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Starbucks, Chipotle Mexican Grill, and Panera Bread: Why They're Still Good Opportunities

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A fast-casual restaurant is one which does not offer full table service. The food, however, is considered to be higher quality than the fare served in typical fast-food shops -- now commonly referred to as "quick-service restaurants." This is a not-so-new but fast-growing concept in dining in between fast food and casual dining, thus the name "fast-casual." 

Another feature of these restaurants is affordability -- the prices are modest as the typical cost of a meal is in the $8 to $15 dollar range.

These outlets may be a good buy for consumers, but investors should proceed with caution as the broader economy waits for the java to kick in. Let's take a look at some top fast-casual food joints.

Panera's third quarter dough
Panera Bread (NASDAQ: PNRA  ) reported third-quarter earnings this week for the period ended Sept. 24.

The fast-casual café chain reported fiscal third quarter net income of $43 million, or $1.48 per diluted share. These figures compare to net income of $37 million, or $1.24 per diluted share for the same time period in 2012 -- a 19% year-over-year increase in diluted earnings per share. 

However, Panera lowered its fourth-quarter guidance because of weak comparable sales. Management now expects fourth-quarter and fiscal 2013 EPS of $1.91 to $1.97, down from a range of $2.05 to $2.11 per share.

Shares have taken a hit of about 6% because of this development combined with a revenue number that missed analysts' estimates. Currently the stock is hovering at $153, slightly off the 52-week high and shares could face more downward pressure in the short term.

While the outfit's brand name is strong, investors should question how long it will be before the share price rises again. In short, the tepid economic recovery may convince consumers to do their own baking this holiday season.

Starbucks' La Boulange challenge
Starbucks'  (NASDAQ: SBUX  )  $100 million acquisition of bakery chain La Boulange this year makes the big barista Panera's key rival. The question remains as to whether Starbucks can take a bite out of Panera's market share.

Panera is still the market leader, but Starbucks currently operates more than 19,000 locations in the global village. Acquiring the La Boulange line is a play to attract more lunchtime customers, and Starbucks expects all of its U.S. stores to carry La Boulange products in the coming year.

Meanwhile, Starbucks' share price is presently trading at about $80 per share, just shy of the 52-week high. Moreover, with a price/earnings ratio of 38, the stock looks to be trading at a premium and investors may be taking money off the table.

Ultimately growth hinges on the success of the La Boulange line and Starbucks' expansion into China. The bottom line is in the numbers of course and investors should keep their eyes open on Oct. 30 when Starbucks will announce third- quarter earnings.

Some like it hot at Chipotle Mexican Grill
Chipotle Mexican Grill (NYSE: CMG  ) cooked up hot numbers in the third quarter as higher foot traffic boosted sales. Total revenue for the quarter rose 18% to $826.9 million while operating income jumped 17% to $137.1 million.

Chipotle's net income rose to $83.4 million, or $2.66 per share, up from $2.27 per share in the third quarter of 2012. Same-store sales increased by 6.2%. The results are due in part to Chipotle's menu additions and marketing efforts.

Store sales were also boosted by the catering services initiated by the company at the start of the year. According to the management, catering sales are close to 1% of total sales at those restaurants that offer the service.

The bottom line
The fast-casual sector will continue to see long-term growth as new players join the battle. While standard bearers like Panera, Starbucks, and Chipotle have already established their brands, future growth depends on menu additions to lure consumers. Meanwhile, there are other fast-causal chains to consider like long time servers Au Bon Pain or Boston Market.

In the end, the challenge to this line of restaurants will be consumers that may be tightening their belts given the sluggish economic recovery, if not their shrinking waistlines. And other consumers may still prefer "two all beef patties, special sauce, lettuce cheese, pickles onions on a sesame seed bun" still being served quickly under the golden arches of McDonald's. 

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Related Tickers

9/30/2016 4:02 PM
CMG $423.50 Up +2.77 +0.66%
Chipotle Mexican G… CAPS Rating: ****
PNRA $194.72 Up +2.42 +1.26%
Panera Bread CAPS Rating: ****
SBUX $54.14 Up +0.69 +1.29%
Starbucks CAPS Rating: ****