Panera Needs a More Even Rise

• Email
• Share
• Print

Over the years, Panera Bread (Nasdaq: PNRA) has done a great job growing its top line, but it has had trouble translating those results to the bottom line. Increasing costs for labor and bread have hurt margins and earnings, and though the company pledges to fix the problem, doing so is proving to be tougher than a stale piece of bread.

At least Panera managed to bake up some decent results in August. Same-store sales climbed by a solid 3.1%. Company-owned bakeries did even better, with a 4.1% rise, while franchises rose 2.5%.

Patrons love Panera for the wonderful smells and flavors that fill its stylish and very relaxed bakery/cafe shops. The food is fresh and healthful, the menu free of trans fats. The stores serve up a variety of sandwiches on freshly baked bread, as well as soups, salads, and a nice assortment of bagels, rolls, and other mouth-watering items. It's like hanging out in a Starbucks (Nasdaq: SBUX) -- complete with the Wi-Fi connectivity -- with the bonus of enjoying the sweet smells of a bakery. I'm getting hungry just thinking about it! No wonder it keeps drawing customers in.

Unfortunately, Panera must get its costs under control for investors to start getting that same warm and cozy feeling about the stock. People clearly aren't tired of Panera's concept, or else the top line would suffer. But it just isn't flowing to the bottom line right now. And what good are sales increases without profitability?

While fresh, nutritious, and great-tasting food will always be popular, Panera also faces aggressive competition. Chipotle (NYSE: CMG) (NYSE: CMG-B) is the hot flavor of the day, although it remains to be seen whether the Mexican-food purveyor will stay at its current level of popularity. McDonald's (NYSE: MCD), meanwhile, also offers Wi-Fi and is becoming more of a direct competitor to Panera with its line of coffee products.

I'd advise Fools to hold off on purchasing shares until it can show that it can contain costs. Right now, Panera stock looks kind of like uncooked dough. It can taste good, but it may just give you a stomachache later.

Related Foolishness:

• Panning Panera Again
• Panera Pummeled
• Remembrances of Panera's Past