History creates some unease over Einstein Noah move

by Josh Sosland
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Among the many waves of products that propelled the growth of grain-based foods through the 1990s, none was more promising and ultimately disappointing than the boom and bust in bagels. As opposed to earlier products like croissants, high end cookies, muffins and cinnamon rolls, bagels were viewed as healthful and succeeded in multiple channels (wholesale baking, in-store, food service, retail).

While bagels hardly have disappeared, their initial promise faded in the late 1990s when aggressive business expansion plans by bagel restaurant chains collapsed. Prominent among these was Einstein/Noah Bagel Corp., which filed for bankruptcy in 2000 when, the company said, its “resources proved to be insufficient to meet its current and future operational, financial and capital requirements on a current and long-term basis.”

This episode was brought to mind by the recent action by a successor business — Einstein Noah Restaurant Group Inc., a publicly traded company. In recent years, Einstein Noah has been scrappy, working hard and creatively to revive the bagel’s popularity into a vibrant restaurant concept. Against this progress came a recent announcement that the company is considering issuing large amounts of debt to fund a $160 million special dividend to shareholders. The plan was announced coincident with an earnings outlook warning. The proposed debt was described as “speculative” by Moody’s, and Einstein Noah has acknowledged the risks inherent in its business.

“If the weak economy continues for a prolonged period or worsens, it could further reduce discretionary consumer spending, cause consumers to trade down to lower priced products within our restaurants, and/or shift to competitors with lower priced products, which in turn could reduce our guest traffic or average check,” the company said in its recent 10-K.

It is impossible to know with certainty how the company’s new plan will play out, but layering its obvious risks with the company’s early history, this proposed action minimally is disappointing.

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