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Panera's Still Toast

Investors are cheering Panera Bread's (Nasdaq: PNRA  ) quarterly results today, but in this Fool's opinion, they're grasping at breadcrumbs and hoping for the best.

Panera's net income dropped 5.8% to $17.8 million, or $0.56 per share. This included $0.03 per share in one-time charges, as the company wrote down its investment in the Columbia Strategic Cash Portfolio (what the ...?) and took a charge related to discontinuation of its Crispani pizzas. There was also a charge of $0.03 per share related to unfavorable tax adjustments. Revenue, on the other hand, increased 29% to $300.8 million.

Panera pared its earnings outlook for 2008 to 12% to 18% growth, or $2.00 per share to $2.11 per share. This target assumes Panera's ability to successfully increase prices by 5%. As with many companies, commodity costs are rising at Panera. The company cited "rapidly escalating wheat costs" as a significant element, and it hopes to pass the costs along. Maybe investors feel heartened, because Panera said it has already been able to successfully boost prices by 2.5%, but wheat costs are skyrocketing. Although Panera said it has locked in below market price, that price is more than double the average cost per bushel last year; further, in Panera's press release, the wheat market is described as experiencing "unprecedented inflation." That doesn't sound comforting to me. 

Panera may be losing its once-celebrated Crispani pizzas (CEO Ron Shaich defended Crispani last February), but I couldn't help but pause when the company said one strategy for 2008 is "a focus on breakfast sandwiches" -- I guess it's hoping Starbucks' (Nasdaq: SBUX  ) loss of breakfast sandwiches will be Panera's gain.

I really like the concept of Panera -- fresh-baked bread is so awesome and I have always enjoyed its food -- but I still don't view it as a particularly appetizing investment. Trading at about 19 times forward earnings doesn't sound like a bargain when it may grow 2008 earnings by only 12%, and consumers' acceptance of higher prices is by no means a foregone conclusion. Meanwhile, it faces all kinds of competitors luring hungry, price-conscious consumers at all times of day, including a rejuvenated McDonald's (NYSE: MCD  ) and Chipotle (NYSE: CMG  ) (NYSE: CMG-B  ) , another hot contender.

I have no idea why investors are reacting so favorably to Panera's tidings today -- the forward view sounds a bit scary to me. In my opinion, there are plenty of better places for investors to put their bread.

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Related Tickers

10/21/2016 4:00 PM
PNRA $196.86 Up +1.54 +0.79%
Panera Bread CAPS Rating: ****
CMG $411.94 Up +6.84 +1.69%
Chipotle Mexican G… CAPS Rating: ****
MCD $113.93 Up +3.36 +3.04%
McDonald's CAPS Rating: ***
SBUX $53.63 Up +0.04 +0.07%
Starbucks CAPS Rating: ****