Einstein Bros 2007 Annual Report Download - page 38

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wide price increase, a slight shift in product mix to higher priced items, and an increase in the volume of units sold resulting from suggestive
selling techniques. We also see growth in markets in which we offer catering by our company-owned restaurants. Our catering business
contributed 1.1% of the increase to our comparable store sales.
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 2005 and 2006 are as follows:
Fiscal 2005 Fiscal 2006
First Quarter 4.6% 6.2%
Second Quarter 6.3% 3.6%
Third Quarter 5.9% 3.2%
Fourth Quarter 3.9% 4.7%
Our restaurant gross profit increased $7.1 million, or 10.7%, in 2006 compared to the 2005 period, which included an extra week. 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.
In analyzing 2006 against a comparable 52-week basis for 2005, our restaurant contribution margins improved 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 as a
result of a shift to more targeted marketing, $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,
$1.2 million in lease and lease related expenses (consisting of increased costs of lease renewals substantially offset by cost savings due to restaurant
closures), and $0.5 million in installation costs and monthly fees for DSL service in our company-owned restaurants. The extra week in the 53-
week period in 2005 period contributed $1.8 million in gross profit.
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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
franchised and licensed restaurants. Overall, licensee and franchisee royalty income declined slightly by 1.4% 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, licensee and franchisee royalty income improved 6.4% or $0.3 million in the 2006 period.
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, offset by the closure of several Manhattan Bagel franchises.