Patrons have long respected Panera Bread (NASDAQ:PNRA.DL) for its commitment to serving high-quality food in an inviting and comfortable setting. Yet from an investing standpoint, Panera hasn't lived up to its full potential lately, as the fast-casual chain has had difficulty getting its sales to rise at the pace shareholders would prefer to see.
Coming into Tuesday afternoon's first-quarter financial report, investors wanted to see evidence that Panera was successfully executing on its initiatives toward boosting its overall business prospects, and hoped that sales and net income figures would justify greater optimism about Panera's long-term promise. As we saw last quarter, though, Panera fell short of investor expectations, and it could be a while before a full turnaround becomes evident.
Let's look more closely at Panera Bread's latest quarter and its vision for the future.
Panera Bread falls flat
Panera Bread's financial results left much to be desired in investors' eyes. Sales of $648.5 million were up more than 7% from the year-ago quarter, but most of those following the stock had hoped to see growth rates closer to 9%. Moreover, adjusted earnings per share of $1.41 were not only down 9%, but also fell $0.03 per share short of what investors had expected.
More importantly, those numbers excluded a $5.57 million after-tax refranchising loss. When you incorporate those costs into Panera's results, net income dropped by roughly a quarter from the year-ago period.
Looking more closely at the numbers, Panera saw comparable-restaurant sales growth slow from last quarter's pace. Comps for company-owned restaurants rose 1.5%, while franchise-owned restaurants actually saw a 0.1% decrease in same-restaurant sales. Combined, gains of 0.7% in comps showed the struggles that Panera is suffering, and even at its company-owned cafes, Panera saw almost no gains in customer count.
Meanwhile, operating expenses weighed heavily on Panera's margins. Operating margins fell by 1.8 percentage points even excluding refranchising costs, with Panera citing higher wage costs, as well as other expenses related to the company's strategic initiatives. Food and paper-product price inflation also had a big impact, rising at a 9% pace, and helping to push total bakery-cafe expenses up almost 10%.
Still, Panera has continued raising its store counts. The company opened 11 new company-owned cafes and had franchisees add 14 more, bringing the total in the system above the 1,900 mark. Panera has maintained a roughly 50/50 split between franchise-owned and company-owned locations, and interestingly, average weekly sales at the newest franchise cafes have exceeded their company-owned counterparts by nearly a $6,500 margin, at roughly $53,700.
What Panera needs to do next
Panera CEO Ron Shaich kept the restaurant chain on message, pointing to "progress on our initiatives to make Panera a better competitive alternative with expanded growth opportunities." Shaich repeated his belief in the Panera 2.0 guest-experience initiative, and other innovations in food, marketing, and store design, and their ability to drive growth in the future.
Still, Panera doesn't have expectations for immediate improvement for many of its key financial metrics this year. Panera repeated its belief that comparable-store sales will grow between 2% and 3.5% for the full year, and it thinks earnings per share will finish flat to down as much as high single-digit percentages. Operating margins will take a sizable hit, with drops of between 1 and 1.75 percentage points reflecting regular operational cost increases, but excluding the impact of refranchising efforts.
In the long run, Panera believes that refranchising some of its company-owned stores will add to earnings. Plans to convert as many as 150 cafes this year are well underway, with letters of intent on nearly half that number already.
Many Panera investors will focus on the fact that the stock dropped almost 4% in after-hours trading following the announcement. Yet when you consider that the company has more than made up for its declines following its fourth-quarter earnings report, Panera's stock performance is actually quite strong.
What that indicates is that, thanks to recent efforts to implement a big stock buyback, Panera's future isn't quite as reliant on quarterly results. If the restaurant chain can execute on its long-term growth strategy, then Panera could manage to hold onto its recent gains despite the slow progress it's making currently on its turnaround efforts.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Panera Bread. The Motley Fool owns shares of Panera Bread. 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.