All the optimism that surrounded Panera Bread (NASDAQ:PNRA.DL) in the run-up to its third-quarter earnings was busted the moment the company declared its results on Oct. 22. The results were not much of a surprise, as peers such as Darden Restaurants (NYSE:DRI) and Ruby Tuesday (NYSE:RT) have been struggling as well.
It's evident that faltering consumer confidence is taking its toll on the eatery business as consumers are looking to stretch their dollars. When consumers are cash strapped, they tend to eat out less, and this impacts the same-store sales of eateries and restaurants. A decline in comps was the real reason behind the dramatic fall Panera's share price.
Panera's struggle continues
Panera Bread's flat performance this year doesn't come as a surprise as the company has missed consensus estimates on comps for three quarters in a row. In the latest quarter, analysts were expecting company-owned comps to increase 2.9% and franchise comps to improve 2.7%, but the actual numbers came in at 1.7% and 0.9%, respectively, translating into a big miss.
As a result, Panera Bread failed to meet analyst estimates on revenue despite an 8% year-over-year gain to $572.5 million . Analysts were expecting revenue of $584.8 million , so the miss was quite big. Panera had missed revenue estimates in the second-quarter as well, and this is a worrying trend for investors.
In fact, Panera Bread failed to meet its own guidance of company-owned comps growth of 2%-4%. Comparable net bakery-cafe sales in the quarter increased only 1.3%, much lower than the year-ago quarter's level of 5.8% and second-quarter comps of 3.7%. Going forward, with a 1.6% increase in comps for the first 27 days of the fourth quarter, the fourth-quarter comps guidance was trimmed down to 0%-2% from a previously guided range of 3%-5%.
What is most worrying is the fact that Panera Bread has reduced its fourth-quarter outlook. Panera now expects earnings in the range of $1.91 to $1.97 per share, down from the previous estimates of $2.05 to $2.11 per share. It has also trimmed its earnings projection as a result of lower operating margin expected in the fourth quarter.
So things look difficult for Panera and it looks like management is buying time as it "intends to provide more detailed guidance for fiscal 2014 in February 2014." It looks like analysts are not projecting much growth in the future as well, as the gap between Panera's trailing P/E of 24 and forward P/E of 21.7 is quite small. So investors looking for growth in this sector should consider other options, as Panera is uncertain about its business, and its valuation isn't attractive either.
Darden trying different, but still weak
The entire industry seems to be struggling due to a variety of headwinds. Darden Restaurants, for example, blamed a slower macroeconomic recovery, the impact of the Affordable Care Act, and faltering consumer confidence that led to weaker traffic and a 3.3% decline in comps. It missed analyst estimates on both top and bottom lines. The revenue was up by 6% from last year to $2.16 billion , and muted comps were the main reason behind the revenue miss.
On the earnings front, increased expenses and weak store traffic resulted in adjusted earnings of $0.53 per share missing the consensus estimate by more than 23%. In addition, earnings were down more than 37% from the year-ago period.
Going forward, Darden Restaurants expects the business environment to remain sluggish in fiscal 2014 due to a slower economic recovery. Darden, however, is planning to expand its footprint in international markets in order to reduce the impact economic headwinds on its home turf. Darden is expanding in Asia through a local chain called "Secret Recipe," which operates more than 300 units in Malaysia, China, Thailand, Indonesia, Singapore, Philippines, Brunei, Cambodia, India and Australia.
Ruby Tuesday: The worst of the lot
Similar to the two companies above, Ruby Tuesday also reported negative results across-the-board, and CEO J.J. Buettgen put all the blame on the faltering economy.
Ruby Tuesday reported a whopping 11.4% decline in comps, and the company projects high single-digit same-store sales declines in its upcoming quarter as well. Also, like its peers, input costs were an issue, and it reported a loss of $0.37 per share as compared to a profit of $0.04 per share in the same quarter last year.
It is not surprising to find that year-to-date, Ruby Tuesday's stock has taken the worst hit as compared to Panera Bread and Darden Restaurants, and the company has a very pessimistic view going forward. Analysts are also bearish about the company. Its earnings are expected to decline at a rate of 1.20% per year for the next five years. So, investors would do well to stay away from this stock.
None of these three companies in the eatery business have done well of late. All have underperformed the S&P 500 index, with Ruby down almost 30%. Management of all three companies isn't sure as to how the future might turn out, and that's why it is best to stay away from these three until there are solid signs of a resurgence.
Fool contributor Vinay Singh has no position in any stocks mentioned. The Motley Fool recommends Panera Bread. The Motley Fool owns shares of Darden Restaurants and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.