Shares of fast casual giant Panera Bread Company (PNRA) were down over 5% after slow same-store sales growth and weak guidance were announced in the company's latest earnings release. While the quarter wasn't great, first quarter results look mixed depending on which competitor, Chipotle (CMG -1.34%) or Noodles & Company (NDLS 0.85%), is used for comparison.
Panera's first quarter
For the first quarter of 2014, Panera's revenues grew 8% year over year, while net income declined 12%. The company's actual revenue ($605m) and net income ($42.4m), both beat Wall Street expectations, yet the stock slid on poor guidance for the fiscal year 2014. Panera's EPS range 2014 was guided down 5% to $6.80-$7.00, which is leaving a sour taste in investors mouths. Although, to get a true sense of where the company is heading a deeper dive into the latest quarter is needed.
Evaluating the quarter
Considering how often Wall Street analysts estimates are incorrect, Panera's net income "beat" isn't a great thing. The decline in net income looks poor on face value (a 12% drop), but it needs to be viewed in appropriate context. Panera is making several big investments to improve operations and store throughput, (Panera 2.0, etc.) , and CEO Ron Shaich says these investments will "stage future growth." At this point, the only reason to be really excited about this quarter is for tomorrow's (potential) profits.
There were some other worrisome signs for the quarter. Same-store sales growth was essentially flat, at 0.1%, which Panera's management blamed on the weather. However, even amid the same conditions, a few restaurants have managed recent same-store sales growth that is inspiring. They tend to be the restaurants with fans loyal enough to brave a snow storm; Chipotle, for instance, had massive same-store sales growth, of 13.4% in their winter quarter.
Panera fared better than Noodles & Co., which actually saw same-store sales decline 1.6% in the quarter. This shows the dichotomy within fast casual's recent growth; they're not all Chipotle (or B-Dubs, etc.), and both Panera and Noodles are proving to be places you end up eating at, rather than places you seek out. Panera is a fine restaurant, it's doing reasonably well, but it lacks that rabid following that will brave a snow storm for its food. This means it must have less; less pricing power, less growth, and ultimately (if you buy the stock) a lower valuation.
Source: Panera Bread Co.
What's next
Winter weather, long-term investments, all of Panera's excuses for a so-so quarter and weak guidance are reasonable. However, this is the second disappointing quarter in a row, blamed (in part) on weather; before that, bottlenecks in operations were an excuse. This restaurant has essentially under-performed for about a year, amid a myriad of excuses.
CEO Ron Shaich deserves the benefit of the doubt, and I'm confident Panera will grow faster again. If you buy the stock here, make sure you're viewing it as a long-term investment, and that you're willing to wait for Shaich's investment's to pay off. Until the company produces some tangible in-store improvements, the stock will likely stay in neutral.
