We remain Neutral on restaurant company Panera Bread Co. (PNRA). While we view the company’s earnings and revenue growth in the second quarter of 2013 positively; its inability to meet the Zacks Consensus Estimate on both counts, a reduced guidance for same-store sales and a decline in transactions over the last three quarters keep us on the sidelines at the current level.
Why the Reiteration?
On Jul 24, 2013, Panera Bread reported second-quarter 2013 earnings of $1.74 per share, which was higher than the year-ago level by 16.0%. Improvement in the top line coupled with efficient cost control measures boosted year-over-year earnings growth during the quarter. Revenues grew 11% year over year mainly bolstered by increases in all categories including company-owned bakery-cafe revenues, franchise royalties and sales of fresh dough to franchisees.
The company’s operating margin increased 60 basis points backed by better margins on fresh dough and other product sales to franchisees and lower operating expenses. Panera increased prices by 1.7% during the second quarter to offset inflation. Apart from these, we prefer the company’s strong pipeline with varied menu offerings, its sound marketing proposition and franchisee acquisition initiative.
However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. Panera trimmed its expectation for full-year same-store sales twice in the first half of 2013.
Further, Panera plans to invest heavily in its operational capabilities including initiatives related to information technology to serve its customers better. This expenditure is expected to be back-half loaded in 2013 and the benefits of these investments will not be realized before late-2014 and 2015, thus pressurizing its bottom line.
Panera Bread currently carries a Zacks Rank #4 (Sell). Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN), Domino’s Pizza Inc. (DPZ) and Burger King Worldwide Inc. (BKW), all carrying a Zacks Rank #2 (Buy).
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