Panera Down but Not Out

While its first-quarter beat out expectations, Panera Bread Co (NASDAQ: PNRA  ) set the scene for a weak year, overall. Earnings per share fell for the quarter, but revenue rose on a slight increase in comparable cafe sales. Unfortunately, that looks like the end of the ride for Panera this year. In its release, Panera dropped its earnings-per-share estimate slightly, based on a drop in its comparable-sales estimate.

Investors fled the company this morning, and shares were down 6% by midday. The fall seems to be based on a drop in visitors, as more companies flock to the fast-casual theme, giving customers a wider range of choices. Investor favorite Chipotle Mexican Grill (NYSE: CMG  )  and rising star Wendy's (NASDAQ: WEN  ) have helped put the squeeze on Panera, but this is far from the end of the line for the sandwich chain.

Trouble with the weather
One of the problems Panera and other retailers have cited in earnings recently has been the harsh winter weather. While Panera beat out analysts' estimates for revenue, turning in $605 million, it said that the number would have been higher if the weather had cooperated. Even accounting for the impact of the winter, transactions fell around 1.5% compared to the same period last year. 

That helped hold the company's same-store sales increase down to just 0.1%. Considering that Chipotle managed a 13.4% increase in its same-store sales, while Wendy's managed a semi-respectable 1.9%, it seems that not everyone was subject to the heavy pull of the weather.

In defense of its drop in forecast annual results, Panera called out a five-to-10-year cycle that it sees itself having, saying that every so often, "Panera has restaged its business to drive future growth." This year, that restaging is going to see the launch of Panera 2.0, which is designed to help fix the problems the company sees with its cafes.

Reworking operations at Panera
Panera 2.0 is supposed to help alleviate the crush that customers can feel when they're at the company's counters. The company is going to streamline its ordering and pick-up processes to help folks have a less stressful visit. It's a problem that Chipotle solved with its first opening, setting up a cafe that was entirely designed to cut down on the amount of work required to give customers their food.

That's led Chipotle to a 15% operating margin, running slimmed-down operations to cut costs to the bone. Panera, by contrast, turned in an 11% operating margin this last quarter, showing ample room for improvement.

Bounce-back opportunities
Chipotle is the highflier of the three businesses right now. Panera is looking for the next thing that's going to push it back into the sky, while Wendy's is still working on its revitalization. During the last year, the fast-food chain has embraced some higher-end, fast-casual themes, giving it a massive boost. With redone restaurants, new menu items, and a cleaner visual theme, Wendy's is now a few steps ahead of Panera in its search for success.

That doesn't mean that Panera is down for the count, just that it's hit a lull. The brand's catering business is still growing, and I think that it can run away with that market if it can get the back-end running smoothly. Today's result is an indication that Panera investors got out ahead of themselves, but it doesn't mean that Panera is doomed.

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