Manhattan Bagel on a roll to fight ill winds from Pacific

Nation's Restaurant News, Dec 9, 1996 by Richard L. Papiernik

The troublesome acquisitions of two California chains continue to take big bites out of Manhattan Bagel Co. Inc., the Eatontown, N.J.- based bagel maker, store operator and franchisor that bought the chains in 1995 to launch its West Coast expansion.

For instance, the company could have declared a profit of $1.28 million for the nine months ended Sept. 30, a gain of 41 percent from its $910,390 profit in the comparable period of 1995. But it got hit with some hefty onetime charges connected to those acquisitions.

It's apparent that there's a big gap between could-haves and actualities. With more than $4 million in charges resulting from its California operations, Manhattan Bagel lost $1.59 million for the nine months.

Still, the 280-unit company keeps rolling up sales growth and forging retail and co-branding partnerships as it continues to face the costly head winds blowing in from the Pacific.

Manhattan Bagel's latest hit is a writedown related to the recent shuttering of its Los Angeles production plant. The company explained that the dough being produced there was not winning the same kind of consumer plaudits received in other areas.

"We've decided to take the same product that made us successful on the East Coast and get that out to California," said Jason Gennusa, Manhattan Bagel president and chief executive, adding that the product in Southern California was not up to our current standards."

"Rather than compromise on quality, we elected ... to reopen our Meridian Road plant in New Jersey," he said. "We will continue to ship the bagels from New Jersey until our new West Coast facility equipped to our specifications is built."

The company is searching for a new site and using the old one in suburban Canoga Park as a distribution warehouse. "It probably is going to take us a couple of months before we commit to a site for the plant," Gennusa said.

Meanwhile, the shutdown, including the writedown of machinery, equipment and leasehold improvements at the Los Angeles plant, triggered a $500,000 onetime charge against earnings for the third quarter ended Sept. 30. Still to be detailed are thousands of dollars in extra costs involved in the coast-to-coast shipping of bagels.

Earlier this year problems at Manhattan Bagel's I&J Bagel subsidiary, which runs the 28-unit I&Joy chain in the Los Angeles area, caused the company to revise its first-quarter financial report downward by $350,000. Triggering the revision were accounting irregularities that Manhattan Bagel said were not apparent during the preacquisition due-diligence search. A number of shareholders filed suit.

In the second quarter the problems at I&J resulted in a $713,000 charge, or $420,670 after taxes, "for professional fees associated with investigation of bookkeeping and accounting practices ... as well as related settlements of certain consulting agreements."

The operational status of Manhattan Bagel's eight-unit Holey Bagel acquisition in the San Francisco area also is currently under review. "We're making a decision on which units we will continue to operate," Gennusa said, adding that a decision will be made by July 1997 to franchise, sell or close the others.

In the third quarter the company took a $3.1 million charge, or $3.45 million after taxes, related primarily to the writedown of goodwill and other assets at its eight Holey Bagel stores. Gennusa conceded that the expenses hit hard.

"From an immediate P&L standpoint this is a killer, but for the long term this was the right decision," Gennussa said.

Part of that revitalization plan is a program that will cost about $100,000 a unit to upgrade the I&J units.

"You can't just make a decision to change and find that, presto, it's all fixed today," Gennusa said. "In terms of product the I&Joy customers are now getting the best possible bagel they can get in our stores, and we are selling more bagels there than we ever did before. I think sales will go higher once the stores are fully renovated."

In the meantime the company's stock has plummeted from its lofty heights among the top of the industry performers earlier this year. The stock recently was trading at $6.75 a share, at the low point of a 52-week performance ranging between $6.375 and $29.50.

Gennusa said he believed that it would take several quarters of positive results before investors come back with confidence. Though the company showed losses for the third quarter and nine months - of $2.42 million and $1.59 million, respectively - the sales for the quarter were up compared with volume for the comparable period a year earlier. Revenues for the quarter grew 48 percent, to $9.41 million, from $6.37 million. For the nine months they were up 78 percent, to $28.11 million, from $15.76 million.

Much of that was generated from a successful $3.5 million acquisition of the 28-unit Bagel Builders chain and its Specialty Bakeries plant near Philadelphia.

Gennusa pointed out that several other improvements are under way, including "strong sales increases" resulting from a new advertising campaign portraying the company's product in wanted posters as "America's Most Wanted Bagel."