Panera Fails To Make Enough Bread

In the battle for carb-eating customers, Panera Bread Company (NASDAQ: PNRA  ) executives are not happy with themselves. On Oct. 22 Panera reported its results for the third quarter. While the results certainly were above the year-ago period and showed positive gains in revenue, same-store sales, and net income, they were below the more optimistic expectations management set for itself.

Results
Adjusted diluted EPS was up 9% to 1.35 compared to $1.24 last year. Revenue was up 8% to $573 million compared to $529 million. Systemwide same-store sales increased 1.3%. Most of the increase was due simply to price increases, since the number of transactions actually fell 1%. Having higher guest checks is great, but not so much when they're accompanied by a falling number of guests walking in the door.

Overall, the results certainly weren't terrible. Systemwide sales hit record levels for the quarter, but that was because new restaurants opened up. Panera Bread opened 17 new restaurants, while its franchisees opened 15, which brought the total up to 1,736 at the end of the quarter.

Outlook
Nothing burns investors more than to see the phrase "the Company is revising its target." Panera Bread clipped its fourth-quarter EPS guidance range 6%-7% to $1.91 to $1.97. It targeted same-store sales growth of between 0% and 2% compared to its original 3% to 5%. For the first 27 days in the quarter, Panera Bread reported only 1.6% growth, which was far below the original 3% to 5% guidance. Ouch. When you factor in that the company had a 1.7% average price increase, this is actually negative growth in the number of transactions.

CEO Ron Shaich was humbled and didn't say much to sugar coat it. He stated, "While these comparable store sales continue to be above average for the industry, they are below our expectations. As one might expect, our recent comp performance has led to a great deal of self-examination and a thorough review of how we compete and how we operate our business." Acceptance and focus on change instead of denial is certainly better than the alternative. He outlined a number of identified weaknesses and strategic plans to address the problems in 2014.

Moving forward
Shaich mentioned capacity and throughput constraints that lead to a "less differentiated experience." This implies that the stores haven't been flexible enough to cater a bit to local taste, which you commonly see with other chain restaurants. Panera Bread is planning a new national advertising campaign and "enhanced access for customers," though no further details were given.

Competitors
Panera Bread's shortfall in its fight for the carb tooth probably came as a surprise to most investors. Chipotle Mexican Grill (NYSE: CMG  ) couldn't feed its customers fast enough. Last quarter it saw its same-store sales leap 6.2%, blowing Panera Bread out of the water. Unlike Panera, Chipotle attributed the drive in sales to actual guest traffic rather than price increases. Chipotle Mexican Grill expects similar same-store sales growth for the fourth quarter. 

Einstein Noah Restaurant Group (NASDAQ: BAGL  ) doesn't report its results until Halloween, but as of last quarter its efforts to turn dough into dough have been paying off. Though its same-store sales only increased a modest 0.7%, this compared to a 0.6% decline from the quarter before for an overall improvement of 1.3%. CEO Jeff O'Neill noted:

"...transactions experienced their smallest decline since the first quarter of 2011 ... With our in-store customer-centric strategy and local and national marketing support now firmly in place, we are poised to reap the benefits of these investments through the back half of the year and beyond with continued traction in both comparable store sales and transactions."

Seems like everybody in the carb industry lately is happy with the direction things are going--except for Panera Bread.  

Final foolish thoughts
Though Panera Bread may be disappointed with its results, its chain continues to be a winner overall as evidenced by its record sales. The fact that Panera Bread's management recognizes, identifies, admits, and immediately begins to address its shortfalls is a sign of great management. Panera Bread is operating in quite a carb-friendly environment, so watch to see how its new initiatives "Pan" out.

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  • Report this Comment On October 27, 2013, at 3:11 PM, byteMeImblonde wrote:

    Oh no!! My heart really goes out to all those rich people that must eat their sandwiches with their delicate fingers sans bread and risk fouling their expensive manicures with copious globs of mayonaise!! Oh lord how ever shall I sleep tonite?? Perhaps I'll try to find a warmer heating grate - they did say it's gonna frost tonite,,,might have to stuff my sox with newspaper too.

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