The recession wasn't so bad for upscale fast-casual food chain Panera Bread (Nasdaq: PNRA). Panera's chairman and former CEO Ronald Shaich said the economic downturn didn't really hurt his company; he used the last couple of years to differentiate the company further by maintaining premium prices, giving raises, and opening stores.

While Panera was boosting its operations and adding $17.99 lobster sandwiches to its menu, lower-priced competitors such as Burger King (NYSE: BKC), Yum! Brands (NYSE: YUM), and Wendy's/Arby's Group (NYSE: WEN) were forced to use barbell pricing strategies to get customers through the door. These downscale chains used value meals or $1 meal promotions to draw customers, in hopes that these hungry patients would spend more once they were inside.

Lofty expectations
Panera's pricing power and value proposition has allowed the company to prosper, and shareholders have reaped the rewards. The stock has been one of the best-performing equities not only among its peers, but also in the entire consumer discretionary space. However, as the economy continues to improve, Panera faces inflationary headwinds that could affect earnings and force difficult pricing decisions.

Since I recommended Panera in September, its shares have appreciated by more than 21%. While I liked the stock because I felt it was the best performer in a highly competitive industry, even then, the valuation of the stock was a little rich for me to load up. So today after the stock's rapid advance, I can't recommend buying shares at these levels. At an enterprise value/EBITDA of 12.3, it's not in the stratosphere of momentum favorite Chipotle (NYSE: CMG), which trades at 21.0, but it's still relatively expensive compared to its peers, including David Einhorn favorite Einstein Noah Restaurant Group (Nasdaq: BAGL) which has an EV/EBITDA of 6.9.

Pricing pressure
While Chipotle is what I would call a priced-for-perfection stock, Panera is simply priced for "really good." The company must continue to beat expectations on the bottom as well the top line to maintain its lofty valuation. This becomes more difficult in an inflationary environment for food.

On the company's most recent conference call, Shaich acknowledged that the company believed inflation would trend higher than previously anticipated. Panera has been able to better manage the volatility of commodity prices through hedging, particularly in the wheat market. In this regard, Shaich also noted that Panera has locked in 75% of its cost of wheat for 20011 at close to the price it paid in 2010. However, Panera also has significant exposure to meat, produce, and dairy costs, which are also expected to rise throughout 2011. Management will have to decide whether it can pass on any rise in costs to consumers. While maintaining its prices during the recession helped the company establish its value proposition, consumers might act differently when they see the prices start to increase even higher.

Still a good story
Panera is still a very well-positioned company, boasting a very strong balance sheet with more than $230 million in cash and no debt. The company also still has tremendous potential for store growth, domestically and abroad, when management decides the time is right.

In addition, Panera is starting to see very strong growth from its catering business. Sales in that segment are up 23% year to date. The company is investing a lot of money here, which could significantly boost future earnings potential.

That said, I'm content to wait on the sidelines for now, since the valuation that investors have placed on Panera is a little too rich for my blood. If the company continues to fire on all cylinders, the stock still has some room to run. But with commodity prices on the rise and some tough decisions ahead for management, I'm looking elsewhere for value.

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