hole-in-one results
On Feb. 27, Einstein Noah Restaurant Group reported fiscal fourth-quarter results. Revenue popped 3.2% to $114.2 million. Same-store sales inched up 0.1%. Net income soared 53% to $4.9 million, or $0.27 per share.
CEO Michael Arthur pointed out that the gains came despite "weather and holiday-related headwinds," with Einstein Noah Restaurant Group exceeding industry traffic trends. In fact, the positive same-store sales trend continued through mid-February "despite unseasonably cold weather and weak consumer confidence."
Traffic jam
Einstein Noah Restaurant Group's traffic talk sounds familiar. Both Starbucks and Dunkin' Brands also reported a spike of traffic into their restaurants.
Source: Starbucks
Meanwhile, Dunkin' Brands reported similar results. The company's revenue jumped 13.3% and same-store sales popped 3.5% last quarter. Dunkin' Brands credited its "operational excellence" and "marketing innovation." Traffic rose as a result. Starbucks CEO Howard Schultz pointed out that while there was a 15% decline in foot traffic at malls, Starbucks actually saw a 4% pop in same-store traffic at its restaurants. He said that there was a major shift this holiday season to online shopping and that it actually benefited Starbucks. Perhaps people have more time to kill and can stop for coffee and/or a bite to eat.
Evidently, it was a good overall environment for these little shops. Arthur pointed out that Einstein Noah Restaurant Group "delivered our best traffic performance since the fourth quarter of 2010."
Busting at the seams
Einstein Noah Restaurant Group ended the year with 852 restaurants. It increased its restaurant count in 2013 by a record 61 locations, or 7.7%. The company plans to accelerate its restaurant growth beginning in 2014 with 75 to 85 new restaurants, or between 8.8% and 10% growth. This is a huge growth percentage number for just about any public restaurant chain.
During the conference call, COO Emanuel Hilario mentioned "approximately 150 units remain to be built" of commitments from franchisees. He added, "Taking a peek into the first quarter of 2014, we have built on the momentum as company comp sales are positive despite the weather impact." This implies that same-store sales are continuing to escalate. It probably doesn't hurt that the company raised prices in January to offset inflation.
New restaurants opened on average have 15% higher sales than existing restaurants. Consequently, expect to see total system sales rise much faster than same-store sales. Einstein Noah Restaurant Group credits the bump mostly to its improved site selection process. Look for an even higher number of stores to open in 2015.
Einstein Noah Restaurant Group trades at a P/E of less than 15 based on analysts' estimated earnings for 2014. Fools should take a closer look. Between the steady improvement in same-store sales, menu-price increase, and rapid expansion of restaurant count, the chain seems to represent a compelling growth story at a good value.
