Panera: Good Carbs or Bad Carbs?

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Some investors seem to think Panera Bread  (Nasdaq: PNRA) looks appetizing, even though rising wheat prices helped sap profitability in its latest quarter.

The results were nothing new. Panera's first-quarter net income decreased 17% to $12.4 million, or $0.41 per share, while revenue increased 27% to $305 million. Last quarter, Panera let everybody know that the high price of wheat would pressure profitability, and so it has -- wheat increased to $13 per bushel from $5.80 per bushel last year this time.

There's some positive excitement surrounding Panera, most likely because the quarter exceeded expectations. That enthusiasm may explain today's 10% increase in its share price. (It may not justify it, though, since the jump sounds a bit outlandish to me.)

Panera touted its ability to improve margins by discontinuing its Crispani product, exhibiting discipline in its pricing and category management programs, and implementing other cost-cutting initiatives. Interestingly enough, the cited improvement excluded the negative impact of the increasing wheat costs, which, um, are a pretty major part of its business. (I can't help but wonder whether the company will strip out effects of wheat when prices once more turn favorable.)

Panera also recognizes that improving return on invested capital is a priority, and pointed to its average weekly sales in company-owned stores, which improved by 25% to $39.1 million.

Still, our current economic slowdown -- consumer-led -- gives Panera a challenging environment to operate in, and it has plenty of competition from reasonably priced, casual quick-stops like McDonald's (NYSE: MCD), Chipotle (NYSE: CMG) (NYSE: CMG-B), and Starbucks (Nasdaq: SBUX). I'd give Panera better odds than higher-priced chains like Cheesecake Factory (Nasdaq: CAKE) and Ruby Tuesday (NYSE: RT), but the restaurant biz in general is ultra-challenging these days.

Panera doesn't include its balance sheet and cash flow statement in its press releases, so unless you've dug into its Form 10-K, you might not have seen that Panera recently took on $75 million in debt. It mostly used its credit facility to finance its share repurchase program, and while that's not uncommon, I don't really like to see that use for debt, especially in such troubled times. Back in March, Panera increased the amount of its credit facility to $250 million.

With today's surge, Panera trades at 29 times trailing earnings. Does it really deserve a premium to Starbucks (admittedly beleaguered lately, but trading at a price-to-earnings ratio of just 19)? And while McDonald's trades at 28 times earnings, it's also been firing on all cylinders. I like Panera's fresh bread, but I believe investors who are buying this stock today run the risk of filling up on bad carbs.

Food diary:

• Last quarter, I thought Panera was still toast, although many investors appeared to disagree.
• I also found Panera unpalatable in January.
• Don't worry, there's still time for Panera to be the Worst Stock for 2008.