Value Line recently initiated coverage on Einstein Noah Restaurant Group (BAGL). As its stock ticker eludes, the company owns, operates, franchises, and licenses bagel specialty restaurants in the United States. The company derives the bulk of its revenues during breakfast hours, which will likely continue to be a very competitive space.

The company’s product offerings include fresh-baked bagels, pastries, and other bakery items that are cooked and prepared on-site. It also sells a variety of sandwiches, wraps, salads, and soups. Einstein recently bolstered its product portfolio by introducing premium and specialty coffee/espresso drinks.


Einstein Noah Restaurants primarily operate under the Einstein Bros. Bagels, Noah’s New York Bagels, and Manhattan Bagel Company brands. It commenced operations in 1993, and since then, has grown considerably due to a number of acquisitions, as well as the opening of company-owned restaurants. Franchising has also helped bolster the company’s store count and market reach. As of January 3, 2012, it had 773 restaurants in 39 states and in the District of Columbia. The Colorado-based restaurant chain employs more than 6,500 individuals.

Roughly two-thirds of Einstein’s annual top line is derived from sales during breakfast hours. The breakfast market is a fiercely competitive battle ground, and Einstein goes head-to-head with several well-established companies. Although not considered to be a fast-food establishment, Einstein must compete with McDonald’s (MCDFree McDonald’s Stock Report) and other such businesses. In addition, recently, several big chains, like Starbucks (SBUX), Panera Bread (PNRA) and, Subway (privately owned) have increased their breakfast menus and have allocated material funds to increasing customer awareness through marketing and advertising campaigns. For Einstein to remain successful, it must continue to offer quality food items, at reasonable prices, that satisfy customers.

Einstein utilizes a great deal of wheat, coffee, and dairy products in order to produce its menu items. Weather and economic conditions can meaningfully alter the supply and demand of particular goods which, in turn, can impact Einstein’s revenues and margins. Global demand and prices for many of these raw materials has materially increased of late, which has added to the company’s operating costs. In an effort to mitigate the risk of increasing market prices, the company works with a third party advisor to hedge against rising commodity costs. Additionally, Einstein Noah can elect to pass on some of those additional expenses to consumers. However, if it were to raise its prices too much, some customers will surely turn to its competitors, particularly the fast-food purveyors, which typically offer similar products at lower price points.

Furthermore, Einstein obtains the bulk of its ingredients from just a few suppliers and vendors. For instance, it purchases all of its cream cheese from just one source. Einstein’s reliance on just a few key suppliers could become a problem, if one of those companies experiences a production or distribution problem. A reduction in the quality of products would probably also hurt Einstein’s operations.   

The Stock

Einstein Noah Restaurant Group completed its initial public offering (IPO) in 1996. At that time, 2.5 million shares were sold at an average price of $5.50 per share. National Securities Corp. acted as the lead underwriter. In June 2007, a secondary offering occurred. Five million shares were sold at $18.00 per share. Since the IPO, the company’s stock has traded on the NASDAQ Exchange under the ticker BAGL.

The money raised from the stock offerings, as well as profits from operations, has helped Einstein increase its store count, as well as support a quarterly dividend. The first distribution occurred in February 2011. At this time, the equity’s dividend yield is materially higher than the Value Line median and the Restaurant Industry average. Thus, income investors may want to take a look here.

Recent Developments

In conjunction with the company’s 2012 first quarter results, Einstein’s Board of Directors announced it has authorized a review of strategic alternatives available to the company. This includes a possible business combination or sale in order to maximize value for stockholders.

There is no timetable for the review, nor is there any assurance that the evaluation of strategic alternatives will result in any transaction. Greenlight Capital, L.L.C., a hedge fund run by David Einhorn, has a roughly 64% ownership stake in the company, which means the firm has enough voting power to determine whether a change in control of the company can occur.

For a more detailed evaluation of Einstein’s current business prospects and the stock’s investment merits, subscribers are advised to monitor our regular quarterly coverage in The Value Line Investment Survey, while keeping an eye out for Supplementary Reports when breaking news takes place.    

At the time of this article’s writing, the authors did not have positions in any of the companies mentioned.