What Panera 2.0 Means for Investors

Panera is fixing one of its biggest problems with its latest innovation, but does that now make it a worthwhile investment?

May 15, 2014 at 9:00AM

Shares of Panera Bread (NASDAQ:PNRA) are down more than 10% over the past month. The biggest reason for this pullback was Panera's weak first-quarter results, but the even bigger problem is that investors keep comparing Panera to Chipotle Mexican Grill (NYSE:CMG). Time and time again, Panera hasn't been able to compete with the numbers that Chipotle produces.

Chipotle posted a 13.4% increase in comparable-store sales last quarter, while Panera saw its comparable-store sales come in at a 0.1% increase. The low increase was blamed on the winter weather. It was noted that the winter took 150 to 200 basis points from its comparable-store sales growth.

Becoming more consumer-friendly
Its latest technological innovation will reduce wait times and cut down on ordering mistakes. Consumers are finding the ordering process at Panera to be a complete mess. It causes some shoppers to give up on ordering and leave, and also leads to messed-up orders and longer wait times.

Statistically, one out of every seven orders are incorrect. This is primarily due to incorrect inputs at the register. The situation should improve dramatically when customers enter their orders themselves. To change things for the better, Panera is revamping the ordering process, which is one of the biggest complaints with the company. Processes at Panera have been simplified by removing items from the menu and creating hubs that will cater to groups of two to six stores.

A closer look at Panera 2.0
This new initiative is being called Panera 2.0. The initiative will enable customers to order using a mobile app or at an Apple iPad kiosk in the restaurant. Orders will then be delivered to their tables. To-go customers can place their orders up to five days in advance and then collect their orders from a designated pick-up area.

The system is expected to be available at all stores by 2015. Analysts say that long wait times have restricted same-store sales growth. The company now admits that it had been treating all of its 8 million customers as "eat-in" customers, whereas up to 45% place to-go orders. The company is starting to see the results of this shift in its Boston stores, where the system has been up for a year or more, and the locations there have higher same-store sales than others. 

Panera is taking a page from the Starbucks playbook
Panera is playing catch-up with arch rival Starbucks (NASDAQ:SBUX), which has had a mobile app for quite a while. However, it has more than mobile apps to worry about, as Starbucks is trying to match its own selection of sandwiches and baked products with Panera.

Starbucks has been successful with its mobile initiatives, and mobile transactions now account for some 14% of all store purchases. The latest version of its iPhone app allows digital tipping, and shaking the phone brings up the bar code which the store must scan to accept digital payments. Starbucks is also expanding its beverage options to include tea, juice, and alcohol.

How shares stack up
Panera trades at a P/E that's less than 20 based on next year's earnings estimates, and its five-year average P/E ratio is 27. Chipotle trades at a P/E that's more than 30, but Panera's return on investment is 28% compared to Chipotle's 21%. Then you have Starbucks, which trades at a P/E ratio of 22. Starbucks' return on investment is currently negative. This comparison makes Panera the cheapest of the three stocks, with the highest return on investment.

Bottom line
Panera is not only changing the way customers order--it is also looking to refresh and upgrade its stores. By year-end 2015, every store will be refurbished and eat-in customers will no longer have to pick up their own orders. This should help Panera better compete with the likes of Chipotle. For investors looking to play the fast growing fast-casual market, Panera is worth a closer look.

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Marshall Hargrave 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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