Einstein Noah Vs. Starbucks and Taco Bell: Is a New Breakfast Lineup Enough?

Bagel-shop kingpin Einstein Noah is looking to charge up its sales growth with a bigger presence in breakfast, a space that has been getting crowded lately. Should investors buy in, or take a wait-and-see approach?

Jun 1, 2014 at 6:43AM

Source:  Einstein Noah Restaurant Group

Bagel-shop kingpin Einstein Noah Restaurant Group (NASDAQ:BAGL) has been on a major store expansion drive, growing its store base by approximately 25% over the past four fiscal years.  The company plans to ratchet up that pace even further in 2014; it expects to increase its overall store count by an additional 10% in an effort to match the expansion plans of larger competitors, like Starbucks (NASDAQ:SBUX).

However, shareholders are still waiting for Einstein Noah's financial results to catch up to its pace of physical-store expansion; the company posted a marginal 3.7% gain in operating income in its most recent fiscal quarter.  With Einstein Noah unveiling a new lineup of breakfast sandwiches and beverages in early March, though, perhaps this is the quarter when the company breaks out.  So is it time for investors to bet on the story?

What's the value?
Einstein Noah is the king of the bagel-shop concept, operating roughly 850 stores across the country through its Einstein Brothers, Noah's New York, and Manhattan brands.  The company has built a solidly profitable operating model by diversifying beyond its trademark bagels; it currently offers an assortment of made-to-order sandwiches, soups, and salads.  Einstein Noah has also been angling for higher beverage sales, mostly through coffee, which currently only accounts for around 10% of its total sales.

In its latest fiscal year, Einstein Noah reported modest top-line growth of 5%, helped by menu price increases as well as a strong double-digit gain from its catering segment.  On the downside, though, the company's profitability slipped slightly compared to the prior year, due to lower per-store productivity and higher occupancy costs at its non-traditional locations.  The net result for Einstein Noah was lower operating cash flow, which negatively affected its ability to fund its ambitious growth plans.

Certainly, Einstein Noah's more aggressive push into the breakfast daypart with an enhanced roster of sandwiches and coffee beverages makes sense; it would likely improve its stores' sales productivity and potentially reverse last year's negative comparable-store sales performance, its first comp decline since fiscal 2009.  Unfortunately, the move also puts the company in the direct headlights of competitors that are also trying to bolster their breakfast sales, like Starbucks.

Everyone wants a piece of the breakfast pie
The king of the coffee shop niche has made no secret about its big intentions in the breakfast space, which are highlighted by its recent unveiling of new breakfast options that include Ham & Swiss and Vegetable & Fontiago sandwiches.  Indeed, the company undoubtedly designed its 2012 acquisition of bakery La Boulange to improve its offerings in the baked goods and prepared-foods areas.

In fiscal 2014, Starbucks has continued to post strong financial results, highlighted by a 10.4% top-line gain that was aided by strong comparable-store sales growth and a continued store expansion drive around the world.  More importantly, the company's profitability continued to improve; this has led to strong cash flow generation which has fueled its various product development initiatives, which will no doubt include further entries in the breakfast space.

Also looking for a share of the breakfast pie is Yum Brands' (NYSE:YUM) Taco Bell unit, which entered the space earlier this year with a sandwich lineup that included its Waffle Taco and Breakfast Burrito options.  The company is likely hoping that the strategic move will help return Taco Bell's sales growth to the plus column after a flat year-over-year performance in its latest fiscal year.  While it is unclear what kind of a player Taco Bell will be in the breakfast space, its size and scale of operations will undoubtedly make life more difficult for Einstein Noah.

The bottom line
Einstein Noah has big plans for 2014 that include a significant store expansion drive as well as a greater presence in the breakfast daypart. Whether or not those plans will result in higher sales remains to be seen, given the similar breakfast aspirations of larger competitors like Starbucks and Yum Brands' Taco Bell unit.  Given Einstein Noah's minimal profit growth in fiscal 2014 to-date, prudent investors should probably take a wait-and-see approach prior to plunging into this bagel king.

Einstein Noah may have a fighting chance, but your credit won't
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Robert Hanley owns shares of Einstein Noah Restaurant Group. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers