We remain Neutral on Panera Bread Co. (PNRA) over the long term, based on second quarter 2011 earnings, the new menu offering and increased positive impact from My Panera loyalty card program. These were partially offset by high unemployment and faltering consumer confidence along with inflated commodity costs.
Panera has remained unruffled by the recent economic slowdown. The company has been able to grow its earnings per share over 20% since last couple of quarters. Its breakfast, lunch, chill, dinner and catering businesses have been growing for the last eight consecutive quarters. While most of its peer companies are concentrating on the transition to a franchisee-based model, Panera is relying on the reverse. The transition affirms management’s confidence in its core business model.
We remain optimistic on the solid pipeline of upcoming new menu offerings as well as more aggressive advertising expenditure planned for the remainder of the year. The third and fourth quarters of this year will see a substantial upgrade in menu offerings. In addition to new products, management intends to capitalize on the increasing demand for its catering business. We believe catering will prove to be a strong growth driver in the years to come. Sales from that program grew 26.0% in fiscal 2010 and contributed nearly 1% to overall same-store sales. Management commented that catering has grown over 20% for the past 6 quarters.
Another key long-term growth driver of the company is the My Panera loyalty program, which was rolled out in November 2010. The program rewards customers for frequently visiting Panera Bread's cafes. In less than a year, the program became widely accepted among customers.
On the flip side, like all restaurant companies, Panera is vulnerable to higher input costs. Panera expects food costs to increase to 4.5% year over year in the third quarter of 2011, with pressure being greater in the fourth quarter. Although Panera plans to take 3% pricing next year, we believe that will be insufficient to weather the full impact of commodity inflation. A slight increase in tax rate for the remainder of the year will also impart a downward bias on the company’s earnings.
Panera, which competes with the likes of Domino's Pizza Inc. (DPZ) and The Cheesecake Factory Inc. (CAKE), currently, retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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PANERA BREAD CO (PNRA): Free Stock Analysis Report
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