Is Panera Bread a House of Cards?

The results of Panera Bread's most recent quarter confirmed my suspicions: Panera is having problems.

May 6, 2014 at 2:24PM

Restaurants are tough investments. As quickly as they rise to the top, they can sink to the bottom, and they require a keen and constant eye on operations. For a while now, I've been concerned with Panera Bread (NASDAQ:PNRA), and the results of the company's most recent quarter confirmed my suspicions: Panera is having problems.

Lugubrious: Look it up
I won't go so far as to call Panera's 8% top-line growth this past quarter lugubrious. But it's not what it was a year ago (13%, incidentally), and with company-owned comps this quarter coming in flat, it's clear something needs to improve. The good thing is, CEO and founder Ron Shaich already knows what that is: throughput.

Throughput, in simplest terms, is getting people through the line. The faster people can move through the line, particularly at peak hours, the more people the store can serve, and those people tend to come back for more because they know they won't have to wait long.

Mmm... golden burrito
The company setting the gold standard for throughput these days is Chipotle Mexican Grill. It's a focus for the company on every call, and just this past quarter, it saw average increases of seven transactions at both peak lunch and dinner hours. It appears management's philosophy of four pillars to great throughput is working like a charm.

Just last month, when Shaich referred to the ordering process at Panera as an experience akin to a "mosh pit," it was plain to see that he's at least identified the source of Panera's problems. As a consumer who likes Panera, I have often been turned off by the in-store experience because it's not efficient and, at times, is a bit confusing. So, hats off to management for recognizing the problem; that's the first step, after all.

Version 2.0
So begins Panera 2.0: management's plan to get things back on track. Panera 2.0 places a priority on improving the ordering experience. Initiatives including advanced ordering for to-go, ordering from your table for dine-in, fast lane kiosks, customized ordering, and (gasp) a mobile app. These are all ideas that should help bring Panera back into the fast lane, but before investors breathe a sigh of relief, remember, it's one thing to say what you want to do. It's an entirely different thing altogether to execute the vision.

This is a bold plan for a lot of stores -- 1,800, to be exact. It's not going to happen overnight. In fact, it's going to take about three years to get the plan up and running in every store out there. So, customers will need to be patient. And investors will need to be even more patient.

Know what to look for
Over the coming quarters, investors are going to want to pay attention to same-store sales, plain and simple. Because Panera both owns and franchises stores, it will be worth paying attention to both numbers and making sure that any major disparities are accounted for and understood. But the total systemwide comps number will be very telling over the coming quarters, as it will tell us whether the stores are witnessing traffic and Panera 2.0 is producing tangible results. The slides below from a recent investor presentation show the breakdown in company-owned stores versus franchises, along with historical same-store sales for both:

Panera Stores

Panera Comps

The Foolish bottom line
It's likely this is a temporary glitch in the Panera story. You don't get to 1,800 restaurants by accident, and Ron Schaich is clearly married to the long-term success of this business. But talk, as they say, is cheap. And while I commend management's vision to get this story back on track, it's all going to boil down to execution, and in this case, the proof will be in the panini.

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Jason Moser owns shares of Chipotle Mexican Grill. The Motley Fool recommends and 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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