Why Panera Bread’s $200 Million Bet Can Pay Off for You

Every company needs to continue transforming itself for the future. To that end Panera Bread has announced its Panera Bread 2.0 initiative, but will it work?

Apr 20, 2014 at 2:04PM

Panera Bread (NASDAQ:PNRA) recently announced its "Panera 2.0" transformation. The initiative includes faster service and the use of technology to increase the quality of food and accuracy of orders  -- and more importantly a superior customer experience.

Panera Bread 2.0 explained
According to Panera Bread's own description, Panera Bread 2.0 is

A series of integrated technologies to enhance the guest experience for all consumers no matter how they choose to use Panera. Panera 2.0 brings together new capabilities for digital ordering, payment, operations and, ultimately, consumption to create an enhanced guest experience for customers.

According to CNN, 40% to 45% of orders at Panera Bread are to go; so the company is creating a first-in-class system where customers would place their orders online and request a pick-up time. Upon entering the store, clients' orders will be already waiting in a designated area.

Panera Bread 2.0 essentially locks in the long-term value of the brand. It also presents a compelling story for long-term investors looking for exposure to an already popular brand taking steps today to prepare itself for the future.

During an interview with Bloomberg's Carol Massar, Panera Bread's CEO Ron Shaich admitted that roughly $42 million has already been directed toward Panera's push for faster and better service. Massar quoted a figure of $125,000 required to upgrade each store; Panera Bread has around 1,700 stores across the U.S, translating to a total investment just north of the $200 million mark.

The only problem is Panera Bread 2.0 won't be rolled out nationally until year-end 2016. But that is not necessarily a bad thing.

Panera Bread is highlighting its long-term growth drivers while its near-term expectations are quite low, especially as heavy investments could eat away at margins in fiscal 2014 and 2015. Adding to investors' concerns is the fact that management has not provided any specific earnings guidance for 2015, which could lead shareholders to conclude that the company's 15% to 20% earnings-per-share growth target is at risk.

Investors could be rewarded in the long-term by buying shares of Panera Bread today as several sell-side analysts aren't looking far enough down the road at the bigger picture and view the short term as challenging with minimal expectations..

Robert Derrington of Wunderlich Securities downgraded Panera Bread to hold from buy on March 26 due to what the analyst believes will be "increased 'lumpy' earnings performance through 2015." 

Investors who are in it for the long term could take advantage of a period of "lumpy" earnings and use any pullback in share price as an entry point to accumulate a larger position.

Despite concerns over near-term expectations, long-term same-store-sales and EPS growth could be understated based on Panera Bread 2.0 initiatives which will be rolled out in the coming years.

Panera Bread holds an edge in food inflation
Panera Bread along with Chipotle Mexican Grill (NYSE:CMG) are leaders not only in the fast-casual and quick-upscale category but also in food transparency.

Danny Carberry is the director of concept for Panera Bread and wrote an article for Food Tech Connect entitled "Trend Watch: 2014 Food Industry Predictions."

In the article, Carberry praised Chipotle Mexican Grill for being at the forefront of shifts in consumer behaviors, including a demand for transparency, sourcing integrity, and basically anything and everything "green." Chipotle Mexican Grill, according to Carberry, is a company "doing it right."

Unfortunately for Chipotle Mexican Grill, being a leader in its field comes with very high costs. The company is flirting with the idea of increasing its prices as it faces cost inflation, especially for its core offerings of avocados, salsa ingredients, and beef.

We are not in a hurry, and we wouldn't hesitate, if conditions suggest that we shouldn't take it, that maybe we will either defer it or take it off the table altogether in 2014.

Now at some point, we don't want to be underpriced, so there is a desire to not be so far under what others are charging in the industry that people are wondering, 'Well, gee, I wonder with this food integrity thing, how can they claim that their ingredients are better when they are charging so much less than other restaurant companies out there?' So we would not want to be in that kind of a situation, but it's still possible we may pull the menu price off the table in 2014. -- Chipotle Mexican Grill's co-CEO said during the company's fourth-quarter conference call in January.

Panera Bread will see its costs "easing" (according to Bloomberg) as record harvests from India to the U.S. expand the supply of wheat, sugar, and other commodities. In fact, Panera Bread expects "very modest deflation" for wheat in 2014.

Foolish takeaway
Chipotle Mexican Grill can come up with all the creative marketing gimmicks it wants to reach its consumers. But none of this will ease inflation concerns, especially over beef, which is in a long-term sustained inflation period, according to John Barone, president and commodities analyst at Market Vision. Barone believes that beef inflation is likely to continue through 2016 or possibly 2017. This could signal that Panera Bread is the tastier investment for those in it for the long haul.

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Jayson Derrick 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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