Au Bon Pain mulls remedies, pares back expansion plans

Nation's Restaurant News, August 28, 1995 by Richard L. Papiernik

BOSTON -- Au Bon Pain, the company that spread its fresh-baked pastry, bread and sandwich cafe concept across America, is trying to work up a new recipe in the second half of 1995 to correct problems with falling earnings, deteriorating margins and an acquisition that has not yet risen to expectations.

Until management and operational changes are further developed, the company is trimming back on plans for unit expansion at its Au Bon Pain core concept as well as at the St. Louis Bread units acquired about 20 months ago. Company officials also conceded that some underperforming stores opened in 1994 in California and in Maryland may be closed.

In its second-quarter earnings report, the company said that through 1995 the number of new Au Bon Pain openings, after completion of three already under way, is being held to 15 units, rather than the 20 projected earlier in the year. St. Louis Bread will meet its already downward-revised projection of 20 units this year, primarily because the last nine cafes are already under construction.

For 1996, unit expansion has been cut in half, with 20 to 25 total new openings slated for both concepts rather than the 50 to 60 units projected earlier. Au Bon Pain, the company said, will see eight to 10 new units, and St. Louis Bread will open between 12 and 15 units.

The planned reductions are being made, the company said, because of "the significantly greater impact on current earnings of the transition costs at Au Bon Pain and the expected management transition at the end of the earn-out period at St. Louis Bread."

St. Louis Bread founder and executive vice president Ken Rosenthal will be staying on when the earn-out period finishes on Dec. 31, said Anthony Carroll, chief financial officer of Au Bon Pain. But sweeping top-level management changes will begin in January with the move of Rick Postle into the presidency at that division. "There will be fairly substantial changes throughout the highest level positions, and we want the new management organization to take hold before we continue the growth," Carroll said.

Explaining the quarterly results, the company noted a doubling of St. Louis Bread units over the last year and said: "In the midst of high growth, current management was not able to maintain store-level margins at historical levels. In particular, the cannibalization of sales in certain existing stores in St. Louis, without appropriate expense reduction, contributed to the lower operating margin."

At Au Bon Pain, the company said, unit-level and operational-management changes are under way during the temporary delays in expansion as the company attempts "to facilitate full focus on improvement in the Au Bon Pain margins."

The company explained that margins at Au Bon Pain were affected by retail management transitions that had a "substantial impact in terms of human resource costs and field-level dislocation."

Other margin pressures cited by the company included a "slight decrease" in the use of baked goods, "which have a relatively lower food-cost percentage"; price increases in lettuce, coffee and flour; and communication and rollout costs of the change to Peet's branded coffee.

For the quarter, the companywide operating margin dropped to 2.7 percent from 7.6 percent in the previous year's second quarter. Operating income was down 55 percent, to $1.41 million from $3.1 million.

That follows on a 1994 fiscal year performance in which operating margins fell to 8.5 percent from 11.5 percent in 1993.

"There has been considerable pressure on margins as we go about making changes that are needed for an organization that has been growing so quickly," said Ronald M. Schaich, co-chairman and chief executive of Au Bon Pain. "We're confident that we're moving in the right direction, and we're already seeing a positive impact.

"But it's a little like the process of a healthy woman trying to get pregnant -- you've got to keep working at it."

Schaich said he was confident that the St. Louis Bread acquisition would be a long-term benefit for the company "as we give the new management time to get stable and solid."

The company's report for the second quarter and first half of its 1995 fiscal year shows that some serious work is needed to bring the company back to a positive growth mode.

Schroder Wertheim analyst Wayne Daniels cut earnings projections dramatically following the report, to 38 cents a share, from 60 cents, in 1995 and to 50 cents a share, from 85 cents, in 1996.

Au Bon Pain's net income fell nearly 80 percent to $330,000 from $1.64 million in the comparable quarter of 1994. Revenues, however, were up 26 percent, to $51.5 million from $40.9 million primarily owing to the addition of 52 new units since the 1994 quarter. The company also said it had "modest" combined comparable-restaurant sales of 0.9 percent systemwide.

Comparable-restaurant sales at St. Louis Bread for the quarter were down 5.2 percent while Au Bon Pain unit comparables were up 1.9 percent.

For the first six months, ended July 15, net income was down 43 percent, to $1.93 million from $3.42 million in the previous year's first half. Revenues were up 31 percent, to $114.47 million.