On Dec 5, we issued an updated research report on Panera Bread Company (PNRA).
On Oct 29, Panera posted dismal third-quarter 2014 with earnings of $1.38 per share missing the Zacks Consensus Estimate by 2.8% due to higher expenses. Earnings, however, increased 2.2% year over year owing to improvement in revenues. Though revenues of $619.9 million increased 8% year over year – due to improved comps, it missed the consensus mark by 0.2%.
System-wide comparable net bakery-café sales increased 1.4%, better than flat comps in the last quarter. Comps at company-owned units grew 2.1%, better than 0.1% improvement in the second quarter of 2014. Comps at company-owned units reflect average check growth of 0.7% and a year-over-year transaction growth of 1.4%. Panera Bread witnessed 0.7% comps growth at franchised-operated units versus 0.2% decline in the previous quarter.
In order to enhance its competitive position, the company has been implementing new strategies, which include the rollout of Panera 2.0, achieving operational excellence, menu innovation and promotional strategies. All these aim at increasing sales and earnings, going forward.
Going forward, the company intends to continue its efforts toward improving operational capabilities. However, this would lead to increase in general and administrative expenses. Also, the company’s aim to open additional units will increase pre-opening expenses.
Moreover, the Panera 2.0 program that aims at speedy service would increase expenses, thereby putting near-term margins under pressure. In fact, the company’s margins have been suffering since 2013 due to several initiatives undertaken by the company such as increasing café hours to 35 per week in Oct 2013.
Meanwhile, like other restaurant chains, food costs remain a matter of concern for Panera. The increase in butter, avocado and bacon costs is expected to remain a headwind. Owing to lower-than-expected growth in average check and higher-than-expected input costs, Panera also lowered its comps and earnings guidance for the year. This Zacks Rank #3 (Hold) company predicts margins to decline 200 to 225 bps in 2014.
Stocks to Consider
Better-ranked stocks in the same industry include BJ's Restaurants, Inc. (BJRI), DineEquity, Inc. (DIN) and Domino's Pizza, Inc. (DPZ). While BJ's Restaurants and DineEquity sport a Zacks Rank #1 (Strong Buy), Domino's carries a Zacks Rank #2 (Buy).
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