Filling Up on Panera

Panera (Nasdaq: PNRA  ) reported fourth-quarter and full-year earnings last week, and it marks the end of a rather inconsistent year for the bakery and cafe.

Fourth-quarter EPS increased 19% on a pro forma basis. Adding back a $0.03-per-share charge related to Panera's deal to acquire interest in bakery and cafe Paradise, and accounting for stock-based compensation and that the fourth quarter this year included an extra week as the company shifted its calendar, the company earned $0.62 per share versus $0.52 last year.

Panera's revenues increased 25% to $232.9 million in the quarter. Same-store sales may have increased 4% for the year, but they increased only 2% in the quarter.

You might recall that last quarter, Panera's expenses were increasing. This time around, the operating margin decreased to 13.1% this quarter from 14.5% in the comparable 13-week period last year. Operating margin for the year decreased to 11% from 12.7%. (Unfortunately, we can't check Panera's balance sheet and cash flow statement yet because they weren't included in the press release.)

Meanwhile, if Panera's same-store sales have seemed more tepid here lately, that is going to continue in the first quarter, when the company said comps will be flat to up 1%. Panera said that comps will increase 2% to 4% in 2007, although it believes earnings strength will grow in the second and third quarters.

If you check out Jeremy MacNealy's coverage of Panera's conference call, you'll see that the company admitted it was a choppy year and said it's having troubles attracting as many lunchtime customers as it would like. Jeremy pointed out that Panera's has some serious competition from the likes of Starbucks (Nasdaq: SBUX  ) and even McDonald's (NYSE: MCD  ) , which has been putting a bit more class into its menu lately, what with healthier options and gourmet coffee.

Panera said that in 2007 it will focus on further differentiating itself from the competition, and that should be of interest to shareholders. The company said it expects to increase earnings in 2007 by the low-to-mid 20% range.

Is this a good time to take a bite out of Panera? Maybe. If investors got overly optimistic early last year, that has subsided over the course of the last year -- the stock has fallen 20.6% in the last 12 months. A forward P/E of 21 may sound a bit high, yet it's lower than that of Starbucks and in line with Panera's expected earnings growth in 2007. On the other hand, Panera isn't exactly the juggernaut that Starbucks is and Panera has plenty of competition from many sources, so investors would do well to watch what the company does to further differentiate itself in the coming year.

For related Foolishness, check the following articles:

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Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


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