Within the restaurant industry, Panera Bread (NASDAQ:PNRA) is a prime example of how things have changed in recent years. Rather than simply wanting the convenience that fast-food outlets offer irrespective of quality, Panera and fast-casual peer Chipotle Mexican Grill (NYSE:CMG) have capitalized on the desire for high-quality fare at prices that are still reasonable and without the long dining times that a full-service restaurant requires.
Coming into Tuesday afternoon's third-quarter financial report, Panera investors were hoping that the restaurant chain would continue to see some progress in implementing key initiatives designed to increase efficiency and bolster sales, and although sales and net income figures were both fairly close to what investors had expected, the general tone of Panera's report was positive.
Let's look more closely at how Panera Bread did this quarter and whether investors should be excited about the future.
Panera Bread looks anything but stale
Panera's third-quarter results were largely in line with what those following the stock had expected. Revenue rose 7% to $664.7 million, which was about $2 million short of the consensus forecast among investors. After accounting for one-time items, adjusted net income fell more than 8% to $33.8 million, but adjusted earnings of $1.32 per share were still a penny better than expectations.
As we saw last quarter, Panera was able to boost its comparable-restaurant sales in the third quarter, continuing a favorable trend that contributed to optimism about the company's longer-term prospects. Comps for company-owned bakery-cafes climbed 3.8% in the third quarter. Rising check sizes per transaction contributed almost triple the positive impact as improved traffic on comps.
Still, there was a big gulf between company-owned restaurants and franchise locations, where comps rose at less than half the pace, at just 1.8%. Moreover, in the first part of the fourth quarter, company-owned stores saw comparable sales rise just 3.4%, suggesting that it could be tough for Panera to keep its positive momentum.
The expense side of the income statement shows some of the struggles that Panera faces in trying to maximize its profits. Costs of food and paper products jumped 8% year over year, and labor costs skyrocketed more than 11%. More modest gains in occupancy and other operating expenses also contributed toward falling profit margins and added more pressure onto Panera's bottom line.
CEO Ron Shaich contrasted his company's performance to sluggish conditions among its competitors. "We are particularly pleased with these results in light of the slowing sales reported across the industry in October," Shaich said, in explaining that Panera outperformed its overall industry by the widest margin in two years. Indeed, Chipotle Mexican Grill reported comps of just 2.6%, although its more aggressive store-opening pace led to a 12% boost in total revenue. Moreover, although Shaich identified start-up and transition costs associated with its numerous strategic initiatives as holding back near-term results, he remains confident that the moves will pay off for Panera in the long run.
What's next for Panera?
Among those efforts were continued openings of new stores as well as renovations of existing locations to convert to the new Panera 2.0 format. Panera opened 10 new company-owned stores and authorized 14 new franchise-operated locations, increasing the total number of bakery cafes in the system to 1,946. The company also refranchised 29 former company-owned locations, pushing the total number of franchise-operated stores above the 1,000 mark. Panera managed to upgrade 108 stores to incorporate Panera 2.0, bringing the total number of conversions close to the 300 mark overall.
In terms of guidance, Panera largely repeated what it had said previously. Comps should climb at a 2% to 3.5% rate for the remainder of fiscal 2015, with operating margins falling between 1 and 1.75 percentage points and earnings coming in flat to down mid- to high-single digit percentages. Panera expects to convert another 100 or so locations to the Panera 2.0 format. Some good news showed up in weekly sales performance estimates, which Panera now believes will be at the high end of its previous guidance for $43,000 to $45,000.
For the fourth quarter, Panera believes that comps will likely end in the middle of its 2% to 3.5% range, and earnings per share will fall modestly by mid-single digit percentages. Yet CFO Mike Bufano is even more upbeat about Panera's long-term future, noting that "our leading sales indicators are gaining momentum" and that Panera is "accelerating the rate of investment in the second half of the year" in order to reap benefits further down the road.
Panera's results didn't have a big impact on shareholders, with the stock remaining unchanged in after-hours trading following the announcement. In order for Panera to justify its current share price, it will need to demonstrate not only that it can grow more quickly but also that it can keep up with industry leaders like Chipotle Mexican Grill over the long haul.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and 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.