Should You Invest in Panera's Turnaround?

The first quarter was bad, but turnaround strategies suggest that Panera could improve. Is this an opportunity for investors?

May 20, 2014 at 4:55PM

It looks like Panera Bread's (NASDAQ:PNRA) troubles are here to stay. The company has been under pressure this year, with shares down more than 11%. In addition, Panera's first-quarter results didn't bring much relief to investors, as the company lowered its full-year earnings guidance. Considering that competition from rivals such as Starbucks (NASDAQ:SBUX) and Chipotle Mexican Grill (NYSE:CMG) is increasing, Panera investors are a worried lot.

However, the same cannot be said about Panera's management team, which is focused on a turnaround plan in order to get back on the growth track. The company believes that the Panera 2.0 initiative will lead to better times going forward. Let's examine whether the moves the company is making can lead to improved performance.

A look at Panera 2.0
Management is focused on enhancing Panera's competitive position and expanding its growth opportunities. To achieve this, Panera is implementing three key strategies: the rollout of Panera 2.0, driving operational efficiencies, and innovation in menu and marketing. Apart from this, it is also updating its stores with new formats.

Also, through Panera 2.0, the company is looking to deliver an enhanced customer experience powered by technology. Panera 2.0 includes plans of opening in-cafe kiosks along with a new website and mobile-ordering app. This will make it easier for customers to place, customize, and pay for orders. By year-end 2014, the company expects to roll out the initiative to 150 cafes, up from just 14 cafes at present.

The rollout of this plan is expected to pressure Panera's near-term earnings performance. However, the long-term performance might improve if more customers visit Panera's locations due to a better experience.

Moving in the right direction
Panera's second strategy is to enhance its competitive position and improve operations. So, the company is investing in its kitchen-display system and plans to introduce shortly a first-generation auto load-balancing system. In addition, Panera has added 35 extra labor hours per week at each cafe. The company said that it is already seeing some benefits due to this plan, as production times have dropped by around 35 seconds on average. 

Moves such as these should enable Panera to make its kitchen more efficient and deliver orders without taking too much time. The company's ultimate intention is to lower its production time to less than three minutes so that no guest leaves a Panera cafe because they grow tired of waiting in line. 

The company's third strategy is to bring innovation to its menu and marketing. Panera plans to launch three new varieties of flatbreads in the next few weeks, including a Southwest flatbread, Thai flatbread, and a Mediterranean chicken flatbread. According to management, the flatbread is a strategic product, as it has the potential to differentiate Panera in the broader marketplace.

The competitive scenario
These moves are important considering Panera is facing competition from Starbucks, which moved into Panera's market after acquiring La Boulange in 2012 for $100 million. La Boulange is a bakery chain and recently opened its 22nd bakery-cafe in San Francisco. Under Starbucks, La Boulange offers items such as burgers and fries. It also offers a Maine lobster sandwich on a croissant bun, and Starbucks has plans of adding hot and cold sandwiches along with new lunch options in the future. 

On the other hand, Chipotle Mexican Grill is focusing on improving delivery times. In addition, Chipotle is expanding its locations at a fast pace, having added 40 new restaurants in the first quarter. Chipotle has been growing at a rapid rate, as its same-store sales were up 13.4% during the first quarter. In comparison, Panera's same-store sales performance was flat.

It seems like Panera's failure to address the needs of customers has led it to lose market share to Chipotle. However, considering that Chipotle plans to raise prices to address rising food costs, Panera could see some customers returning. 

Final words
Finally, Panera's stock price decline has made it cheap when compared to peers. It has a trailing P/E of 23, while the forward P/E looks promising at 20.5 and indicates earnings growth. Both Starbucks and Chipotle are way expensive at earnings multiples of 363 and 47, respectively.

Considering that Panera is a probable turnaround play and it is currently trading near its 52-week low, it might be a good time to buy some shares.

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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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