We expect Missouri-based restaurant chain Panera Bread Company (PNRA) to beat expectations when it reports third-quarter 2014 results on Oct 28. Last quarter, it posted a negative surprise of 0.6%. Let’s see what is in store for the company this season.
Why a Likely Positive Surprise?
Our proven model shows that Panera is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: The company’s Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +0.70%. This is a very meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Panera Bread has a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Panera’s Zacks Rank #3 and +0.70% ESP makes us confident of an earnings beat.
Factors to Consider
In the first half of 2014, the company posted sluggish comps, reflecting the impact of a severe winter that hurt traffic and the Easter-shift. However, the company should experience a turnaround in the upcoming quarter backed by its extensive menu innovation and digital initiatives. In fact, Panera’s intent to drop all artificial additives from its menu and use antibiotic-free chicken in all its items should help drive consumer traffic in the third quarter.
However, Panera’s margin in the third quarter will remain under pressure due to incremental investments in digital initiatives and menu innovations associated with the Panera 2.0 program. Despite the long-term benefits associated with the program, the company will incur additional expenses in the to-be-reported quarter.
Additionally, with the rise in prices of meat and seafood due to diseases and widespread drought, commodity costs are expected to increase. This is especially alarming for the company as it operates in an intensely competitive segment and this might dent its profits.
Stocks to Consider
Panera is not the only firm looking up this earnings season. We also anticipate earnings beat from three other companies in the restaurant industry:
Burger King Worldwide, Inc. (BKW), with an Earnings ESP of +3.70% and a Zacks Rank #1 (Strong Buy).
Red Robin Gourmet Burgers Inc. (RRGB), with an Earnings ESP of +2.94% and a Zacks Rank #3.
Einstein Noah Restaurant Group, Inc. (BAGL), with an Earnings ESP of +4.55% and a Zacks Rank #3.
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