Einstein Noah Restaurant Group Reports Third Quarter 2009 Financial Results

Einstein Noah Restaurant Group, Inc. (NASDAQ: BAGL), a leader in the quick-casual segment of the restaurant industry operating under the Einstein Bros.® Bagels, Noah's New York Bagels®, and Manhattan Bagel® brands, today reported financial results for the third quarter ended September 29, 2009.

Selected Highlights for the Third Quarter 2009 Compared to Third Quarter 2008:

• Total revenues declined modestly to $100.0 million vs. 100.9 million in the third quarter of 2008.
• System-wide comparable store sales decreased (2.7%) while transactions decreased (2.1%) continuing to reflect substantial improvement from the beginning of the year.
• Corporate margins in the third quarter were 18.6% compared to the prior year’s 19.0% despite incremental $0.6 million in marketing spending as well as increased catering support.
• Marketing investment continued to improve Company store transactions with breakfast transactions approximately flat compared to the prior year period.
• GAAP net income and diluted EPS were $60.9 million and $3.65 respectively, vs. $4.5 million and $0.28 in the third quarter of 2008. The 2009 period included a deferred tax benefit of $56.8 million and approximately $750,000 of accrued additional redemption on the Series Z Preferred Stock. The 2008 period included a $1.9 million charge for California wage and hour settlements.

Jeff O’Neill, Chief Executive Officer and President of Einstein Noah, stated, “System-wide comparable store sales and transaction performance reflect substantial improvement from the beginning of the year when our current marketing and merchandising initiatives were implemented. These efforts are ongoing, and are intended to serve as a foundation for sustainable long-term growth as we’ve previously stated. Despite the challenges of the current economic environment, we remain confident that our progress to build awareness, trial, and frequency will continue to gain momentum and position Einstein Noah for improved performance as we move toward 2010.”

O’Neill continued, “In addition to our pipeline of new products, including healthier options, we are also at the forefront of menu innovation. In combination with other corporate initiatives, we expect our efforts will build brand equity, facilitate strategic unit expansion, and create long term value for shareholders.”

Third Quarter 2009 Financial Results

For the third quarter of 2009, system-wide comparable store sales decreased (2.7%) while total revenues fell a modest 0.8% to $100.0 million from $100.9 million in the third quarter of 2008. Company-owned restaurant sales decreased 1.3% to $91.2 million, mostly as a result of a 3.1% decrease in comparable store sales, which was partially offset by a net increase of six additional company-owned restaurants since October 1, 2008. Similar to the preceding quarter, the Company continued to invest in marketing initiatives to build traffic and drive awareness of its brands. These efforts continued to improve the trend on transactions for the quarter to (1.5%) versus declines of (8%) to (9%) at the beginning of the year. Marketing initiatives and coupon-related discounts increased $0.6 million and $0.7 million, respectively compared to the prior-year period. Company-owned restaurant gross profit was $16.0 million, or 17.5% in the third quarter of 2009, compared to $17.2 million, or 18.6% in the third quarter of 2008.

As a percentage of company-owned restaurant sales, company-owned restaurant cost of goods sold were favorable by 110 basis points in the third quarter of 2009 compared to 2008, and the Company expects the cost of major agricultural commodities to decrease approximately $0.4 million in the fourth quarter of 2009 compared to the same period in 2008. Labor costs, as a percentage of company-owned restaurant sales, rose 90 basis points in the third quarter of 2009 compared to the prior-year period due to an investment to increase our catering presence, an increase in health benefits costs and higher minimum wages.

New Units and Development

The Company also benefitted from a net increase of 29 additional license restaurants and four franchise restaurants since October 1, 2008. The effect of the new locations, helped drive franchise and license related revenues up 17.0% to $1.8 million in the third quarter of 2009.

Restaurant openings during the third quarter of 2009 consisted of 15 outlets including, two Einstein Bros. company-owned restaurants, two Einstein Bros. and one Manhattan Bagel franchise restaurants, and ten Einstein Bros. licensed restaurants. Three outlets were closed during the period (two company-owned locations and one licensed location).

In the fourth quarter of 2009, the Company anticipates the opening of three new company-owned Einstein Bros. restaurants, one to three additional franchised restaurants, and up to 13 additional Einstein Bros. licensed restaurants.

The Company also maintained its franchise momentum, recently signing four new development agreements bringing the total to date up to 12 agreements for the development of 56 Einstein Bros. restaurants. Six new franchise locations have already opened and 50 new franchise locations are scheduled to open in the coming years.

Other Operating Items

Manufacturing and commissary revenues held steady at $7.0 million in the third quarter of 2009, while gross profit increased to $0.9 million, compared to gross profit of $0.5 million in the third quarter of 2008. This improvement was attributed to moderate price increases, lower raw ingredient costs, as well as production and labor efficiencies at the Company’s bagel manufacturing facility.

General and administrative expenses increased to $8.1 million in the third quarter of 2009 from $7.7 million in the third quarter of 2008.

Net income was $60.9 million in the third quarter of 2009, or $3.65 per diluted share, compared to net income of $4.5 million, or $0.28 per diluted share, in the third quarter of 2008. The comparability between periods was affected by the third quarter net income tax benefit of $56.8 million including $61.0 million attributable to recognition of the benefit from the reversal of substantially all of our valuation allowance on the Company’s deferred tax assets. Net income in the third quarter of 2008 included a $1.9 million charge related to two California wage and hour settlements for which there is no comparable in the current year.

Rick Dutkiewicz, Chief Financial Officer of Einstein Noah, said, “In the last two quarters, we have taken aggressive actions to streamline our expense infrastructure and drive productivity improvements in the areas of SKU rationalization, labor efficiencies, and food cost management. These actions along with favorable commodity costs resulted in an 110 basis points improvement in cost of goods versus prior year, which helped to limit sales deleverage despite higher labor, catering, and marketing costs. We also strengthened our financial condition by generating approximately $13.5 million of free cash flow year to date. We are continuing our upgrade program for select company-owned facilities, and building new franchisee relationships, which will further expand our recurring royalty stream. We reversed our valuation allowance and reported a substantial deferred tax benefit this quarter due primarily to our continued and projected profitability and to a lesser extent the favorable ruling we received from the Internal Revenue Service. On a go forward basis, our earnings will now be fully taxed from a GAAP standpoint, but the utilization of our net operating losses will eliminate the majority of our cash taxes.”

Conference Call Today

The Company will host a conference call to discuss third quarter 2009 financial results today at 3:00 p.m. Mountain Time (5:00 p.m. Eastern Time). Hosting the call will be Jeff O’Neill, president and chief executive officer, and Richard Dutkiewicz, chief financial officer.

The dial-in numbers for the conference call are 1-877-407-0784 for domestic toll-free calls and 1-201-689-8560 for international. The conference ID is 335738. A telephone replay will be available through November 12, 2009, and may be accessed by dialing 1-877-660-6853 for domestic toll-free calls or 1-201-612-7415 for international. Participants must enter account 3055 and conference ID 335738.

To access a live webcast of the call, please visit Einstein Noah's Web site at www.einsteinnoah.com. A replay of the webcast will be available on the website for at least four weeks.

About Einstein Noah Restaurant Group

Einstein Noah Restaurant Group is a leading company in the quick casual restaurant industry that operates locations primarily under the Einstein Bros.® Bagels and Noah's New York Bagels® brands and primarily franchises locations under the Manhattan Bagel® brand. The company's retail system consists of more than 600 restaurants, including more than 100 license locations, in 36 states plus the District of Columbia. It also operates a dough production facility. The company's stock is traded under the symbol BAGL. Visit www.einsteinnoah.com for additional information.

Forward Looking Statement Disclosure

Certain statements in this press release constitute forward-looking statements or statements which may be deemed or construed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "forecast," "estimate," "project," "plan to," "is designed to," "expectations," “prospects,” "intend," "indications," "expect," "should," "would," "believe," “target”, "trend", “contemplate,” “set the foundation for” and similar expressions and all statements which are not historical facts are intended to identify forward-looking statements. These forward-looking statements involve and are subject to known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance (financial or operating), or achievements to differ from the future results, performance (financial or operating), or achievements expressed or implied by such forward-looking statements. These factors include but are not limited to (i) the results for the 2009 third quarter and period over period revenue, gross profit, operating income, net income, depreciation and amortization, comparable store sales and margin performance are not necessarily indicative of future results, and our expectations for full year 2009 results and improved performance in 2010 are subject to shifting consumer preferences, economic conditions, weather, competition, seasonal factors and cost containment initiatives, among other factors; (ii) our ability to improve transactions and our long-term growth are dependent upon consumer acceptance of our products and marketing initiatives, general economic and market conditions, among other factors; (iii) our ability to continue to improve store level margins and contain costs is dependent upon the success of our plans for productivity improvements, particularly SKU rationalization, labor efficiencies and food cost management, which, in turn, are dependent upon our ability to execute on these initiatives and the cost of agricultural commodities; (iv) the ability to develop and open new company-owned, licensed and franchised restaurants and continue our upgrade program for company-owned restaurants and opportunities for franchised and licensed locations is dependent upon the availability of capital, the availability of desirable locations, reaching favorable financing and lease terms, as well as the availability of contractors and materials, and the ability to obtain necessary permits and licenses; (v) our ability to expand our development pipeline is dependent upon the factors listed in (iv), above, and our ability to attract franchisees and licensees, negotiate favorable agreements, and their ability to secure financing; (vi) our ability to expand our recurring royalty stream is dependent upon our ability to attract successful franchisees and licensees; (vi) our ability to obtain lower costs for agricultural commodities is dependent upon weather, crop sizes and production, the market, economic conditions, including market and inflationary pressures; (vii) our ability to build brand equity, facilitate unit expansion and create long-term value for our shareholders is dependent upon the success of our initiatives, financial results and the factors listed above, among other factors. These and other risks are more fully discussed in the Company's SEC filings.