Einstein Bros 2006 Annual Report Download - page 32

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salaries and benefits, insurance, supplies, repair and maintenance expenses, advertising, rent, utilities and property taxes. Because certain elements
of cost of sales such as rent, utilities, property taxes and manager salaries are fixed in nature, incremental sales positively impact gross profit.
Depreciation, amortization and income taxes do not impact our restaurant contribution margins.
In analyzing 2006 against a comparable 52-week basis for 2005, our restaurant contribution margins improved 210 basis points to 20.2% from
18.1% primarily due to price increases and product mix shifts positively impacting revenue, improved control over food waste, labor hours, and
supplies spending partially offset by increases in food costs, wage rates, utilities, lease and lease related expenses. In comparing the reported 52-
week period for 2006 against the reported 53-week period in 2005, the $7.1 million increase in gross profit was primarily due to revenue of
$14.5 million driven by price increases and product mix shifts. Our margins were also favorably impacted by approximately $1.8 million reduction
in marketing expense, $0.6 million savings in real estate taxes that included the settlement of a real estate tax dispute and $0.6 million in decreased
workers' compensation loss reserves. These improvements, reductions and savings were partially offset by increases of approximately $2.7 million
in salaries and wages, $2.3 million in food costs and distribution expenses, $1.9 million in energy and utility costs, $0.7 million in lease and lease
related expenses, and $0.5 million in costs due to installation of DSL in our
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company-owned restaurants. The extra week in the 53-week period in 2005 period contributed $1.7 million in gross profit.
Manufacturing Operations
Our manufacturing operations, which include our USDA approved commissaries, predominantly support our company-owned restaurants and
generate revenue from the sale of food products to franchisees, licensees, third-party distributors and other third parties. All inter-company
transactions have been eliminated during consolidation.
During 2006, our manufacturing operations experienced negative margins primarily due to increases in raw materials and freight costs and
incremental start-up costs associated with new products and customers. During the fourth quarter of 2006, our margins improved slightly partially
due to implemented price increases to some of our third party customers. We also opened two new commissary locations, aggregating our
commissary system to five locations, which will increase our current production capacity. Finally, we engaged a third party consulting firm to
assist us in developing manufacturing cost models. We believe these initiatives will allow us to become more operationally efficient in the future
and positively impact our manufacturing operations.
Franchise and License Operations
Revenues for the franchised and licensed operations consist primarily of initial fees and royalty income earned as a result of sales within
franchise and license restaurants. Overall, franchisee and licensee royalty income improved 0.6% in 2006 as compared to 2005, which included an
extra week of royalty income. On a comparable 52-week basis and excluding $0.3 million in accelerated royalties due to an early termination of a
franchise agreement in the 2005 period, franchisee and licensee royalty income improved 7.9% or $0.4 million in the 2006 period. The percentage
increase was predominantly due to improved comparable sales in the Manhattan and Einstein Bros. brands and an increase in number of Einstein
Bros. licensee restaurants, offset by the closure of several Manhattan franchisees.
General and Administrative Expenses
Our general and administrative expenses increased 3.8%, or $1.4 million, in 2006 when compared to 2005. As a percentage of sales, our
general and administrative expenses were 9.6% in 2006 compared to 9.3% in 2005. Predominantly contributing to the increase was approximately
$0.7 million in stock based compensation expense and $0.7 million for our 2006 annual leadership summits for our Einstein Bros. and Noah's
general managers and our Manhattan Bagel franchisees.
Depreciation and Amortization
Depreciation and amortization expenses decreased 35.6%, or $9.4 million, in 2006 compared to 2005. The decrease is primarily due to all of
our amortizing intangible assets becoming fully amortized and a substantial portion of our other assets becoming fully depreciated within the
second and third quarters of fiscal 2006. Depreciation and amortization expense is predominantly related to the assets of Einstein/Noah Bagel
Corp. that we acquired in bankruptcy proceedings in June 2001.
Loss on the Disposal, Sale or Abandonment of Assets
Loss on the disposal, sale or abandonment of assets represents the excess of proceeds received, if any, over the net book value of an asset. We