Despite the economy and weather, Chipotle Mexican Grill (CMG 0.93%), Panera Bread (PNRA), and Einstein Noah Restaurant Group (NASDAQ: BAGL) make it look easy to rake in profits in the fast-casual space. People enjoy having fresh sandwiches made in front of them, in increasing numbers. As such, the growing popularity of this newer style of dining is evidenced by the failure of a more traditional chain.
The latest casualty
On March 15, Subway competitor Quiznos filed for Chapter 11 bankruptcy protection. The company listed more than $500 million in debt that it hopes to slash down to $100 million during the restructuring. This is the second time in recent history that Quiznos found itself in trouble and looked for a lifeline. Back in 2012 it negotiated a deal that eliminated $300 million in debt. Perhaps if the company was able to just simply make and sell more sandwiches profitably, none of this would be necessary.
As it is, the chain once had more than 5,000 locations and is down to just around 2,100. Subway is, of course, a major competitor with 40,000 locations, so there is certainly still a strong market for sub-style sandwiches. But the competition is fiercer than ever, as consumers have many more choices.
The Chipotle way
The fast-casual model tends to be consistently structured no matter what is on the menu. You start out at one end, cafeteria style, and slide past the ingredients and verbally give your preferences until your freshly made sandwich is complete. Chipotle Mexican Grill uses this concept but with burritos, salads, tacos, etc. It's largely the same thing, only instead of choosing a type of bread, you're choosing a type of shell or a bowl and loading it with a choice of ingredients.
And it's working. Hungry consumers are flocking to Chipotle in record numbers, inevitably pulling patrons away from other chains such as Quiznos. In short, Chipotle seems to be eating Quiznos' lunch. Last quarter, revenue jumped 21%, same-store sales soared 9.3%, and net income leaped 30%. Chipotle ended the quarter with 1,595 locations and plans to open between 180 and 195 more this year alone. Based on the trend, it may not be long before Chipotle surpasses Quiznos in terms of number of locations.
The Panera way
Panera Bread too is gaining on Quiznos in terms of number of locations. It ended last quarter with 1,777 restaurants. The company plans to add 115 to 125 new locations this year, with each new one threatening to take more and more market share away from Quiznos. Last year, Panera Bread saw a 12% increase in revenue with systemwide same-store sales popping 2.3%.
While Quiznos is busy with a bankruptcy filing, Panera Bread is busy making investments for continued growth. CEO Ron Shaich stated, "While we expect these investments will result in modest earnings growth in the near term, we believe they will lead to expanded transactions, comparable store sales, and ultimately earnings growth, well into the future."
The bagel way
Einstein Noah Restaurant Group is yet another competitor fighting for the afternoon crowd. Last quarter it saw revenue pop 3.2% and same-store sales make a tiny blip up of 0.1%, which was still well ahead of industry traffic trends.
While Einstein Noah Restaurant Group currently has only 852 locations, that number is about to rise. Last year the bagel-sandwich chain grew its locations by 7.7%, and this year it's slated to tack on another 8.8% to 10% growth. Einstein is finding that, on average, new restaurants have 15% higher sales than existing ones due to the company's improved skills in the area of site selection. Each of these locations that were opened anywhere near a Quiznos would have likely contributed to its bankruptcy.
Foolish final thoughts
Look for Chipotle Mexican Grill, Panera Bread, and Einstein Noah to continue to grow as more competitors fall. Perhaps those guys may even take over former Quiznos locations. All three have enjoyed years of fantastic growth.
Fools should take a closer look at all three as growth stories, especially if the stocks pull back enough. Chipotle and Panera trade with forward P/E ratios in the 30s and 20s, respectively, based on analyst estimates, and may be a bit pricey for now. Einstein Noah trades at a more reasonable-looking P/E of 15 despite having equal or more ambitious growth plans on a percentage basis.