Among fast-casual restaurant chains, Panera Bread (NASDAQ:PNRA.DL) has held great promise for investors focused on the trends toward higher-quality food and a premium dining experience. Yet recently, Panera has struggled to deliver the growth that bullish investors expected to see from the company, and coming into Wednesday afternoon's fourth-quarter financial report, many hoped that Panera would be able to assuage fears that its highest-growth days might be over. Unfortunately, Panera's guidance for 2015 raised new concerns about just how problematic the current environment has been for the chain and how long it might take for its growth initiatives to start paying off with better financial performance. Let's take a closer look at how Panera Bread closed out 2014 and what's next this year for the company.
Why Panera Bread just won't rise
Looking at key revenue and earnings numbers, Panera Bread put in mixed performance in investors' eyes. Revenue of $672.5 million was up just 2% from the year-ago quarter, and it fell short of the roughly $676 million in sales that those following the stock expected to see. Moreover, although earnings beat consensus estimates by a penny, it was nevertheless hard for investors to get excited about an 11% drop in net income that worked out to $1.82 in earnings per share. Full-year results were similarly troubling, with a 6% rise in sales still leaving net income down 9% for the year and leaving earnings per share 2% lower than they were in 2013, even after accounting for an aggressive reduction in share count.
Panera did have a bit of good news, as comparable store sales rose 3% overall after adjusting for an extra week in last year's fiscal fourth quarter. Company-owned stores saw a 3.3% increase in comps, with average check amounts growing 2% and traffic rising by 1.3%.
Still, rising expenses continued to weigh on Panera's profitability. Total expenses from its bakery-cafes rose at a 3.5% pace during the quarter, with labor cost increases of more than 5% having a particularly dramatic impact. Food and paper-product costs also climbed almost 4% from the year-ago quarter, contributing to the drop in operating profits.
Interestingly, Panera hasn't seen the success that one would expect from its newest stores. Looking at average weekly sales, figures are consistently higher for those stores opened in 2012 or earlier compared to more recently opened locations. In particular, Panera stores from 2013 posted average sales that were 13% lower than the systemwide average, and 2014's cohort of new stores also underperformed, albeit less dramatically. That suggests that Panera's expansion efforts aren't isolating the best prospects for untapped markets.
Why 2015 will be tough for Panera
Panera CEO Ron Shaich again emphasized the positives, pointing to rising traffic as a sign of a turnaround. Yet Shaich also prepared investors for more pain ahead, as Panera 2.0 initiative and other structural enhancements will "adversely impact our 2015 results, but we believe they offer the potential to elevate Panera's competitive position and broaden our growth opportunities."
Specifically, Panera Bread gave guidance for 2015 that forced investors once again to put off their hopes for an earnings-led recovery. Panera expects comparable-store growth of between 2% and 3.5% for the full year, which would be consistent with its recent results but not provide any substantial upward momentum. Even worse, Panera believes that its earnings per share will come in at best flat and at worst down by mid-single digit to high-single digit percentages. That's a slap in the face for investors who had hoped to see earnings per share climb by roughly 1.5% this year.
Shareholders fled the stock in response to the company's poor guidance, with Panera shares trading down more than 8% in the first half-hour of after-hours trading following the announcement. If the decline holds, it will essentially wipe out all the progress that the stock had made in since its poor earnings report in the third quarter. For a stock trading at 26 times trailing earnings, news of declining earnings growth for a full year doesn't inspire much confidence. Yet long-term investors should root for even lower share prices ahead, as long as they believe that Panera 2.0 and the company's other investments in its future will pay off in the long run.