Panera’s Moves Look Impressive, but the Stock Isn’t a Buy Just Yet

Panera is looking to turn the business around with some impressive strategies, but Chipotle and Starbucks are threats that can’t be ignored.

Apr 21, 2014 at 10:24AM

Panera Bread (NASDAQ:PNRA) shares have been under pressure this year after the company issued a weak forecast in February. Panera cited bad weather as the main reason behind the disappointment. In addition, the company is experiencing operational difficulties due to customers' changing preferences and rising competition from Chipotle Mexican Grill (NYSE:CMG) and Starbucks (NASDAQ:SBUX).

Now, Panera is looking to make a comeback with its Panera 2.0 plan, but will it succeed? Let's find out.

Not that bad
Many of Panera's cafes in the Midwest and the Mid-Atlantic Northeast corridor underperformed in the fourth quarter as a result of harsh weather. This led to a decline of $0.03 to $0.04 in the company's earnings per share. In addition, Panera expects to earn just $1.52 in EPS in the first quarter, well behind the Wall Street estimate of $1.70 per share. 

Nevertheless, the company managed to grow fourth-quarter revenue by 16% from last year. Moreover, according to the Black Box index, a measure of the U.S. restaurant composite, Panera's growth was 1.6% better than the industry's performance.

Ringing in the changes
Going forward, management is determined to improve the bottom line. In a bid to enhance the customer experience, Panera is revamping its ordering process. It plans to execute an end-to-end system that will provide an enhanced order, payment, execution, and consumption experience for all its customers. This forms the basis of Panera 2.0. 

The company is also looking to strengthen its menu by introducing more items and giving customers additional choices. Panera will be adding new flatbread sandwiches to its menu in the spring. These sandwiches will feature quality proteins and bold flavor profiles that will enable the company to better experiment with its new seasonings and spices. Panera will start with varieties such as high-protein chicken, Mediterranean chicken, and Southwestern chicken in a bid to tap younger customers. 

Panera's squash soup and antibiotic-free turkey chili are also selling well. These two soups underscore the ongoing push that the company is making to differentiate its offerings via high-quality products. To complement the rollout of new products, Panera is also focusing on its marketing efforts. Its spending on media efforts grew from 1.4% of sales in 2012 to 1.7% of sales last year.

In 2014, the company plans to spend around 1.9% of sales on advertising. These advertisements are expected to have a strong impact in more expensive markets such as New York, Boston, Atlanta, Dallas, and Los Angeles, where Panera has had a very limited advertising presence. 

The company expanded its current store count by adding 18 new bakery cafes in the fourth quarter, while its franchisees opened 24 new cafes. By year-end 2013, Panera had a total of 1,777 cafes in operation. It also opened three new catering hubs in the third quarter, taking the total number to seven by the end of fiscal 2013. The company plans to open 20 new hubs in 2014, which will provide support to more than 100 cafes and improve its distribution strength. 

Competitive threats
Moves such as these should help Panera improve its performance going forward, but competition from the likes of Chipotle and Starbucks is a concern. Chipotle has been posing a strong threat to Panera since it is known to "quickly and efficiently move diners into and out of its restaurant locations" in the words of Fool contributor Philip Saglimbeni.

As a result, it was not surprising that Chipotle's fiscal 2013 same-store sales were up 5.6%, while Panera struggled at just 2.3%. Saglimbeni points out that Panera recorded impressive same-store sales growth of 5.7% in 2012. 

Hence, the company lost the initiative and Chipotle gained due to its customer-centric approach. In addition, Chipotle is expected to continue its rapid pace of growth. It plans to open 180 to 195 new restaurants this year, similar to last year's addition of 185 locations. Clearly Panera will need to move swiftly and efficiently to accelerate growth in the wake of Chipotle's moves.

Another threat comes from Starbucks, which acquired bakery chain La Boulange in 2012 for $100 million. Since most Starbucks locations are in prime areas, with many of them in close proximity to Panera stores, the coffee giant is a threat that Panera investors shouldn't ignore. Also, Starbucks has been experimenting with its pastry menu, with plans to launch hot and cold sandwiches along with new lunch options.

Bottom line
Panera has struggled of late, and the stock's performance has been bad over the last year. But looking forward, the situation might improve as management rings in the changes to attract customers and improve profitability. However, investors should adopt a wait-and-watch approach and see if Panera's strategies are working despite the stiff competition it faces before making a call on the stock.

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information