Worst Stock for 2008: Panera Bread

Resolve to keep your portfolio healthy: Help us pick the worst stock for 2008.

Businesses can -- and should -- be analyzed from many angles. Crunching the numbers is obviously important, but beyond that, immersing yourself in a company's operations by acting as a consumer, or by interacting with employees and suppliers, allows you to paint a better picture of the firm's future.

Studying a business from the consumer perspective is easy when the subject is a company like Panera Bread (NYSE: PNRA  ) . I've been a longtime fan of Panera's menu lineup and have surely contributed a large percentage to its top line. During college, I loved the franchise so much I even applied for a part-time job there. That is where my love for the company -- not its food -- came to a screeching halt, and the experience helped pave the way to my eventual nomination of Panera as the worst stock for 2008.

What truly lies behind the bakery counter
As an employee, I got a behind-the-scenes tour that allowed me to dig in and observe how Panera truly operates. I discovered a poorly run restaurant, managed inefficiently. I got to witness an excessive amount of food being wasted every day (as employees tossed bread rolls at each other in the back), and beyond that, my 21-year-old mind was perplexed by upper management's inability to recognize that they are fighting to operate in a dinner market they can't compete in.

Destinations like Cheesecake Factory (Nasdaq: CAKE  ) and Brinker's (NYSE: EAT  ) Macaroni Grill and Chili's concepts draw in a large chunk of the dinner crowd, so the trivial sales Panera generates in the evening cannot justify the rising expenses and the cost of keeping the restaurants open during dinner hours.

You don't need a financial background to observe an empty Panera Bread during the last few hours before closing time. As an employee, after approximately 5 p.m., I found that the number of customers fell dramatically. Consequently, we would stand around talking and cleaning until closing at 9 p.m. -- fully staffed. With minimum-wage costs on the rise, it is becoming more and more expensive for Panera to pay a bunch of college students to stand around in a bakery generating very little revenue.

Management attempted to draw in a larger dinner crowd with the new Crispani Pizza, but the gourmet offering only tacked on greater labor costs without producing strong sales. That's no surprise, though. The Crispani tastes great, but Panera is probably the last place a family would think to go for a pizza night. Yum Brands' (NYSE: YUM  ) Pizza Hut and Domino's (NYSE: DPZ  ) offer more economical prices, and California Pizza Kitchen (Nasdaq: CPKI  ) boasts a much larger selection of delicious gourmet pies.

Margins losing their flavor
Panera is a well-liked restaurant business, and it has a vast amount of growth potential, as there are still a mere 1,167 bakery-cafes. The potential revenue generation for Panera and its strong balance sheet are very promising characteristics for this company. But current operational management is weak. And no matter how popular the place may be as a breakfast and lunch destination, Panera's strong revenue growth is simply not falling to the bottom line.

6/2006

9/2006

12/2006

3/2007

6/2007

6/2007

   Gross Margin

44.4%

41.4%

41.2%

40.5%

40.2%

39.5%

   EBIT Margin

12.2%

11.1%

11.0%

10.5%

9.6%

8.9%

   Net Income Margin

8.0%

7.3%

7.1%

6.7%

6.2%

5.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

Ingredient costs are rising more rapidly than sales and menu prices. Customers are also shifting away from Panera-manufactured breads and bagels to lower-margin salads. And the policy of using fresh dough each day causes the company to suffer when weather conditions slow traffic, because unused dough must be tossed out.

Economically, 2008 isn't expected to be any easier for consumers, so retailers and restaurants will most likely continue to struggle. Panera is already inundated with troubles, so the challenging macro economy will be even more daunting for the company, leaving the near future looking crusty and stale.

The Hidden Gems Pay Dirt team believes Panera is a turnaround story waiting to happen. They recommend buying the stock at its current beaten-down price. For my part, though, I don't think the company stands a chance to revive its bottom line in 2008. So what do you think -- is Panera the worst stock for 2008? Head over to Motley Fool CAPS and mark it "underperform" if you agree with me, and check back next week when we reveal the "winner."


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 26, 2008, at 3:09 PM, SandraCA wrote:

    Does Panera include the stores that they just opened as part of their sales? In order words, does Panera keep opening stores to show a positive sales performance?

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