Panera Disappoints

Yesterday, right after the market close, Panera Bread Company (NASDAQ: PNRA  ) reported earnings. In lieu of any positive news for the company, shares were down around 0.2% in the hour leading up to its release, a sign that the market was slightly pessimistic about its prospects.

Leading into the earnings release, analysts expected the company to post earnings per share of $1.35 on revenue of $584.8 million. This compares to earnings per share of $1.24 posted in the third quarter of last year and revenue of $529.3 million. Given these expectations, the company would be on track to match the $6.81 per share and revenue of $2.42 billion that the market expects for its current fiscal year.

A Look Back at Panera
Over the past few years, Panera has performed exceptionally well. This is demonstrated by the company's five-year revenue increase of 64% from about $1.3 billion in 2008 to $2.1 billion in 2012, as well as its 157.3% increase in net income from $67.4 million to $173.4 million over the same time horizon.

Even during the company's second quarter of 2013, it performed well as sales increased by 11% from $530.6 million in the same quarter a year ago to $589 million. Likewise, Panera saw its net income rise by 15.6% from $44.1 million to $51 million over the same timeframe, primarily as a result of higher revenue, combined with its selling, general, and administrative (SG&A) expenses declining from 5.8% of sales to 5%.

Panera's success has been the result management's ability to capitalize from a change in consumer tastes as healthier alternatives have become available and at a cost that is not much higher than traditional fast food providers like Yum! Brands (NYSE: YUM  ) . In this article I detailed how Yum! Brands, the parent company of big names like Taco Bell, KFC, and Pizza Hut, has seen (and will likely continue to see) a decline in its business as consumers become more finicky about what goes in their stomach.

Although other players in the restaurant industry have been hit recently, Yum! Brands, which saw a 68% decrease in its earnings per share for its last quarter compared to the same quarter a year ago, might be the biggest chain to be materially affected by a shift toward quick-casual dining. In all fairness, the largest blow to the company last quarter was a writedown of some intangible assets of its Little Sheep acquisition in China as consumers have become concerned about an avian flu outbreak. However, I believe the market is overlooking the fact that the company saw a 13.2% decrease in its revenue in the United States compared to the same quarter a year ago (though same-store sales increased by 1%), which is likely due to competitive pressures from emerging chains like Panera.

Panera's Not the Only Winner!
Though Panera's growth has been tremendous over the past few years, it's not the only company to experience a significant increase in business as consumers become more concerned about the value they receive for the price they pay when ordering a meal. Chipotle Mexican Grill (NYSE: CMG  ) , a quick-casual dining chain, has seen itself grow at an even faster pace over the past few years. For instance, the company has seen its revenue rise by 105% since 2008, while its net income rose by 255.5% by its 2012 fiscal year. Even this year, the company has seen its business boom and its share price rise to an all-time high of $520 even as it failed to meet analyst's expectations.

Panera's Earnings Release
For the company's 2013 third quarter, earnings per share came in above analyst's estimates at $1.48. However, after taking out one-time favorable tax adjustments, the company's diluted earnings per share was brought down to $1.35, precisely in line with estimates. Though this result would appear good to the market, shares sank by around 3.4% after-hours due to revenue for the quarter coming up short at $572.5 million (2.1% below what analysts expected), as comparable-store sales rose by only 1.7%. This was comprised of check amounts rising by 2.7%, partially offset by a 1% decline in transactions.

On top of worse-than-expected revenue, the company released earnings per share guidance of between $1.91 and $1.97 for its fourth quarter, a downward revision from the $2.05 to $2.11 it previously expected. As a result of this revision, the company's full-year earnings guidance can be expected to be somewhere between $6.77 and $6.83 per share, the median of which is slightly below the market's estimate.

Foolish Takeaway
Moving forward, it appears as though Panera has a lot of work to do. The company is very profitable, but the fact that it is growing slower than expected is somewhat disconcerting. On top of its lackluster growth, the company will likely have to contend with cost management, as illustrated by its 1% transaction decline and 2.7% check increase. What this means is that fewer customers are visiting each location but that they are shelling out more for each order they make. In the event that the company cannot keep these metrics under control, it will have significant difficulties proving its value proposition to customers who could otherwise eat at Chipotle for cheaper while receiving the same quality.

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  • Report this Comment On October 23, 2013, at 1:47 PM, megaKC wrote:

    on the "foolish takeaway" paragraph...how can you compare Panera with Chipotle? Panera has 100 times more variety of products while Chipotle is serving up assembly-line burritos and tacos. Although they both may be in the QSR market sector, they have very few similarities.

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