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.

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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.

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