Source:  Panera Bread

Shareholders in fast-casual restaurant chain Panera Bread (PNRA) have had lots to smile about over the past five years. The company's stock price has gained 200% as Panera Bread has grown sales at a fast clip by providing quality food at a reasonable price, a model that has also worked well for competitor Chipotle Mexican Grill (CMG 1.85%).  Anecdotally, much of the customer-base gains have probably come from casual-dining chains like Darden Restaurants (DRI -1.05%), which have struggled to maintain their market share because customers see fast-casual chains as a better value proposition.

However, while Panera reported slightly better-than-expected profitability in its latest fiscal quarter, a flattening of its comparable-store sales growth and a year-over-year drop in its operating income likely provided the fodder for its subsequent share-price decline.  So at its lower current price, is Panera a good bet for investors?

What's the value?
Panera is the self-proclaimed king of the soup and sandwich niche with a network of roughly 1,800 stores around the country, roughly half of which are company-owned.  Panera has effectively used its MyPanera loyalty program to build a loyal, repeat customer base. The program had 15 million members at last count, and this valuable group accounts for approximately half of its total sales and allows Panera to scrimp on its marketing spending, which it targets at 1% to 2% of sales per year.  The net result for Panera has been a profitable business model complete with a double-digit operating margin, which thereby allows the company to internally fund its ambitious expansion plans with operating cash flow and avoid the potential pitfalls associated with debt-fueled growth.

In the latest quarter, though, Panera showed some signs that its overall customer base may be reaching a near-term peak; its sales volume declined 2.8%, a worse performance than the one in the prior-year period.  While higher prices offset a portion of the volume decline, the company could only generate a 2.9% average price gain, less than half of the gain it saw in the prior-year period.  The numbers indicate that Panera might increasingly have trouble generating comparable-store sales growth in the future, the lifeblood of any retail-oriented enterprise.

Olive Garden tries to get wise
Of course, part of the problem might be that the casual-dining chains don't intend to go quietly into the night, thereby creating competitive headwinds for Panera. A case in point is Darden Restaurants' Olive Garden unit, which has taken a page from the fast-casual playbook; it recently unveiled more affordable menu offerings with its so-called Cucina Mia platform, and also introduced lighter-fare menu options that are targeted to the fast-casual chains' health-conscious customer base.  While Olive Garden's customer volume has yet to show signs of life, with a decline of 4.3% for the first nine months of fiscal 2014, the concept's nationwide reach is likely putting pressure on the pricing of some competitors in the fast-casual space.

Sticking with best of breed
Naturally, Panera's management is trying to turn the volume trend around. It has invested heavily in technology initiatives that are designed to allow more online ordering, potentially reducing wait times and enabling the company to enhance its per-store productivity.  However, the initiative is still in test mode through a pilot program of 14 cafes in two markets, so it may be some time before any benefits meaningfully flow through to Panera's bottom line. 

As such, Panera seems to be a work in process and investors should probably stick with the best of breed in the sector, Chipotle, which continues to grow rapidly and find new customers. Indeed, the company's growth actually seemed to accelerate in its latest quarter, evidenced by a 13.4% increase in comparable-store sales compared to a 9.3% gain for the previous quarter.  While the company's stock price isn't cheap at a P/E multiple of roughly 47, Chipotle's ability to continually increase its customer base likely means that its profit-growth story has room to run.

The bottom line
Shareholders in Panera have been smiling over the past five years because of strong stock price performance, but future gains might be a little tougher given Panera's larger size and the desire of the casual-dining chains to recapture lost market share. While the company should remain a major player in the fast-casual space, thanks to the loyalty of its customer base and the quality of its menu offerings, investors should wait for some better business momentum prior to taking the plunge into its shares.