Einstein Bros 2006 Annual Report Download - page 29

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specified period of time that is generally one year or less. We do not engage in the practice of buying futures contracts and therefore we do not
have derivative accounting. Packaging and distribution costs are primarily affected by the cost of oil because petroleum-based material is often used
to package products for distribution. Although we have generally been able to increase our retail prices at our company-owned restaurants to
offset the increased costs of these items, we may not be able to do this in the future.
Compared to 2006, we expect most of our food costs that are commodity based to remain relatively stable or increase slightly during 2007.
Flour represents the most significant raw ingredient we purchase and we believe several factors related to wheat and corn production appear to be
improving for 2007. During 2006 when the cost of oil was significant, the demand for ethanol (a corn-based product) increased, effectively driving
demand and placing upward pressure on corn prices. As a result, many farmers rotated to corn crops rather than soy. This has the potential effect
of driving prices for corn down and trends in the wheat market generally follow. In addition, demand for the international export of wheat has
lessened. Currently, analysts are projecting strong winter wheat crops, which will help to lessen price pressures. However, there can be no
assurance that all of the aforementioned factors will occur or that we will even benefit from a decline in the cost of commodity based products we
purchase.
Most of the fresh produce that we purchase, such as lettuce and tomatoes, is subject to normal market fluctuations. We purchase predominantly
all of our orange juice from a single supplier, which has production in two regions, Arizona and Florida. During 2006 when citrus orchards in
California experienced adverse weather conditions, our supplier mitigated risk with their dual sourcing of production. Accordingly, while the cost
of oranges and orange-related products is generally increasing by approximately 30%, we expect that our cost for orange juice will remain
relatively flat compared to 2006.
In late 2006, we negotiated contract terms with two new distribution partners. In early 2007, these new partners began delivering products to
our company-owned, franchise and license restaurants in the respective geographic regions. We believe the new partners will provide a higher
level of services at a lower cost for our company-owned restaurants. However, there is no assurance that the new distributor will perform as we
expect, or that their cost structure will provide for the cost savings that we anticipate.
Compensation Costs
Compensation costs reflect the hourly wages, salary, bonus, taxes and insurance that we pay our associates at each restaurant. Compensation
costs tend to vary by geographic region based upon the labor market, local minimum wages, and the supply and demand of workers. Also,
compensation costs tend to be semi-variable in nature and increase or decrease somewhat based upon the volume of products sold.
There is significant competition for personnel and limited availability in the labor pool. In most of the states in which we operate, we are
aware of increases in state minimum hourly wage rates that became effective January 1, 2007. Accordingly, we anticipate increases in hourly
wages during 2007. We continue to make improvements in labor efficiencies that may help to offset a portion of the increases in labor costs.
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Other Operating Costs
Other operating costs consist of utilities, restaurant and other supplies, repairs and maintenance, laundry and uniforms, bank charges and other
costs related to the operation of company-owned restaurants. Certain of these costs generally tend to be fixed in nature and are only modestly
impacted by changes in the volume of products sold. Utilities, distribution costs and other expenses impacted by fuel price fluctuations are not fixed
and are contingent upon contract rates negotiated by third parties outside of our control. Many of our contracts are re-priced quarterly based on the
prior quarter's market fluctuations resulting in a delayed effect upon on operating costs. During 2005 and part of 2006, we experienced increases in
the cost for oil and accordingly, our distribution partners and common freight carriers passed on fuel surcharges to us. Currently, the cost of a barrel
of oil has decreased as compared to the average cost in 2006. During periods of uncertainty and significant market fluctuations, we cannot be
certain of the impact on our future operating results. If we are unable to leverage cost increases with operating efficiencies or price increases, it
may negatively impact our operating results. Conversely, decreases in fuel prices will positively impact our utilities, distribution costs and other
related expenses.
Other operating costs also include rent, common area costs, property taxes and insurance, liability insurance, delivery fees and allocated
marketing expenses. We exclude depreciation and amortization expense from company-owned restaurant expenses. Changes in these costs are
generally the result of changes in our rent and other related facility costs. Accordingly, these costs are predominantly fixed in nature and are
modestly impacted by changes in the volume of products sold.
Certain states and local governments have increased both the rate and nature of taxes on businesses in their regions. These increased taxes
include real estate and property taxes, state and local income taxes, and various employment taxes.