Einstein Bros 2007 Annual Report Download - page 34

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to a system-wide price increase, a slight shift in product mix to higher priced items, partially offset by a decrease in the volume of units sold.
Additionally, restaurant sales for 2007 benefited from $1.3 million in gift card breakage, which relates to unredeemed balances from 2003 through
2006. We expect the benefit that will be received in future years will be considerably less than this amount.
Comparable store sales represent sales at restaurants open for one full year that have not been relocated or closed during the current year.
Comparable store sales include company-owned restaurants only and represent the change in period-over-period sales for the comparable
restaurant base. A restaurant becomes comparable in its 13th full month of operation.
Comparable store sales for each quarter in fiscal 2006 and 2007 are as follows:
Fiscal 2006 Fiscal 2007
First Quarter 6.2% 1.0%
Second Quarter 3.6% 5.2%
Third Quarter 3.2% 5.2%
Fourth Quarter 4.7% 3.2%
Our restaurant gross profit increased $2.3 million, or 3.1%, in 2007 compared to 2006. Our restaurant margins are impacted by various
restaurant-level operating and non-operating expenses such as the cost of products sold, 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.
Our restaurant gross profit margins (company-owned restaurant gross profit divided by company-owned restaurant sales) improved slightly to
20.3% from 20.2% in 2007 compared to 2006. Price increases implemented in 2007 and $1.3 million of gift card breakage were offset primarily by
higher commodities costs, labor and labor related costs, and other store level expenses. The cost of flour, cheese, coffee and butter collectively
increased $3.4 million. Wheat and, in turn, flour have reached unprecedented price levels and volatility over the past year. Increased wage rates,
including mandatory minimum wage rate increases, raised our labor costs by approximately $2 million in 2007 compared to 2006. In addition,
increased staffing due to extended hours in company-owned stores increased our labor costs in 2007 compared to 2006 by approximately an
incremental $2.2 million. Labor related costs increased by approximately $1 million for health care coverage and workers compensation claims.
Additionally, in 2007 we spent more for taxes, maintenance and insurance related to our company-owned stores.
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 2007, our manufacturing operations experienced negative margins primarily due to increases in raw material costs, freight costs and
incremental start-up costs associated with new
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products and customers. Additionally, our margins declined in recent months due to the increases in the price of wheat.
In addition, we incurred one-time charges of approximately $0.5 million associated with our closed commissaries and write-down of inventory
associated with conversion from an old inventory system to the current information technology system.
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
franchised and licensed restaurants. Overall, licensee and franchisee royalty income improved 9.9%, or $0.5 million in 2007 as compared to 2006.
The percentage increase was predominantly due to improved comparable sales in the Manhattan Bagel and Einstein Bros. brands and an increase in
the number of Einstein Bros. licensed restaurants and Manhattan Bagel franchises of 31 and 2, respectively. This was offset by the closure of 2
Einstein Bros. license restaurants, 12 Manhattan Bagel franchises, and one Manhattan Bagel restaurant that was sold to the Company. The initial
franchise and license fees that were recognized for 2007 and 2006 were $0.6 million and $0.5 million, respectively.