Panera Bread Goes for the Power Breakfast

Panera continues to innovate in order to keep customers coming back. That’s the sign of a quality company.

Mar 18, 2014 at 10:00AM

Interesting in eating sprouted-grain bagels? Did you just shake your head and ask yourself, "What the heck are those?" If you want the simple version, it's a healthier alternative to white flour.

Panera Bread (NASDAQ:PNRA) has tested its version of the sprouted-grain bagel, and that test has been deemed a success. The sprouted-grain bagel has 240 calories, as opposed to the 290 calories you will consume with a regular bagel.

The dilemma for Panera Bread has nothing to do with the quality or health offerings of this new product, but getting the message across to customers without confusing or frustrating them. The phrase "sprouted grain" is more likely to be recognized by Baby Boomers than other generations. To be blunt, the younger generations, such as Generation X and Millennials, are more important to fast-casual brands like Panera due to long-term growth potential. This is especially the case with Millennials, which is a larger generation than Generation X and slightly more health-conscious.

All of this sounds interesting, but does Panera really need to make this move?

Power Breakfast
Whether you're a fan of Panera or not, you have to admit that the phrase "Power Breakfast" is pretty catchy. That's the route Panera is going in order to not confuse and frustrate its customer base. The primarily principle of the Power Breakfast is that it will highlight protein content while also offering more nutrients and whole grains via new menu items. Panera Bread won't be eliminating white flour, but it will be offering more options for health-conscious consumers.

Did Panera really need to make this move? If we use the word "need," then the answer is no. However, a successful company will always need to innovative in order to drive sales growth. And by targeting a broader range of consumers, it can only help. On top of that, bakers agree that moving away from white flour will help their speed.

Panera isn't the only company going this route. Olive Garden -- a subsidiary of Darden Restaurants (NYSE:DRI) -- has had a difficult time attracting Millennials. Fast-casual brands like Panera have been stealing market share, primarily because they offer fresh food at affordable prices, all in a comfortable atmosphere. 

Olive Garden is known for its pasta and breadsticks. That's good news for carbohydrate fans, but this fan base is shrinking. That's why Olive Garden recently made a key move to attract more health-conscious consumers. It added gluten-free rotini, and penne pasta with dried spinach and tomato concentrate, to its menu. Furthermore, it's testing other healthier pasta options.

Olive Garden needs to do something. Its comps sales for December, January, and February: negative 10.5%, negative 2%, and negative 2.6%. Traffic numbers for these three months: negative 12.9%, negative 4.6%, and negative 4.9%.

Fortunately for Panera, it recently reported stronger numbers than this.

Strong, but not strongest
In the fourth quarter, Panera's revenue jumped 16% year over year to $662 million. Be careful with revenue, though; these numbers can be misleading due to new store openings. Pay more attention to comps (same-store sales.) Panera's systemwide comps improved 1.1%, which is good in today's consumer environment.

Looking ahead to fiscal-year 2014, Panera expects comps growth of 2%-4% and diluted earnings-per-share growth of 5%-8%.

Those numbers are solid, and with Panera trading at 27 times earnings it should look at least somewhat appealing to investors. However, another restaurant chain in the fast-casual space is blowing away Panera's comps numbers.

Chipotle Mexican Grill (NYSE:CMG) delivered a fourth-quarter comps gain of 9.3%. That number is a bit on the ridiculous side, and this is meant in a good way. If you want to look at the bigger picture, comps improved 5.6% for fiscal-year 2013. That's a very strong gain for a full year.

Chipotle doesn't just offer affordable and customizable menu items in a comfortable atmosphere; it's also known for its approach to targeting the health-conscious consumer. For instance, Chipotle takes pride in using locally and responsibly raised meats. All of its food is organic, and it uses pasture-based dairy. Additionally, Chipotle is aiming for no GMOs, hydrogenated oils, and preservatives in the future.

The one potential negative for Chipotle is that it's currently trading at 56 times earnings, making it more expensive than Panera.

The Foolish takeaway
Chipotle is the most impressive restaurant in the fast-casual space right now, but Panera is strong in its own right, and it's now making moves to attract more health-conscious consumers – without alienating its white flour fans. The best part is that this transition should have no significant impact on costs. Panera remains a top option for many Millennials as well as other generations. As long as this is the case, it should be a quality investment option. Please do your own research prior to making any investment decisions. 

Panera and Chipotle are still growing, and so are these companies.... 
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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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