Don't let it get away!
Help yourself with the Fool's FREE and easy new watchlist service today.
This market doesn't accept slower growth from a company that has been known for consistent results. When Panera Bread (NASDAQ: PNRA ) reported earnings growth of just 9%, the stock was given a quick markdown. However, Panera's competitor Chipotle Mexican Grill (NYSE: CMG ) disappointed investors in the past and has regained favor. The question is, are Panera's issues persistent, or can the company cause its stock to rise like its bread?
Is competition the problem or is this Panera's fault?
If Panera's slower sales growth is due to the chain falling out of favor, the road back could be difficult if not impossible. However, if the company's sales are being hurt because Panera simply can't service its customers efficiently enough, that is another issue altogether.
Panera is frequently compared to Chipotle because both chains have more than 1,500 locations, and until recently both companies were reporting fairly consistent revenue and earnings growth. Another restaurant that is compared to these two is Buffalo Wild Wings (NASDAQ: BWLD ) . Though Buffalo Wild Wings is a sit-down concept, and both Panera and Chipotle are categorized as fast-casual, the former is a fast-growing concept that seems to find a home in the same strip malls as the latter.
If we look at the design of Buffalo Wild Wings, Chipotle, and Panera Bread, it's fairly easy to understand why speed of service is a challenge at Panera. The Buffalo Wild Wings experience is tied to the idea of sitting down and watching your favorite game while dining.
Where Chipotle is concerned, the chain is all about efficiency. Customers' meals are prepared in front of them, and they check out once their food is made. Speed is the name of the game, and the company doesn't keep customers waiting.
Panera Bread is designed to be something between a sit-down restaurant and a fast-food joint. Unfortunately, as Panera has expanded its menu, the staff's ability to quickly move customers through has been hampered. The bottom line is, it's the design of Panera that seems to be a big part of the problem.
Investment is the word of the day
Throughout the company's conference call, Panera's CEO, Ron Shaich, suggested that 2014 would be a time of investment in the future. In a survey the company conducted, two of the reasons customers gave for not visiting Panera as frequently were order accuracy and slow service.
However, some of the issues at the restaurant seem to argue that management was a bit out of touch. For instance, the company invested "an additional $2 million this quarter to restore small ware inventory [utensils, plates, and bowls] in our cafes to our recommended levels." When management doesn't know that a lack of basic materials is slowing down service, investors should worry about the future.
That said, additional issues are not as easy to fix and will lead to "modest [earnings per share] growth" for 2014 at least. To improve order accuracy, Panera is installing kitchen-display systems. This is an issue that Chipotle will never have since the food is prepared in front of the customer, and Buffalo Wild Wings has servers to ensure orders are correct.
Most troubling is that the company found that as many as one-third of its restaurants didn't have the appropriate equipment to service increased demand. Though Panera will invest in this additional equipment, this shows poor planning by the company.
How did they miss this?
The bad news is, Panera's management apparently didn't realize that it wasn't ready to continue growing. While this is disappointing, at least the company is owning up to its mistakes and making the investments to correct them.
Second, Panera already sports a higher labor cost at 26.5% of revenue than Chipotle at 22.8%. Considering that the sit-down chain Buffalo Wild Wings gets by with a 29% labor cost, Panera's percentage seems high. Unfortunately, this spread is only going to worsen, as Panera is preparing to invest "35 additional hours per week into each of our cafes."
The demand is there, can the company capitalize?
The good news is, with constant lines at most of the company's restaurants, the demand is there, though the service isn't. In addition, the company's recent issues have cut the valuation on the stock to slightly less than 23 times projected earnings. With Buffalo Wild Wings selling for more than 34 times earnings and Chipotle topping 50 times earnings, Panera is significantly cheaper than its peers.
Panera's projected earnings growth of less than 17% in the next five years is slightly slower than Buffalo Wild Wings at around 18%, or Chipotle at more than 21%. However, if management is able to successfully raise the level of service at the chain, results should improve.
Assuming these investments pay off, this may just be a bump in the road for this normally rising stock. If management misses problems in the future, however, the stock could get tossed aside like day-old bread.