Is Panera Bread a Buy After a Sell-Off?

Investors weren't too happy with Panera Bread's (NASDAQ: PNRA  ) second-quarter results on Tuesday. Heading into the report, the company undoubtedly faced tough expectations. Now, with shares down about 10%, is this a buying opportunity?

A mixed bag
I was watching three metrics in particular on Tuesday: comps, store openings, and revenue growth. Here's how each metric fared.

Comps: Company-owned comparable net bakery-cafe sales were up 3.8%, year over year. Last quarter, comps were up 3.3%. After adjusting for a 100-150 basis points of unfavorable weather impact last quarter, however, comps this quarter actually fell sequentially, from about 4.3%-4.8%, to 3.8% -- a disappointing (or at least unexciting) and meaningful decline.

Notably, however, comps often tend to fluctuate from quarter to quarter, making year-over-year comps a tough metric to put a finger on. Zooming out a few quarters, therefore, provides a better look at overall trends.


Source: Quarterly SEC filings for quarters shown.

Adjusting for the company's second-quarter unfavorable weather impact on comps, the first quarter marks a new low for Panera Bread -- definitely not a good sign.

But is Panera Bread to blame for weakening comps? Not necessarily. In other words the decline isn't likely due to poor (or less efficient) execution on Panera Bread's part. Weakening comps is a phenomenon shared by many restaurant operators lately. The operating environment, overall, is simply becoming more challenging. Problems range from aggressive promotion from competitors, to frugal consumer spending, to increasingly more competition from the emergence of industry participants in the fast-casual category.

Whether or not it's a company- or an industry-specific problem, a tougher operating environment is never good. Even worse, the only force that may subside in this operating environment could be frugal spending. But betting on that would be mere speculation.

Store openings: Panera Bread had excellent news to report as far as store openings go. Unfortunately, this news seemed to get buried in some of the less fortunate metrics. The company's system-wide bakery-cafe count increased to 1,708, up 35 from last quarter. That's a nice addition compared to the company's growth of 21 stores last quarter. Even better, management went out of its way to inform shareholders that it expects "to be at or above the high-end of target range of 115 to 125" new bakery-cafe openings for FY 2013.

Revenue growth: Revenue was up just 11% from the year-ago quarter, a growth rate slightly lower than last quarter's 13% year-over-year growth rate. Once again, this is reflective of the company's increasingly challenging operating environment.

Undervalued or not?
Though the results definitely echo the challenges that many restaurant operators are facing today, were Panera Bread's results bad enough to merit a 10% sell-off?

Let's add some perspective by comparing Panera Bread to fast-casual peer Chipotle Mexican Grill (NYSE: CMG  ) .

Company

Price/Sales

Price/Earnings

Price/Operating Cash Flow

Panera Bread

2.3

27.1

16.4

Chipotle

4.2

42.2

23.8

Source: Yahoo! Finance.

Yes, Chipotle is growing more rapidly than Panera Bread. Its revenue was up 18.2% from the year-ago quarter in Chipotle's most recent quarterly results. Comps for Chipotle look a bit tastier, too: up 4.5% (after adjustments for a quarter with one fewer day than the year-ago quarter).

But Chipotle's growth story comes at a significant price to investors. Measured by price-to-sales, price-to-earnings, and price-to-operating cash flow, Chipotle is significantly more expensive than Panera Bread.

Even if Chipotle's laser-focused business model makes the burrito maker more competitive than Panera Bread in a tougher operating environment, Panera Bread's reasonable price (now even more reasonable thanks to a sell-off) makes the baker seem like the safer bet for investors bullish on fast-casual concepts.

However, even after the sell-off, fast-casual is still a costly business to get into. I'm not quite ready to fork out the premium required to buy Panera Bread shares at this point, but I could be underestimating fast-casual and health-food trends in general.

It's not cheap enough for me to buy, but I'm adding Panera Bread to my watchlist.

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