Should You Invest in Panera's Turnaround?

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.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

 


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2965555, ~/Articles/ArticleHandler.aspx, 8/22/2014 7:30:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement