Shares of Panera Bread (NASDAQ:PNRA) were looking stale following Wednesday night's earnings report, as the stock dropped 8% after hours on disappointing guidance.
Adjusted earnings per share improved 2%, despite one less week in the quarter, to $1.82. That was enough to beat estimates by a penny, but the bakery chain came up short on the top line. Revenue grew 2% in one less week to $672.5 million, short of estimates at $675.9 million.
Let's take a closer look at why investors are selling.
Same-store sales improved by 3% in the quarter, better than the company's pace for the full year, which increased just 1.1%. Same-store sales are a key measure of restaurant performance because they strip out the impact of new restaurants. While the 3% mark is an improvement over the full year, Panera carries a P/E ratio over 25, and with that number comes the expectation of significant growth. Margins also took a hit because of higher food costs, as management said operating margin fell 140 basis points to 11.5%.
Finally, Panera's guidance seemed to kill the stock after hours, as it projected EPS to be anywhere from flat to seeing a decrease in the mid- to high single digits. Analysts had forecast growth between 1% and 2%. Management is expecting operating margin to fall 100 to 175 basis points because of investments in its Panera 2.0 initiative, higher healthcare costs associated with the Affordable Care Act, and higher labor costs because of minimum-wage increases in some states. Comparable sales in company-owned stores are targeted to grow 2% to 3.5%, and management expects to open 105 to 115 new bakery cafes systemwide, on par with the 114 opened in 2014.
Planning for the future
Though it's easy to see why a projected earnings decline would cause the stock to sell off, Panera's investments in its future shouldn't be discounted. In particular, the Panera 2.0 program looks promising.
Borrowing a page from Starbucks, the initiative plans to enhance Panera's mobile app and store layout to enable rapid pickup of mobile orders. This approach should encourage more takeout orders, which are more desirable than eat-in orders, and speed up service. In addition, the company will add ordering kiosks so customers can avoid waiting in line at the register, Panera will put employees on the customer side of the counter to verify order accuracy and deliver food to tables, elevating the cafes above the usual fast-food or fast-casual service and adding to its value proposition.
Finally, the company plans separate distribution centers for catering orders, which make up 8% of its business. Building dedicated catering kitchens could lower costs and will help restaurants operate more efficiently and provide better service, as staff will be focused only on in-store orders.
With same-store sales moving only modestly higher and profits expected to fall next year, Panera may seem like a struggling business, but it's not at all. On an individual restaurant basis, the company is one of the best performers in the industry, with average sales of $2.4 million, rivaling Chipotle and McDonald's. CEO Ron Shiach said the current investments will have an adverse impact on 2015 results but noted that investments over the past year are already showing results and that the Panera 2.0 initiative should lead to "expanded medium- and long-term earnings growth."
If he's right, this could be a great time to pick up some Panera stock.
Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. 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.