In this segment from Market Foolery, host Chris Hill is joined by Motley Fool analyst David Kretzmann as they break down how coffee-and-pastry focused JAB Holding Company will fit a fast casual brand into its privately held portfolio. With the acquisition, the JAB is expected to give the Panera Bread (NASDAQ:PNRA.DL) team even more autonomy than usual.
A full transcript follows the video.
This video was recorded on April 5, 2017.
Chris Hill: Panera Bread is being bought, and we now know it's going to be bought by JAB Holdings. It's a $7.5 billion deal. If you're a Panera Bread shareholder, you're having one hell of a good week. A week ago, the stock was trading around $250, and the buyout price is going to be $315 a share. What did you think when you saw this news? JAB Holdings, you look at their portfolio, the companies that they own, they are very deep into the food space. They have Krispy Kreme donuts, Green Mountain Coffee, Peet's Coffee, Caribou.
David Kretzmann: They love their coffee.
Hill: They do.
Kretzmann: It definitely makes a lot more sense than Domino's acquiring Panera. Panera seems like a much better fit. And, based on what Ron Shaich, the founder and CEO of Panera, has been saying, it sounds like JAB will be giving Panera a lot of autonomy. To me, that would be the only way a deal like this would make sense. You get the impression that Shaich and company really love what they do, and the Panera 2.0 concept is really clicking. So, I would expect JAB to be a little bit more hands off with Panera compared to Krispy Kreme or Keurig, which were brands or companies that were struggling a little bit more. Keurig had Keurig Kold, that was the big deal that totally fell flat on its face around the time when JAB bought them out. Panera seems like it's a good fit, based on where JAB has been going. Like I said, probably a little bit more hands off. I think it makes sense, and for Ron Shaich and company, they can be fully in control, from the sound of it. So, it sounds like a good deal for both.
Hill: It does. The one thing -- and you and and Aaron Bush and I were talking about this earlier this morning -- that's a little puzzling to me is, if you think about Krispy Kreme, Keurig Green Mountain, Peet's, Caribou, when they were all public companies on their own, by the time JAB got around to buying them, they had struggled, as you said. And it was one of those situations where I remember thinking, particularly in the case of Keurig Green Mountain, "Well, that's good. That's good, that they're going the private-equity route, because then they can be out of the spotlight." Panera Bread is crushing it. So, that's the only thing that's a little bit puzzling to me. But, as Aaron Bush said, maybe JAB just wanted something a little easier that they didn't have to go in and fix.
Kretzmann: Yeah, they don't have to fiddle with it quite as much. And it sounds like that's what JAB wants, that's what Panera wants. So, it makes sense there. A few years ago, there was a much different conversation around Panera. Even here at the Fool, we had a good amount of people here who were skeptical about where Panera was going. It was struggling on a lot of different fronts. And it wasn't immediately clear whether Panera 2.0 would click. But it turns out Panera was one of the first restaurant chains to embrace digital, mobile, online ordering. And as a result, at a time when a lot of restaurants are struggling, Panera today is putting out astounding numbers, it's well at the top of the pack, alongside companies like Domino's and others. A few years ago, it wasn't as obvious that Panera would turn into what it has today. The company, even over the past five years, still, after this pop, the stock has still underperformed the S&P 500. I know we have some people at the Fool who follow the company and recommended it a lot longer. If you've held the stock for 8 to 10 years, you've come out well ahead. It's up 300% to 400%. But over the past few years, the company has still struggled. And it's only really within the last 12 to 18 months that it became clear that 2.0 was going somewhere. I think, in the grand scheme of things, it still could be somewhat early. But like we were talking about, JAB, at this point, you just let Panera and Shaich do what they're doing, because it's clearly working. And in the restaurant space, not a lot of restaurants can say that.
Hill: Right. I watched an interview that Shaich gave this morning, and one of the things he was talking about was, you go back three years when he made the famous mosh pit comment, and he was absolutely right about that. But one of the things he talked about in this interview was how long it takes. It's not just a matter of "you need an app" and make it easy for people to order. No. You have to make sure that there are people in the kitchen who are going to be able to deliver on what is being ordered. The stat that surprised me a little bit when he said it, but I suppose it makes perfect sense, when it comes to mobile ordering at Panera Bread, 70% of those orders are customized. So, it's not just someone saying, "I want a bowl of chicken soup," or "I want this sandwich." It's "I want this sandwich, I want it on this type of bread, I don't want the mayonnaise, I do want spicy mustard." All that sort of thing. They really put so much ... it's all the more impressive what they have done. It's also, if you are, for example, a Starbucks shareholder, where one of the recent stories about their business is, they're struggling a little bit with the mobile ordering front, you realize, "Oh, yeah, there's a lot more that goes into it. It's not something that can be turned around in one or two quarters."
Kretzmann: No, certainly not. I think another company that really needs to take notes from Panera and Starbucks is Chipotle. Chipotle actually took the Chief Information Officer, Curt Garner, from Starbucks about a year-and-a-half ago. Even at Chipotle, it's like going through molasses there, it's just so slow to improve the app. I love Chipotle, I'm one of their regular users, but their mobile and online ordering experience, compared to Panera and Starbucks, is just way behind. This stuff does take time. I think it just reiterates or reinforces the importance that as investors, you have to be patient. No company is going to go up in a straight line. Companies like Panera or Starbucks will go through these stumbles, but if you believe in the leadership, the long-term advantage of a company, it pays to stick it out. Even though Panera had a few years where it struggled, by and large patient investors are coming out ahead. So, I think it's critical to be patient, which is easier said than done when you are investing in a company that's going through some shorter-term stumbles.
Hill: Best performing restaurant stock of the last 20 years, better than Chipotle, Starbucks, any of them. It has returned over 10,000% over a 20 year period. So, definitely a testament to long term buy and hold.
Chris Hill owns shares of Chipotle Mexican Grill and Starbucks. David Kretzmann owns shares of Chipotle Mexican Grill, Domino's Pizza, Panera Bread, and Starbucks. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of Panera Bread. The Motley Fool is short Domino's Pizza and has the following options: short June 2017 $140 puts on Domino's Pizza. The Motley Fool has a disclosure policy.