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Here's How Panera Is Getting Better

By Philip Saglimbeni – Mar 17, 2014 at 7:33AM

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Coming off of a challenging 2013, Panera Bread looks set to steadily win back consumers and return to high levels of growth.

Over the last few months, my trips to Panera Bread (PNRA) have become a little less comfortable and a little more annoying. I have been experiencing longer lines and wait times. Panera's service decline stands in stark contrast to the experience at Chipotle Mexican Grill (CMG 0.67%), which continues to shine in the fast-casual dining space.

Shares of Panera Bread have been stuck in neutral for a while, as management seeks new ways to improve the customer experience and produce greater growth for shareholders.

Source: Company Facebook

Atmosphere is everything
Panera Bread has always made it a point to cater to consumers looking for a place to dine quickly and comfortably. The company's website explains, "We are an everyday oasis for our customers. We're the place people come when they want to visit with friends, hold an informal meeting[,] or just enjoy some alone time. Come experience the warmth and welcome that make Panera Bread bakery-cafes a natural gathering place."

Panera's focus on customers who stay on location to eat is part of what distinguishes the company from competitors. Chipotle, for instance, focuses more on getting customers in and out of stores quickly and efficiently.

Chipotle is known for its quick and hassle-free ordering process. Meanwhile, Panera offers a more inviting atmosphere, featuring amenities like free Wi-Fi access and community rooms at many locations. These offerings serve to enhance the overall fast-casual dining experience.

Accordingly, customer service is a large part of the company's appeal. Any disruption in Panera's ability to offer an inviting atmosphere to consumers is a potentially large obstacle to future growth, and one that needs to be solved quickly.

Enhancing the customer experience
Considering the in-store customer experience is so vital for Panera, it is incredibly encouraging to see management focused on improving its performance in this regard.

Although management's recent efforts to improve performance led to declines in the operating margin in the most recently reported quarter, the benefits to Panera's long-term brand make it all worthwhile.  

Chief Financial Officer Robert Matthews explained, "Our fourth-quarter operating margin declined 170 basis points versus last year. The majority of this decline was expected, as we made key initial investments in our cafés to improve our capabilities and ultimately the quality of our customer experience."

In October, the company added an additional 35 hours per week to each of its store locations and ramped up hiring. On supplementary investments, CEO Ronald Shaich explained: "We have upgraded equipment to grow capacity. We added a new kitchen display system, and we worked hard at driving proper staffing and proper process discipline."

All these in-store enhancements are being implemented so Panera can be better equipped in the future to accommodate an expected increase in foot traffic. The best part is that management is already seeing improvements on the ground level.

CEO Shaich concluded, "As a result of these efforts, we've already seen a material improvement in our metrics that tell us how well our cafes are deployed and how quickly our guests are being served."

Improving growth
Not surprisingly, growth estimates for Panera reflect these changes. Although analyst projections remain modest for 2014, they do get substantially better for 2015. The following is a breakdown of the company's projected growth for 2014-2015 compared to that of Chipotle:

Company Revenue 2014Revenue 2015EPS 2014EPS 2015
Chipotle 18% 15.9% 23.3% 23.9%
Panera 7.4% 10.3% 4% 18%

Panera is not growing nearly as fast as the much-larger and more diverse Chipotle. Nonetheless, its revenue and earnings-per-share growth rates are expected to improve dramatically in 2015 to reach double-digit rates once again.

What's more is that the company's forward-looking valuation reflects the slower growth. Panera's forward P/E of 22.3 is significantly cheaper than Chipotle's expensive 36.5.

Bottom line
Although Panera has struggled over the last year in comparison to high-growth peers like Chipotle, company management has identified the main problem and plans to correct it. The company's willingness to sacrifice short-term margin expansion and performance to increase long-term brand strength should foster growth down the road.

Investors who are content to wait for the company's likely return to high growth levels in 2015 are currently being offered a relatively cheap valuation. Accordingly, shares of Panera Bread look plenty tasty at these levels for investors with a long-term focus.

Philip Saglimbeni owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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.

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