Panera Bread (PNRA +0.00%) is a $4.8 billion company that has been one of the biggest players in the fast-casual dining movement. By focusing on providing quality ingredients at price points above fast food but below full-service restaurants, Panera has been able to grow consistently while providing wonderful returns for its shareholders.
In the past five years, its share price has risen from $76 to over $181 for a CAGR of nearly 19%. Last year, it began to address concerns about an unwieldy ordering process by working on a new set of systems known as Panera 2.0. The rollout so far looks promising for the future of the company.
Problems before Panera 2.0: The mosh pit
In 2014, Panera CEO Ron Shaich admitted that after customers ordered their food, they were left in a "mosh pit" to try to figure out how and where they were supposed to pick it up. Anyone who has been in a busy Panera in the last few years knows the feeling. The lines move slowly, the menu is difficult to process quickly, and the order-pickup system is not streamlined.
These throughput problems are made to look even worse when Panera is compared to fellow fast-casual chain Chipotle, where simplicity and speed are the name of the game. Having a more diverse menu and meals throughout the day meant that Panera had to turn toward technology to help solve these problems.
Better technology ... more revenue?
Panera 2.0 involves technological improvements that are both customer facing and in the back of the house. In its latest annual report, Panera states, "[We] upgraded equipment, such as kitchen display systems, to improve order execution and increase throughput, especially at lunch. Our increased focus on process disciplines has also improved speed and accuracy, which is crucial as customization grows."
Panera has introduced mobile ordering, which lets customers order and pay on their smartphone and avoid lines, as well as "Rapid Pick Up," where a customer can order from home, designate a time for pickup, and receive the order without any personal interaction with store employees.
In Q1 2015, company-owned same-store sales were up 1.5%, and they rose 2% in the first 27 days of Q2. This growth is promising and management is targeting a 2%-3.5% increase in same store sales for fiscal year 2015.
The conversion to Panera 2.0 will take time. The store base is currently just over 1,900, split about equally between company owned and franchised. According to the annual report, "[O]ver 100 Panera 2.0 cafes were operating by the end of 2014 and we plan to convert approximately 300 company cafes in 2015." This still represents less than a quarter of all locations.
While this story is far from certain, management is enthused by the early rollouts of Panera 2.0. "Sales have increased and guest friction has decreased at cafes where Panera 2.0 is implemented. Further, we have a better understanding of the start-up and operating costs for Panera 2.0, so that capital costs are coming down and margins are strengthening with each iteration."
Worth a further look?
Panera is not cheap by conventional metrics -- it trades at a forward P/E of 26.7, according to Morningstar, compared to 18.3 for the S&P 500. It does, however, trade right around its five-year averages for its P/E and P/CF ratios. Over that period it delivered the 19% annual returns mentioned above.
Panera is undergoing the transition to Panera 2.0 while simultaneously working to refranchise 50 to 150 of its cafes. There is a lot of uncertainty about its future, but management is optimistic that the changes implemented now will pay off in the future. Warren Buffett has said, "You pay a very high price in the stock market for a cheery consensus." It might make sense to wait and see how management executes the transition over the coming quarters, but good news will likely be met with a higher stock price.
If you believe in Ron Shaich as a founder/CEO with over 30 years at the helm and think fast casual will continue to take a larger share of Americans' food budgets, it might make sense to look into opening a starter position or put Panera on your watch list.
